Tariffs

Trump Says Tariffs Helped 'Build America.' He's Missing Some Important Context.

Trump is wrong about tariffs and so was Alex Hamilton.

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Tetra Images Tetra Images/Newscom

After the ratification of the Constitution, the very first law passed by the new Congress was the Tariff Act of 1789. It imposed an 8 percent tax on pretty much all imports into the United States, with the revenue from the tariffs used to fund the new national government and to pay down debts accumulated during the Revolutionary War.

This bit of early American history seems to be what President Donald Trump was gesturing towards with a Wednesday tweet declaring that America "built on tariffs."

And, indeed, Trump has suggested that the tariffs could help pay off the national debt. The math doesn't really work out on that one—the tariffs have generated about $1.4 billion so far, which is hardly even a drop in the bucket against a $21 trillion national debt, as I've pointed out before.

But set aside those technicalities, and the fact that America's economy in 2018 is literally nothing like the nation's economy in 1789. Today, we have more wealth—in large part because of the benefits reaped from trade—but also far more debt than the Founders could fathom.

Still, there's something to be learned by contrasting the Tariff Act of 1789 with Trump's tariffs of 2018. The key difference between today's tariffs and America's first experiement with import taxes is that those old-timey tariffs were used to raise revenue, rather than as protection for domestic industires. This distinction was hard-won, as northern industrial interests tried to use their influence—through their avatar, Treasury Secretary Alexander Hamilton—to impose higher tariffs that would have served as protectionist measures.

Hamilton's argument wasn't all that different from Trump's. He wanted tariffs for what basically amounts to national security reasons—as a way to protect America's nascent industries, without which the country would struggle to survive as an independent nation. Even though he lost that argument to the Jeffersonians, Hamilton's proposed tariffs were a least more closely connected to a legitimate national security concern than Trump's are.

While they weren't protectionist policies, those early tariffs did solve a very practical revenue problem for the early United States government. In those days before H&R Block (indeed, before income taxes) collecting taxes was a difficult prospect. It was much easier to post-up customs officials at every port and collect taxes on the physical stuff that came ashore than to send tax collectors to every town and borough across 13 states to collect taxes from the populace—espescially since many of those would-be taxpayers weren't entirely sold on the idea of a powerful central government, and had a recent history of armed rebellion against excessive taxation.

The tariffs-for-revenue versus tariffs-for-protectionism distinction is an important one, though Trump seems to struggle with grasping the difference. Today, tariffs have fallen out of favor with virutally all governments around the world as means to raise revenue because there are many alternative ways for governments to collect tax revenue from the general public that are considered to be less damaging to the economy than tariffs—though, of course, all taxes have a distorting effect on how goods, services, and investments are allocated.

But tariffs can still be a tool of protectionism. Indeed, explicitly protectionist tariffs were enacted by Congress in 1815 and again in 1828. On both occasions, they imposed economic costs, failed to achieve their policy goals, and fostered political dysfunction that pushed America closer to the Civil War. Another round of protectionist tariffs enacted during the 1930s is now widely credited with worsening and extending the Great Depression.

Pretty much all of Trump's justification for tariffs—ranging from the ridiculous claims about national security to the possibly illegal suggestion that he's using them to gain leverage in trade negotiations—recognize this function of tariffs. That he's lately begun trying to shoehorn some sort of revenue argument into the debate over taxes is either a misdirection or a signal that the president is woefully uninformed about the economic issues at play. Choose for yourself which it is.

If Trump wants to make the argument that America should use tariffs to raise revenue, like we did in the 1790s, he better have a plan to abolish all federal taxes on income, investments, and labor. If he wants to have that discussion, well, I'll listen.

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  1. Federal taxes as a percentage of GDP in the 19th century hovered around 2% – 6%. They now stand around 18%. Spending was a lot lower, too. You can support a nation on tariffs only, but not one with SS, Medicare, and a bloated budget. (Standard libertarian disclosures – fuck you, cut spending, etc., etc. I’ll take tariffs and 5% of GDP total federal taxation any day).

  2. The tariffs-for-revenue versus tariffs-for-protectionism distinction is an important one, though Trump seems to struggle with grasping the difference.

    No, he probably knows the difference. He’s just lying. Just like Trumpistas lie. He’s the biggest liar of them all.

    And America wasn’t built by levying taxes on imports. That’s a lie concocted by economically-illiterate historians and mercantilists. What built America was trade and capitalism. That’s it.

    1. Compare America’s historical tariff rates to countries like the UK or Germany or even France. Go look on Wikipedia. America’s historical tariff rates were higher than all of those countries yet still smashed them economically in short order.

      I see little historical evidence that America’s comparative tariff rates held down the economy. Even today we have seen export oriented protectionist economies like Japan, South Korea, China, and new comers like Vietnam and Malaysia grow despite protectionist policies. Germany is hardly a free trader either, they just feast on their partners in the EU while keeping out all forms of competition from the common market.

