Leibowitz: The continuing debate over the utility of tariffs

Written by Lewis Leibowitz

Over many years—even centuries—the wisdom and utility of tariffs as an instrument of government policy in peacetime have been debated. That incessant debate continues, and is likely to persist. 

In many ways, it is timeless. Britain repealed the Corn Laws in 1846. The McKinley Tariff in 1890 fundamentally restructured tariffs in the US. The Smoot-Hawley Tariff in 1939 imposed huge new tariffs. After World War II, more trade liberalization came into force. And, most recently, the tariffs during the Trump presidency restricted trade with China and many friendly countries. The commentary in each of these instances examined both the benefits and the harms of tariffs and their relaxation.

A recent column in the Wall Street Journal by Andy Kessler is one of the latest forays into the debate, but Kessler is far from alone. The Washington International Trade Association, a nonpartisan group studying international trade effects of government policies, recently conducted a webinar on the Boston Tea Party, which occurred 250 years ago on Dec. 16. While some of our woke brethren are critical of the Tea Party as an act of terrorism, there is no doubt that it was an early protest against taxation by an out-of-touch, remote regime. Many would agree that such a regime can exist in Washington, as well as London.

I think Kessler’s arguments could be sharpened. Like any issue, tariff policy can get complicated, and Kessler avoided complications. Note that consensus approaches unanimity where international conflict is factored in. During the World Wars, we outlawed “trading with the enemy.” 

But when conflict has not gotten physical, the complications set in. Here is where the debate over tariffs makes eyes glaze over, but it is important to explore them. 

First, in the absence of armed conflict, the arguments for tariffs should narrow to sectors where preparedness for war are important. Tariffs are, unfortunately, a very blunt instrument. They are taxes that raise prices for everything, not just imports. If imported pickup trucks are dutiable at 25%, as they have been since 1963, the prices of domestically produced trucks will go up. Probably not up by the full 25%, but close. If steel tariffs are imposed on imports, the price of domestically produced steel will rise, affecting the prices of all the products made with steel. On balance, these tariffs hurt all Americans to some degree, and help a few companies and workers a lot.

Because of politics, government tends to support the few at the expense of the many. Auto workers know that tariffs on pickup trucks help them, while truck buyers may not appreciate that the tariff hurts them. And the costs to the ignorant harm the economy, much more than the benefits to the workers and companies help the economy. 

Second, the arguments about national security are expanding to sectors that were not considered important previously. Electronics like semiconductors are now in the national defense debate. The overwhelming number of advanced chips are made in Taiwan, which is vulnerable to attack by China. This has led the Biden administration to subsidize new chip factories in the US. It is hard to argue against that—insurance against the loss of production of advanced chips from Taiwan is laudable. But the CHIPS and Science Act, which allocates $39 billion in federal money to encourage more chip production in the US, also conditions the subsidies on some profit sharing between companies and the US government, and the use of union labor in construction. The projected start date for manufacturing has been postponed to 2025. Government subsidies for manufacturing (some call it “industrial policy,” while others call it “picking winners and losers”) can be wrongly directed. A recent article indicates that more than 300 companies have “expressed interest” in some of that $39 billion. I hope the administration evaluates wisely, but the track record there is far from unblemished.

Third, there is a notable lack of determination to end tariff subsidies for domestic manufacturers where more harm than good is done. Tariffs on steel and aluminum have been in place since 2018 under Section 232—ostensibly for national security reasons, but clearly not solely or even principally devoted to that objective. Other trade protections, such as the antidumping and countervailing duty laws, safeguard actions, and other programs, make these products much more expensive—and can even keep products that are not made here out of the market. If new industries are added to the national security mix, the government should look at cutting losses for the industries that no longer need protection. 

The Section 301 tariffs on imports from China are certainly a mixed bag when it comes to national security. Goods from many sectors either entirely unrelated or only tangentially related to national security are covered by these tariffs. The Tax Foundation estimates that these tariffs cost 160,000 US jobs (September 2023 estimate). 

Tariffs are not the only mechanism the US government uses to protect domestic industry. Mandates to “Buy American” for government-funded projects, quotas on sugar imports, and the Jones Act—which was intended to preserve the United States Merchant Marine, and has been spectacularly unsuccessful in that aim—are more examples of meddling. These policies hurt more Americans than they help—and the playing of the “national security” card in many instances has been disingenuous at best, and deceptive at worst. 

Donald Trump has advocated more tariffs on more imports if he is elected president next year. As we hear more ideas along the campaign trail for government intervention in the economy, two fundamental truths should always be remembered: (1) government policies do not always work as intended; and (2) most protectionist impulses cause more economic harm than good.

Editor’s note: This is an opinion column. The views in this article are those of an experienced trade attorney on issues of relevance to the current steel market. They do not necessarily reflect those of SMU. We welcome you to share your thoughts as well at info@steelmarketupdate.com.

Lewis Leibowitz, SMU Contributor

Lewis Leibowitz

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