History of Tariffs in the U.S.

Free Trade, No Tariffs!

The controversies regarding “protective” tariff rates date way back, long preceding the debate over globalization. Even in these early days of American history, tariffs brought about some of the most cutthroat debates within the United States political system.

Following the war of 1812, the early United States government enacted a tariff to help protect domestic industries, which were primarily located in the New England states. The following are the arguments made on behalf of the tariffs:

1. As a result of the British embargo during the war, domestic industrial production grew tremendously. Tariffs were deemed necessary for these “infant industries” to survive.
2. The nation’s founders believed tariffs were necessary to the nation’s defense by helping to keep factories which could produce war materials.
3. In its early days, the United States federal government relied on tariffs as the primary source of revenue.

Over the course of the next several years, tariffs emerged as the hottest political controversy within the U.S., right next to slavery. Northern states, which were immensely industrial, wanted to preserve the protective tariffs, which shut out cheaper goods from Europe. Southern states, in contrast, complained about them. They realized that these “protective” tariffs made them pay way higher prices for manufactured goods. As a result of the decreased imports from Europe, European markets had fewer dollars to buy raw materials (such as cotton and tobacco) produced in the American south. As a result, leaders of the south argued that tariffs caused a remarkable transfer of wealth to the North.

This 19th century debate is very similar to some of the debates about tariffs that take place today. Although tariffs have significantly decreased overall, the U.S. still maintains high tariffs on goods such as steel, agricultural products, textiles and apparel. The ultimate question is the same: do the benefits to workers and producers in these industries outweigh the costs for the consumers?

Say NO to Tariffs!

It is quite easy to see why a foreign tariff would hurt the economy of a country. A foreign tariff raises the costs of domestic producers which causes them to sell less in those foreign markets. Because of this reduction in demand, many jobs are lost. These job losses then impact other industries due to the demand for consumer products decreasing because of the reduced employment level. Foreign tariffs, along with other forms of market restrictions, cause a dramatic decline in the economic health of a nation. It is a vicious cycle!

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Tariffs hurt the country that imposes them in all but the rarest of instances, as their costs almost always outweigh their benefits. Sure, some people who are for tariffs will argue that they are a blessing for domestic producers who now face reduced competition in their home market. However, this reduced competition causes prices to rise – great for the producer, awful for the consumer. Proponents of tariffs also argue that it increases the sales of domestic producers, which is great and all, but it still comes at too great of a cost for the consumer. Between increased production and price, domestic producers are in theory able to hire more workers which causes consumer spending to rise. Finally, tariffs also increase government revenues which can be used to benefit the economy. All of this is what proponents argue should happen, in theory, as a result of tariffs. Later on, though, I will discuss empirical evidence of how tariffs actually impact the economy negatively.

Referring back to some of the “positives” of tariffs explained above, I would like to discuss the impact on the consumer in more depth. If a tariff is enacted on a product, then the price of the good increases. Now, the consumer is forced to buy less of this good. From a consumer view, this increase in price can also be seen as a reduction in consumer income. Because consumers are now purchasing less, domestic producers in other industries are selling less also, hurting them in the process. This view shows that tariffs cause a steep decline in the economy.

Now lets discuss a couple examples of empirical evidence on the effect of tariffs:

1. In 2000, President Bush increased tariffs on imported steel goods anywhere from 8 and 30 percent depending on the product. A study is cited by the Mackinac Center for Public Policy which states that the tariff will reduce the national income by 0.5 to 1.4 billion dollars. This same study also estimates that fewer than 10,000 jobs will be saved by the tariff, resulting in a cost of over $400,000 per job saved. Worst of all, the study states that each job saved will result in 8 being lost.

2. The cost of protecting jobs is in no way unique to the steel industry or to the U.S. for that matter. It is estimated by the National Center For Policy that in 1994 alone, tariffs cost the U.S. economy $32.3 billion or $170,000 for each job saved. To compare this to the rest of the world, tariffs in Europe cost consumers $70,000 for every job saved while Japanese consumers spent a whopping $600,000 for every job saved through Japanese tariffs.

To sum this up, the benefits caused by increased domestic production in tariff protected industries and an increase in government revenues does not offset the negative impact that increased prices cause consumers combined with the costs of levying and collecting the tariff. This is not even taking into consideration that other countries might possibly put tariffs on our goods in retaliation, which would undoubtedly be costly to us. But, even if they do not, enough proof is given that tariffs are still costly to the economy. It is also important to note that international trade significantly increase the wealth of an economy. Anything designed to slow this trade will negatively impact economic growth. For these reasons, basic economic theory would indicate that tariffs are harmful to the country which imposes them.

The Future of Tariffs- Going Away, But Never Completely

In recent years it would appear that the United States has made a significant push toward getting rid of tariffs. On March 26th, U.S. President Barack Obama and European Union leaders promised to remove all tariffs on bilateral trade. This was a very ambitious step towards what will be the world’s largest free-trade deal. This Transatlantic Trade and Investment Partnership is expected to bring $100 billion a year for both sides. Along with this agreement, the United States is currently seeking a similar trade pact with 11 other nations around Southeast Asia and the Pacific.

In addition to trade pacts that are in the works, tariffs are also being reduced by current trade agreements that are scheduled to include future tariff reductions. These agreements include the countries of Australia, Bahrain, Chile, Colombia, Dominican Republic, Korea, Morocco, Oman, Panama, Peru, and Singapore.

As you can see, the United States has made a effortful stride to reduce tariffs and promote free trade, and continues to do so. At the same time, however, some tariffs will always exist simply to “play the politics” and please those who support tariffs under the false notion that they are good for America and save American jobs. In conclusion, tariffs are going away but never completely.