Daily Archives: August 10, 2018

A Ten Thousand Foot View of the Current Tariff Debate

THURS, AUG 10th, 2018

Trade wars and tariffs have been in the headlines for several weeks impacting discussions in boardrooms and living rooms around the world. Many economists are opining about the potential impacts of the proposed and recently implemented tariffs, but how do the tariffs today fit in the context of U.S. trade history? First, a bit about tariffs. Tariffs are a tax imposed on imported goods or services from another country. They serve the purpose of sheltering a domestic industry from foreign competition by making the foreign goods more expensive for domestic consumers.

Tariffs have been around as long as nation-states and commerce have existed. The first tariff law in the U.S. was the Tariff of 1789 which was implemented to generate revenue for the federal government and to protect domestic workers and industries. Prior to 1789, under the Articles of Confederation, individual states sought to impose their own tariffs on imported goods. The 1789 act assessed a duty of fifty cents per ton on cargo of foreign owned or foreign built ships but only six cents per ton tariff on American owned ships. Interestingly this provision favoring U.S. ships still exists today for shipping between U.S. ports. It has been in the news as U.S. commonwealths such as Puerto Rico find themselves paying higher shipping rates from U.S. ports due to the lack of competition from foreign firms.

Tariffs were the greatest source of federal revenue, at times approaching 95%, until the income tax was established in 1913. Between 1789 and 1914 the debate about the correct level of tariffs remained heated. In general, Democrats favored tariff rates sufficient to fund government but no higher while Whigs and Republicans favored higher tariffs to protect American workers and encourage American business. Following the implementation of the income tax in 1913, tariffs have generally trended lower and today are quite low.

The three main reasons tariffs are imposed today are to protect budding new industries, to protect aging and/or inefficient industries, and to protect against dumping – when a foreign company sells products in the export market at a price below their cost or at a price below what they charge for the same products in their own market.

Tariffs can be implicit or explicit. An explicit tariff is a clear fee assessed on imported services and products. Implicit tariffs are rules that prohibit the import-export of certain items – for example, some nations disallow importing of genetically modified foods which serves to protect their farmers from foreign competition. China requires foreign companies that manufacture in China to share ownership of their endeavors with a Chinese firm and transfer their technology to this jointly owned entity.

If every country had the same labor laws, environmental laws, governmental structure and business regulations then tariffs would likely not be an issue. But that is not the way the world works. Each country has its own set of laws and values and will work to protect them. For example, France has placed a high value on its rural agrarian countryside and has implemented trade barriers to keep such areas from being wiped out by U.S. agribusiness. For the last several decades China has implemented trade barriers both to allow budding businesses to incubate and grow and to remain in control of what is still a single party authoritarian economy. The U.S. has implemented hundreds of protectionist measures through a variety of tools from tax breaks to regulatory restrictions which raise the bar for potential new entrants, to outright tariffs on imports. According to the Center for Responsive Politics, $3.37 billion was spent on lobbying Congress in 2017 most of which was focused on legislating an advantage for a specific company or industry.

Tariffs and other restrictions on free, fair, unfettered trade have existed as long as commerce has existed. The current headlines regarding trade practices, while unsettling, are not new. History has taught us that countries will continue to view trade policies from the lens of enlightened self-interest. However, it has also taught us that open markets with free and fair trade promote global economic growth. And, as the saying goes, rising tides lift all boats.

John Q. Bird, CFA, CFP®, MBA
President, Principal and Co-Founder
Albion Financial Group
(801) 487-3700