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A Closer Look At How Tariffs Work
SARA WYANT
WASHINGTON, D.C.
Like many of you, I first learned about tariffs and the impacts on international trade and global economies from my history books. Now, one of the most common questions I get from farmers who see the word “tariff” in the news almost daily is “how do tariffs really work?”
The basic principles behind tariffs haven’t really changed since first enacted in the early years of U.S. history. They are designed to protect domestic businesses – often specific industries like steel or agriculture – and can generate revenue for the government. Basically, they are a tax on imports and normally, they are calculated as a percentage of the price that a buyer pays a foreign seller.
Let’s say, for example, that a U.S. manufacturer wanted to buy a machinery part that is made in China. That specific part normally sells for $100. But now, the U.S. has imposed a 25 percent tariff on imports from China. Instead of $100, the price would be $125, with the tariff portion collected at one of our 328 official ports of entry. Eventually that tariff revenue would flow to the U.S. government. (Actual tariff rates and products vary.)
The opposite applies in countries like China, who have retaliated by imposing steep tariffs on U.S. products like pork and soybeans. A Chinese buyer would have to pay a higher price, or in most cases, simply stop buying from the U.S. and purchase elsewhere, like Brazil.
With China buying up all of Brazil’s soybeans, former Brazilian customers like the European Union will likely start buying from the U.S., the only other major supplier.
With tariffs in place, trade flows tend to reroute to the most cost-effective supply chains, but that doesn’t mean that some U.S. farmers won’t face steep losses in the meantime.
U.S. pork producers now face punitive tariffs of 62 percent on exports to China, a market that once represented 17 percent of total U.S. exports by value in 2017, according to the National Pork Producers Council. Iowa State has estimated that from early March through May when trade disputes were escalating, producers lost $18 per hog, or more than $2 billion on an annualized basis.
Most economists will tell you tariffs have not worked well over the long-term. For example, the U.S. Congress imposed the Fordney-McCumber Tariff of 1922 to protect U.S farmers after World War I. At that time, Europe was recovering from the war and producing more of their own commodities. U.S. agriculture was becoming more mechanized and productive. With low demand and relatively high production, commodity prices in the U.S. dropped dramatically. The measure gave President Warren Harding the power to raise or lower tariff rates as recommended by the Tariff Commission.
Not unsurprisingly, our trading partners complained and created or raised their own tariffs. Some formed new trading relationships to circumvent the U.S.
Over the short-term, the tariffs worked to bump up U.S. farm income a bit. But then farmers figured out that their production costs were increasing, too. “The average cost of a harness rose from $46 in 1918 to $75 in 1926, the 14-inch plow rose from $14 to $28, mowing machines rose from $45 to $95, and farm wagons rose from $85 to $150,” according to Edward S. Kaplan, who wrote," American Trade Policy, 1923–1995.
By 1927, there was growing recognition among global leaders attending a League of Nations’ meeting that tariffs needed to end. However, some countries, like France, moved to increase their tariffs.
Just a couple of years later with the Great Depression approaching, the interest in increasing tariff levels and applying even more tariffs increased again. Sen. Reed Smoot, a Utah Republican and the chairman of the Senate Finance Committee, sought to protect domestic sugar beets, a business at the heart of his state’s Mormon economy. He partnered with an Oregon Republican, Willis Hawley, who chaired the House Ways and Means Committee. Both men sought to protect agricultural interests and deliver on a promise that President Herbert Hoover made during his 1928 campaign to support farmers. Other industries quickly jumped on the tariff bandwagon, with promises of new prosperity to come. The Smoot-Hawley Tariff bill was signed into law in 1930, raising tariffs on over 20,000 products.
Then, the Great Depression smacked Americans from California to New York and all parts in between. There’s considerable disagreement among economists about whether Smoot-Hawley made the Great Depression worse, prolonged it, or both. However, voters decided they wanted a change in political direction. President Franklin Delano Roosevelt, a Democrat who won by a landslide in 1932, pledged to lower tariffs. He was able to negotiate bi-lateral tariff reductions and eventually work toward a multi-lateral trading framework.
Fast forward to 2018 and some economists predict that the history of tariffs is about to repeat itself.
But President Trump and one of his top economic advisors, Peter Navarro are convinced that their tariff strategy is the right one at the right time. Navarro has publicly argued that, while past tariffs are protectionist, this round against China is defensive and long overdue.
One big difference between now and the early 1900’s is that the U.S. economy is humming along nicely, growing at a rate of 4.1 percent. In addition, unemployment is at historical lows. Regulatory burdens are being lifted.
Throughout his campaign and presidency, Trump maintained that other countries are treating U.S. companies and farmers unfairly and this is a good time to maximize pressure and fight back with tariffs on countries like China, Canada, Mexico and the European Community. He recently tweeted that “Tariffs are the greatest!”
So far, U.S. farmers and ranchers are nervous about Trump’s strategy- especially with China. Farm income has dropped by more than half since 2013, and commodity prices continue to suffer. Prices for grain bins and some farm equipment – also impacted by U.S. tariffs on steel and aluminum – are climbing upward.
However, many farmers tell me they are willing to give Trump the benefit of the doubt for trying to force other countries to abolish their tariffs and stop stealing intellectual property and new technology developed in the U.S.
“A lot of people are looking long-term,” said North Dakota Agriculture Commissioner Doug Goehring, who also farms in his home state, “even though they may be concerned” during the short term. “And so am I,” he adds.
However, he says about 96 percent of the people he talks to support the president’s actions against China’s unfair trade practices. “They know they can compete if given a fair chance.” ∆
SARA WYANT: Editor of Agri-Pulse, a weekly e-newsletter covering farm and rural policy. To contact her, go to: http://www.agri-pulse.com/
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