Tariffs: Tarrifying or Tarrific?
January 24, 2025Comments
One curiosity of living a multi-generational life: You witness that certain things occur in cycles.
Hem lengths rise and fall with the thinning and widening of ties. Being in fashion loses its appeal the second time that bell bottoms and tie-dyed shirts come into style. Coffee’s good. Coffee’s bad. Coffee’s good again.
In a recent conversation with a metal-fabricator executive, he remarked that he is looking forward to the across-the-board tariffs on foreign trading partners that President Trump proposed, hoping that they will encourage reshoring. Trump has threatened a 60% tariff on goods from China and a 20% tariff on all other imports. That conversation prompted me to recall my coverage of tariffs in 2002 and to research their history.
Tariffs are Not New
Interestingly, tariffs—taxes on imported goods—have been imposed since the United States’ founding, comprising the largest source of government revenue until the creation of the federal income tax in 1913. Early on, tariffs were imposed to further discourage reliance on Britian’s goods and foster the young nation’s domestic industrial growth. Tariffs rose as high as 50% in 1828, according to History.com.
In the wake of the stock market crash of 1929, Congress passed the Smoot-Hawley Tariff Act, which raised the country’s already high average tariff rate by 20%. Several foreign countries soon enacted retaliatory tariffs, and between 1929 and 1932, U.S. imports from and exports to Europe fell by about two-thirds. Many historians believe that the tariffs significantly worsened the Great Depression.
Tariffs fell out of favor after that, scorned as “protectionist,” and free-trade proponents forged multiple free-trade agreements around the globe. Economists and the general consensus held that that global trade enhanced the U.S. economy.
The North American Free Trade Agreement (NAFTA) was enacted Jan. 1, 1994, on the belief not only that the United States, Canada and Mexico all would benefit economically, but also that it would help halt illegal immigration from Mexico to the United States.
Enter the Dragon
Soon after China was admitted to the World Trade Organization in December 2001, giving it access to the international trade system, the country’s low-cost products took over American store shelves.
As part of the agreement, China was supposed to reduce its tariffs, and eventually, eliminate them, facilitating America’s ability to export American-made goods into the China market; stop its subsidies and dumping; guarantee intellectual property rights; and allow direct foreign investment. However, 24 yr. later, it’s clear that China only partially complied with its terms of the agreement—still limiting access to its market, still not floating its currency, still subsidizing its industries, and still traipsing on intellectual property rights. In essence, open access was not reciprocated. China exploited foreign-market access.
The Tradeoff for Low Prices
The net result: Chinese-manufactured, low-wage, low-priced goods entered into the United States en masse. Because the country’s government pegged its currency at a low ratio to the dollar, its goods were priced artificially low just by crossing the border.
U.S. consumers benefitted, with cheaper prices and increased buying power. U.S. corporations that offshored their operations to China benefitted through low-wage labor and other trade transgressions, then profited immensely when exporting products back stateside.
