Uh-oh! The predictable, yet unintended consequences of tariffs

Thursday, December 20, 2018

If you are involved at all in running a government, the first thing you need to learn is the Law of Unintended Consequences. That means that whatever changes are made in one area will suddenly be found to wreak havoc in an area you thought was only remotely connected to the thing that you changed.

No matter what you jiggle, no matter how little you jiggle it, it will mess something up somewhere else. If money is involved – especially if money is involved – the process generates what I call “Uh-Oh Economics.”

An astounding example of uh-oh economics occurred recently when the U. S. increased tariffs on Chinese products. In retaliation, China raised its tariff on American soybeans. By increasing the price of American soybeans in China, the Chinese will now be buying their soybeans elsewhere, and cheaper, like Brazil. “Uh-oh,” said American soybean farmers, “There goes the market!” “Uh-oh,” said the government, “we can’t get farmers angry.” A hastily contrived $12 billion government subsidy to make up for their expected losses seemed to calm the farmers. But, “uh-oh,” up goes the deficit.

This is why it is good to have experienced people running government. They have already learned that “making good decisions comes from experience, and experience comes from making bad decisions.”

But what was the pressing need to fiddle with tariffs, which must have some of the most farreaching and controversial unintended consequences going?

A tariff is a fee on products imported from another country. It is paid by the person who buys the foreign product and collected by their government, in our case by U. S. Customs and Border Protection.

Tariffs have been around for centuries and they have three main uses: to raise money, to protect or encourage a nation’s industries, and to punish countries we don’t like. They have a couple of major drawbacks, too: They raise the cost of materials needed in the production of food or manufacturing, and almost universally they raise the cost of living for consumers.

In the early 1900s, a very few wealthy men completely controlled the production of one or more essential goods: coal, steel, petroleum, meat and railroads. Support and opposition to tariffs was specific to different parts of the country, depending on the regional economy.

Since tariffs’ main purpose was to protect U. S. industry, the parts of the country where industry was located – the Northeast – supported tariffs. The agricultural areas – the South and West – generally opposed them. Most Democrats, who represented the agricultural areas, were dead set against tariffs because of the harmful effects on farmers, ranchers and on consumers in general. Republicans were somewhat divided in their support. There were the “Stand-Patters” who liked tariffs because they were beneficial to the monopolistic interests of industry which tariffs protected from foreign competition, and the “Insurgents” who opposed them for the same reason the Democrats did: They stifled small businesses and helped the “Robber Barons” get richer and the middle class poorer.

Until 1913, tariffs were the chief means of raising money to run our country. Anti-tariff sentiment was responsible, in part, for the birth of income taxes. To that end, Republican President William Howard Taft was a strong proponent of the Corporate Income Tax, which he signed into law in 1911 (and which he believed should be public information). That was followed in 1913 by the ratification by the states of the Sixteenth Amendment to the Constitution, which removed the constitutional barrier to enacting an individual income tax. Ratification was quickly followed by the Revenue Act of 1913, which greatly reduced tariffs and, to pay for the reduction, created an individual income tax.

It was quite a shift in public policy. In 1792, tariffs accounted for 95 percent of U. S. revenue. Today, it is about 1 percent.

On Dec. 4, 2018, President Trump proclaimed, “I am a tariff man!” sending the stock market into a tail spin. Maybe he meant it, maybe he was just quoting President William McKinley, Republican of Ohio, who said in 1896, “I am a tariff man, standing on a tariff platform.” And indeed, support for the tariff was in the Republican Party platform of 1896. But times have changed and it’s not there today. I’m sure there’s a good reason for that.

Jim Elliott served 16 years in the Montana Legislature as a state representative and state senator, and four years as chairman of the Montana Democratic Party. He lives on his ranch in Trout Creek. Montana Viewpoint appears in weekly newspapers and Missoula Current.


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