By Mark Franke
Guest columnist
If nearly all economists agree that tariffs are bad, why are they so popular?
This was the focus of last month’s gathering of my Socratic discussion group. To help us dissect this apparent paradox, we were joined by two academic economists as subject-matter experts.
Our guests provided a short primer on the history of tariffs, especially those used and abused by the United States. It began with a reference to Milton Friedman, my hero during my undergraduate years as an economics major. Plus one for the invited experts.
At its founding, the new nation relied on tariffs to finance the federal government as no other source of revenue was readily available. In essence, tariffs were a form of taxation back then, a correlation being debated again today. More about that later.
Eventually, the United States began to look at tariffs as a protective measure for infant industries, specifically the nascent textile companies of New England. The problem with this approach is that it resists sunsetting; once assessed, protective tariffs are quite resilient against either reduction or elimination. The favored industry enjoys its special treatment, and today it can hire hordes of lobbyists to protect this protection. More than 12,000 of them are currently registered with Congress.
So what, you may ask? Think about what the net effect of the tariff is. Sure, there are jobs created in the protected industry, but at what cost? The simple answer is at a cost paid by American consumers in higher prices for imported goods. This also allows the domestic producers to sell at a higher price, all this coming out of the pockets of you and me.
That takes us back to the assertion that a tariff is a tax. It’s not a semantic matter; don’t get misled by where it is assessed and to whom. Products with tariffs will be priced artificially high at retail. Someone has to pay the cost of the tariff and, like all other costs of doing business, it is passed on to the ultimate consumer at the cash register.
A simple accounting fact to remember is that businesses do not pay taxes; they just collect them from their customers on behalf of the government. It’s like payroll withholding taxes, only obscured from the ultimate payer.
I have no idea what President Donald Trump’s game plan is. He imposes tariffs, then pauses their implementation. Clearly, he is pursuing some kind of negotiating strategy that must have worked in his former business world, but now introduces significant uncertainty among all the actors affected, both other nations and American businesses.
One of our number suggested that Trump’s strategy is to keep throwing “Hail Mary” passes with the expectation that one will get caught in the end zone. Trump not only has a radically different playbook, but he also is playing by a different set of rules than what the world expects from the U.S. Without doubt, he is a provocateur extraordinaire and an effective tactician.
Trump says he is trying to get a reset on the international trade imbalance. He is right in that there are still those post-WWII tariff agreements that set U.S. rates much lower than most other nations’ to speed economic recovery in war-damaged Europe and the developing world. Then there is China, our bete noire in nearly everything geopolitical these days. They don’t play fair, a charge that resonates on both Wall Street and Main Street.
Is the answer to engage in a war of escalating tariff rates? What if we tried a quite different strategy, one that played to American strengths rather than the advantages held by others?
Socrates, our group’s namesake, instructed us to change ourselves before trying to change the world. Why not unleash our Yankee ingenuity by reducing bureaucratic red tape imposed on business startups? Or slash the number of governmental regulations (180,000 pages worth at last count) that add to the cost and time of doing business? Or reduce taxes on capital and R&D investments in new processes and products?
Think what you like about Elon Musk, but his SpaceX is exhibit number one for what the private economy can do compared to a governmental agency like NASA. If time is money, Musk knows how to make that conversion profitably. We must stop demonizing the innovators, the entrepreneurs, and the capitalists who are the people taking the risks.
Fairness arguments aside, and I realize that these prejudices are hard to push out of the way, the current tariff structure results in other nations’ (read: China as the foremost) wanting to sell their goods at substantial discounts to American households. Americans love deals. Why not let China offer them? If China wants to waste its economic resources giving Americans discounts at retail, then let’s encourage them on their road to long-term economic ruination.
We would make Milton Frieman proud.
Mark Franke, M.B.A., an adjunct scholar of the Indiana Policy Review and its book reviewer, is a former associate vice chancellor of Indiana University-Purdue University Fort Wayne. Send comments to editorial@therepublic.com.
Mark Franke, M.B.A., an adjunct scholar of the Indiana Policy Review and its book reviewer, is a former associate vice chancellor of Indiana University-Purdue University Fort Wayne. Send comments to letters@dailyjournal.net.