      Frankly, I think Hamilton’s infant industry ideas have enabled countries like the USA to Japan to China to grow economically in short order.

      1. And this is the thing free trade zealots can’t fathom.

        Tariffs are merely a tax, like any other. They have their distortions, but so do all other taxes. Tariffs encourage domestic production, income taxes arguably discourage it. To cut income taxes by 50% and raise tariffs would do what??? Well, likely increase domestic production of goods, AKA more jobs, while leaving just as much money in the hands of consumers… If nobody jacked their tariffs on us, what is the downside? With a low labor force participation rate at the moment, probably none.

        Low/no tariffs are cool, but assuming you don’t levy 1,000% tariffs on everything they’re not the end of the world either. Especially in a nation like the USA. Some nations simply don’t have all the resources they need to have a prosperous society. Japan is really low on lots of crucial resources. The USA has basically everything we could ever need, aside from a few odd ball things that we only need small dollar amounts of anyway. Fiji could not survive as a modern nation without trade, the USA could, although there would be pros and cons of course.

        So all nations are not equally dependent on trade. This is just reality. Zealots can never allow the grey zone in between black and white to be discussed…

    2. ” What built America was trade and capitalism. That’s it.”

      What built America was huge amounts of natural resources that were underutilized by the people living on it at the time, who were readily displaced by people eager to harvest the natural bounty available for the taking.

      1. In other words conquest+capitalism. Allowing people to utilize the resources in whatever way they saw fit was what allowed us to expand so rapidly.

        1. “Allowing people to utilize the resources in whatever way they saw fit was what allowed us to expand so rapidly.”

          Yes, allowing people to use the resources of other people, based on the theory that those other people didn’t know how to properly utilize their resources. Also they’re heathens.

          1. Weeell they didn’t.

            I’m a good chunk Native American, and the fact is that they were backwards savages. The “noble savage” thing is a load of romantic horse shit. They never even invented the fucking wheel. No science. No technology that people didn’t have in the old world many thousands of years earlier. They were primitives. The south American Indians were a good chunk better, but still waaay behind the times.

            We’re supporting over 300 million people on land where they couldn’t even support a couple dozen million. They killed, raped, and enslaved each other in greater numbers than the white men ever did. You know who the last people to have slaves in America were? Native Americans in the west! They kept slaves after the civil war for decades, until the while man conquered them and fully abolished the practice. So fuck off with your noble savage nonsense.

            Most that died were simply because of disease, which we had no way of controlling. So why don’t you learn history dude.

            Is conquest nice? No. I wouldn’t advocate we go steal Africa from the Africans again, even though they can’t seem to manage their continent either… But it happened, and the place is a hell of a lot better thanks to it having happened. I’m not going to feel bad about a quirk of history that ended up for the best anyway.

  3. Pat Buchannan makes the same tired, progressive argument all the time: tariffs built America. The argument is also afflicted by the correlation / causation fallacy.

    Support of tariffs is support of central planning.

    Support of tariffs is support of progressivism, see Hamilton, see Clay, see Lincoln.

    Support of tariffs is support of the American System, see internal improvements, see the federal funding of the transcontinental railroads, see crony-capitalism, see mediocrity, see corruption; contrast with James J. Hill’s construction of the Great Northern Railway.

    America prospered in spite of its tariff regime, not because of it.

    1. “America prospered in spite of its tariff regime, not because of it.”

      This very well might be true but there is no way to prove it. History has passed already and we cannot test out whether this assertion is true in some laboratory setting.

    2. Honestly, I do think the infant industry argument has some validity to it. It is simply really hard to break into some industries without at least a bit of protection.

      If Japan had not protected its auto industry, and instead just got flooded by Chevys and Fords the whole time, would its incredibly massive and powerful auto industry have ever come about? Possibly not.

      By having that restriction they DID possibly prevent some other unknown industry from growing up in its place though, and we will never know if that mystery industry may have in fact done better than the auto industry for Japan.

      That’s the thing with debating some of this stuff, there’s simply no way to run an entire alternate history theory through to its logical conclusion.

  4. After the ratification of the Constitution, the very first law passed by the new Congress was the Tariff Act of 1789.

    Sorry to be a pedant, but the very first law passed by the new Congress was “An Act to regulate the time and manner of administering certain oaths.” Act of June 1, 1789, ch. 1, 1 Stat. 23.

    The Tariff Act (“An Act for laying a duty on goods, wares, and merchandises imported into the United States,” ch. 2, 1 Stat. 24 (Jul. 4, 1789)) was the *second* law passed by the new Congress.

    1. Be careful, sometimes, the truth hurts!

  5. far more debt than the Founders could fathom.

