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When politicians espouse the supposed virtues of protectionism and tariffs, they often cite four economic arguments: protect a nation’s industry, end the trade deficit, make the country self-sufficient and do it because other governments are doing it. For years, these have been the common defenses for the regressive policy of tariffs.
Despite the multiple case studies detailing their failed history, global populist movements continue to embrace and promote tariffs, slamming open and free trade (a trade pact is not free trade).
When President Donald Trump announced a 20% tariff on Canadian softwood lumber imports last month, he channeled the likes of Alexander Hamilton and former President Theodore Roosevelt – perhaps not the greatest men to be influenced regarding trade.
Commerce Secretary Wilbur Ross confirmed the tariff would be instituted on Canadian exports to the US of approximately $5 billion per year. The tariff would range from 3% to 24% on five lumber exporters: Canfor, J.D. Irving, Resolute FP Canada, Tolko Marketing and Sales and West Fraser Mills.
Ross blamed the tax on Canada, referring to provinces permitting loggers to cut down trees at lowered rates and to then sell them at reduced prices:
The determination that Canada improperly subsidizes its exports is preliminary, and the Commerce Department will need to make a final decision. In addition, the US International Trade Commission will need to find that the US industry has suffered injury. But even a preliminary decision has immediate real-world consequences, by discouraging importers from buying lumber from Canada.
If Canadian companies could sell the Americans a cheaper product then what’s the big deal?
One of the fallacies behind this move – and, in a broader sense, protectionism – is that exporters are impacted the most by tariffs. This is incorrect. The president’s 20% lumber tax will not be paid for by the Canadian lumber industry, but rather by American lumber-buying companies and homebuyers.
A high-cost domestic industry would welcome a tariff because it protects it from low-cost foreign competition. This is a trade policy that makes a country poorer by raising prices, destroying jobs and increasing taxes for Americans, all in the name of protecting domestic producers.
The administration may believe that it is creating, protecting or saving jobs in the lumber industry. However, the president’s import tax will have a greater effect in other US industries, particularly in construction, where there are thirty-two construction workers employed in homebuilding for every one worker in logging, lumber and wood production combined, according to the American Enterprise Institute (AEI). The tariff would increase housing prices, slow homebuilding and lay off thousands of construction workers.
Simply put: Trump placed a 20% tariff on the American people.
Throughout the 2016 election, Trump asserted protectionist rhetoric, claiming that other nations are performing unscrupulous acts that make it tough for US businesses to compete. Does it matter what foreign producers do if their actions improve the lives of American consumers? Whether it is Canada subsidizing lumber or China supposedly manipulating the yuan renminbi, it is important to refer to a specific excerpt from Adam Smith’s “Wealth of Nations”:
In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest.
Legendary free market commentator Henry Hazlitt wrote in his landmark book, “Economics in One lesson,” about an American businessman of woolen sweaters, who went to Congress to warn of a pending national disaster: the removal or reduction of tariffs on British sweaters. The U.S. manufacturer sells his sweaters for $15, but British companies can sell the same sweaters for $10. To ensure he stays in business and employs thousands of American workers, a $5 duty is essential.
As economist Frederic Bastiat would say, this is an elementary case of “what is seen and what is not seen.”
When the tariff is eliminated, what is seen is the company going out of business, thousands of workers being laid off and consumers buying $10 sweaters, with $5 left to save or spend somewhere else. What is not seen is the British being furnished with US dollars to purchase American goods. Since the British can sell more to the US, they can now buy more from the US.
Hazlitt explains that everyone is better off:
American employment on net balance has not gone down, but American and British production on net balance has gone up. Labor in each country is more fully employed in doing just those things that it does best, instead of being forced to do things that it does inefficiently or badly. Consumers in both countries are better off. They are able to buy what they want where they can get it cheapest. American consumers are better provided with sweaters, and British consumers are better provided with motor cars and washing machines.
Unfortunately, the U.S. has had a long history with tariffs, and, as a result, crony capitalism.
In the nation’s beginning, the Tariff Act of 1789, Tariff of 1832 and the Morrill Tariff of 1861 were all taxes on foreign goods to protect powerful domestic business interests.
In recent years, administrations have failed to learn from the past, bowing to the demands of industry behemoths. Former President George W. Bush implemented a tariff on imported steel in 2002, before repealing it a year later. Former President Barack Obama slapped a 35% tariff on Chinese tires in his first year in office, claiming unfair competition practices by China.
Under yesterday’s circumstances, tariffs on steel or iron did not make America great. Under today’s circumstances, tariffs on lumber or automobiles will not make America great again.
The best advice President Trump could garner is from economist Milton Friedman:
What we urgently need, for both economic stability and growth, is a reduction of government intervention, not an increase.
That would be the greatest policy directive of them all.