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The debate over tariffs has resurfaced in national politics. One proposal is an across-the-board tariff of 10 percent to 20 percent and at least 60 percent on imports from China. The proposals are terrible from an economic perspective because the costs of tariffs are passed on to consumers. Tariffs are also regressive and will negatively affect lower—and middle-class families struggling to make ends meet, which is why economists across the political spectrum have panned such proposals.
Trade has been a contentious issue for more than 30 years. Ross Perot, the last serious independent/third-party presidential candidate, opposed free trade—specifically, the North American Free Trade Agreement (NAFTA)—a centerpiece of his 1992 and 1996 presidential campaigns. If you’re old enough, you may remember Perot complaining about the “giant sucking sound” caused by NAFTA. He was complaining of purported job losses in the United States caused by NAFTA. (I should note here that the vast majority of job losses have occurred because of automation. Less than 14 percent can be attributed to trade.)
It may come as a surprise to most that Congress doesn’t need to take any action for an administration to impose tariffs. On tariffs and other policy matters within its constitutional jurisdiction, Congress has surrendered its authority to the Executive Branch. As such, an administration may impose tariffs under Section 232 of the Trade Expansion Act of 1962 (19 U.S.C. §§1801) and Section 301 of the Trade Act of 1974 (19 U.S.C. §2411). Both laws have come into focus in recent years because of the Trump administration's imposition of tariffs, which have generally been kept in place by the Biden administration.
Although the sentiment behind the phrase “buy American” may have appeal, tariffs are economically destructive and worsen relationships with foreign nations, including allies worldwide.
The United States has experimented with tariffs as a means to protect American-based jobs before, and it didn’t work out so well. In 1930, President Herbert Hoover signed the Tariff Act—more commonly known as “Smoot-Hawley,” after its architects, Sen. Reed Smoot (R-UT) and Willis Hawley (R-OR)—into law in May 1930. The tariffs were advertised as a way to boost an economy reeling from the Stock Market crash that began in September 1929. If you’re a fan of ‘80s movies, you may remember the scene in Ferris Bueller's Day Off in which a monotone teacher, played by Ben Stein, teaches his class about Smoot-Hawley.
At the time, job losses due to the Stock Market Crash of 1929 appeared to have, at least briefly, leveled off. We’ll never know for sure what would’ve happened had Smoot-Hawley not been enacted. The unemployment rate in May 1930 was 3.4 percent. That was lower than the 3.6 percent rate registered the month before. By July, the unemployment rate hit 5 percent. Unemployment reached 10.8 percent by November 1930. It wouldn’t fall below double digits until February 1941. (Just a side note since I mentioned Perot and his opposition to free trade. Vice President Al Gore gave Perot a framed picture of Smoot and Hawley during a 1993 debate on NAFTA hosted by CNN.)
Did anyone try to warn Hoover that Smoot-Hawley was bad policy that would hurt America? Oh, yes. More than 1,000 economists signed a letter in opposition to the Tariff Act. That letter was delivered to Hoover, Smoot, and Hawley. Unfortunately, Hoover signed Smoot-Hawley over the advice of the economists.
The economists who signed the letter explained, “We are convinced that increased protective duties would be a mistake. They would operate, in general, to increase the prices which domestic consumers would have to pay. By raising prices they would encourage concerns with higher costs to undertake production, thus compelling the consumer to subsidize waste and inefficiency in industry. At the same time they would force him to pay higher rates of profit to established firms which enjoyed lower production costs. A higher level of protection, such as is contemplated by both the House and Senate bills, would therefore raise the cost of living and injure the great majority of our citizens.”
The letter also warned of retaliatory tariffs on American exports. “Countries can not permanently buy from us unless they are permitted to sell to us,” the letter stated, “and the more we restrict the importation of goods from them by means of ever higher tariffs the more we reduce the possibility of our exporting to them.”
Smoot-Hawley’s impact on the Great Depression can be debated, but we know it made matters worse, not better. Imports and exports declined significantly, and the United States went further into an economic depression. Smoot-Hawley was such a problem that Franklin Roosevelt signed the Reciprocal Tariff Act in 1934, and trade became more liberalized.
Another example were the steel tariffs imposed by President George W. Bush’s administration in 2002. The tariffs, which were as high as 30 percent, were imposed to protect the steel industry in the United States in competitive states like Ohio and Pennsylvania. (Canada and Mexico were exempted from the tariffs due to NAFTA considerations. A handful of other countries were also exempted.)
The European Union retaliated with tariffs on steel exported by the United States. The tariffs were part of a message from the European Union to tread carefully on tariffs to avoid the possibility of a trade war. Several countries, including Japan and Switzerland, filed a complaint with the World Trade Organization (WTO) against the United States’ steel tariffs. The WTO ruled the tariffs were illegal and imposed hefty sanctions against the United States. When President Bush pledged to keep the tariffs in place after the WTO decision, the European Union threatened additional tariffs on a wide range of goods produced in the United States. Although the steel tariffs imposed by the United States were set to be in place until 2005, the Bush administration eventually relented in the face of an escalation of a trade war and ended the steel tariffs in December 2003.
There are two ways to view the economic impact of the Bush administration’s steel tariffs. The first is reductions in gross domestic product, or GDP. A study published by the U.S. International Trade Commission in September 2003 estimated that “returns to capital fall by $294.3 million and returns to labor, based on the net effect on all labor in the U.S. economy, fall by $386.0 million as a result of the safeguard measures.” The economic losses were more than the gains in revenue from the steel tariffs, which amounted to nearly $650 million.
The second way to look at the economic impact of the steel tariffs is the number of full-time equivalent (FTE) job losses. In a February 2003 study, the Consuming Industries Trade Action Coalition Foundation estimated that “200,000 Americans lost their jobs to higher steel prices during 2002. These lost jobs represent approximately $4 billion in lost wages from February to November 2002.”
Tariffs imposed by the Trump administration, and generally kept in place by the Biden administration, have raised more than $230 billion in revenue since 2018. That’s not nothing, but it’s not a substantial amount over five years. On a static basis, those tariffs are a tax increase of $79 billion annually and will lead to the loss of 140,000 FTE jobs.
What about proposals to impose 10 to 20 percent across-the-board tariffs and tariffs of 60 percent on Chinese imports? The Tax Foundation did some back-of-the-envelope math based on 2023 imports and got $311 billion from the 10 percent tariff and $213 billion from the tariffs on China. However, the caveat is that “[a]ctual revenue raised would be significantly lower because of avoidance and evasion, falling imports, and lower incomes resulting in lower payroll and income tax revenues.” This is because of the behavioral changes that would come because of the increased tariffs. We’d see a decline in gross domestic product of nearly 1 percent and a loss of 684,000 FTE jobs.
The result of tariffs is higher prices at the point of sale. That means less money for you and your family to buy basic necessities that we often take for granted. That’s just the initial impact of tariffs. Other impacts translate into higher prices as well, like retaliatory tariffs. It’s Smoot-Hawley all over again.