    Or any normal human being, really.

  6. In a way tariffs make sense as a form of government revenue. After all, it is the responsibility of government to maintain the borders, protect property rights, and enforce contracts. It does all of those things when goods travel across the border. So tariffs seem somewhat like a fee for services rendered.

  7. While I agree they probably haven’t helped “build America”, they’re certainly nothing new. Again, all I hope is that America having a New Dawn on looking at Tariffs, otherwise, this is nothing more than partisan wailing.

  8. Alexander Hamilton was a cunt.

    And if you still love that musical too much to agree with me, then you’re a cunt.

    1. Word. Never seen the shit musical, because I refuse to watch it. But he was indeed a cunt.

  9. “Trump Says Tariffs Helped ‘Build America.’ He’s Missing Some Important Context.”

    No shit.
    What happened when the Americans considered the tariff rate on British tea?

  10. Dismantle the IRS. Throw all their worthless employees on the street where they belong. Make it illegal for states to collect taxes/fees of any sort. Impose tariffs of not more than 10%.

    1. Wow. You don’t often see such naked lust for an all-powerful federal government in libertarian circles.

  11. As I said above, a tariff is nothing more or less than a tax. It has its distortions that are likely outcomes like any other tax… The question is, is it any worse than any other tax? I’d say no. I think a small 10% across the board import tariff to generate revenue would be pretty awesome. It would encourage domestic production of goods that were less than 10% cheaper to produce here, and jobs are cool given our low labor force participation rate.

    If we lowered the income tax exactly enough to offset in the same legislation that passed such a tariff, what is the downside? Not a lot. People have the same amount in their pockets, and a few more jobs may be created here for items that were on the edge anyway. Not the end of the world.

    People who make it out like moderate tariffs are the end of the universe are idiots. It’s no worse than a regular sales tax, income tax, or anything else.

  12. Early US tariffs supported a tiny federal government.

    The US has far more taxes today and our federal government is bloated where we dont have more belt notches.

    1. Early US tariffs supported a tiny federal government.

      Yeah. A minarchy. Minimal. Government.

      Or was that anarchy?

    2. Everybody loves to complain about how there’s too much federal spending. But when you ask them what to cut, they get vague, or else start listing services that they themselves do not use or benefit from.

      Every dollar the federal government spends shows up as income to somebody, and creates effects that somebody is counting on.
      Mexico has a MUCH, MUCH smaller federal budget than does the U.S. Yet you don’t hear anyone urging relocation to take advantage of the lower governmental expense. Why is that?

      1. Only idiots are like that. It’s easy to ramble off pointless things, or things that are grossly over funded. The Pentagon for one! Department of Education. Basically every department actually…

        The truth is most things the FedGov does are pointless, or dumb to handle at the federal level. Sure people have BECOME USED TO getting their government money, but if it went away they would do something useful instead. The few semi useful things they do could be kicked back to the states and done far more efficiently. Educational attainment has got WORSE since the Department of Education… So how useful can it be exactly??? The same argument can be credibly made for 95% of everything else the feds do too.

  13. Why are tariffs only bad when they’re imposed by the United States? I never hear a peep from the free traders about the protective tariffs of other countries. It What about those? Trump is really the one trying to get free trade out of them.

    1. If you “never hear a peep from the free traders about the protective tariffs of other countries”, it’s for two reasons: one, because you aren’t listening, and two, Before Trump they were pretty negligible. It was free traders who, in the NAFTA negotiations, got Mexico to drop tariffs on imports from the U.S. averaging two and a half times those the U.S. imposed on Mexican imports to zero. As for EU tariffs, they come to less than 3% of imports from the U.S., so free traders are more concerned about non-tariff barriers like regulatory games that bureaucracies play and VATs.

  14. The worst effect of Smoot-Hawley wasn’t “worsening and extending the Great Depression”. It was bringing about World War II. It trashed the German and Japanese economies to the point where both nations had a choice between starving and taking what the needed to survive by force. As Bastiat is often quoted as saying (although no one has yet found when and where he said so), “”When goods don’t cross borders, soldiers will”.

    1. Yeah… As a history buff, that’s just not true. I won’t go into details, but Germany was borked far more by WWI reparations, and Japan had been pursuing an expansionist policy for decades already… What made them bomb Pearl Harbor was FDR cutting them off from US EXPORTS to them, which was specifically done to cripple their already going war effort.

      Try again.

  15. An income tax rate of nothing, and a tariff rate of 8% on all imports would be a good thing. Of course, if any country wanted to object to that policy, we could always let China, Brazil or India worry about building their roads, public utilities, protecting their borders, feeding their starving populace, and delivering medicine to the needy. I’m sure they would appreciate those investments more if they didn’t come from big bad white people anyway. Too bad none of those countries I mentioned can even feed themselves at the moment though.

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