Tom Saler: History shows tariffs tend to end badly

Standing beside the bleeding corpse of the man he murdered, Shakespeare’s Richard III convinced the victim’s grieving relative, Lady Anne, that he killed her father-in-law and husband out of love. Oh, and let’s get married, OK? They do.

Literature’s most astute observer of human nature didn’t need to witness 21st-century nativism to dramatize how distressed people can be manipulated.

So with moral inversion back in style — real is fake and fake is real — it shouldn’t be surprising that President Donald Trump could declare that “trade wars are good, and easy to win.” Somewhere, heads are nodding. But the historical record suggests they should be shaking.

That the trade war of the 1930s turned a recession into a depression is hardly breaking news. The subsequent loosening of trade barriers also coincided with the biggest jump in global living standards in human history, adding to the global market for U.S. goods and services. As a percent of GDP, American exports have tripled since 1960.

But implicit in Trump’s “America First” branding is the presumption that free trade policies are perversely intended to put America second or third or, dare we say, last?

Never explained is why a politician in need of votes would willingly subjugate American interests. In a particularly revealing comment, however, Trump noted that while his outgoing chief economic adviser Gary Cohn was a “globalist … in his own way he’s a nationalist because he loves our country.” You don’t need to be a Shakespearean scholar to unravel that statement’s dark implication.

Bad math

While the administration’s plan to impose tariffs on imported steel and aluminum seems directed at China, less than 2% of U.S. steel imports and an even smaller percentage of raw aluminum imports come from that country. Meanwhile, domestic industries that use steel and aluminum employ 30 times more people than industries that make steel and aluminum.

This is not to suggest that China is blameless. The Chinese steel industry is rife with overcapacity and its efforts to reduce inventory could be viewed as dumping. If so, a more productive response would be to unconditionally exempt non-offending countries and bring the case against China before the World Trade Organization, the institution created to adjudicate such matters.

Keeping it local

During the economic boom of the late 20th century, it seemed inconceivable that a backlash against globalization would soon take root here and abroad. In hindsight, we shouldn’t have been surprised. Cycles of engagement and retrenchment date back to the Roman Empire.

“Even when patterns of globalization endure for many centuries, they can break down remarkably quickly, leading to dramatic changes in fortune,” wrote HSBC senior economic adviser Stephen D. King in his recent book, “Grave New World: The End of Globalization, the Return of History.”

King also warns that ejecting “referees” like the WTO could have negative consequences. “As the U.S. loses its appetite for supporting the global institutions that have established the ‘rules of the game,’ it is not impossible to imagine that the 21st century will increasingly be characterized by (Orwell’s) Nineteen Eighty-Four-style superpower rivalry, with Oceania dominated by the US, Eurasia by Russia and Eastasia by China.”

Under pressure from the steel industry, the Bush administration in 2002 imposed a 30% tariff on certain steel imports. One study found that “more American workers lost their jobs in 2002 to higher steel prices than the total number employed by the U.S. steel industry itself…” Judging from the muted reaction of financial markets, the Trump tariffs might be just another vapid episode of reality television.

Taking no chances, the European Union prepared a lengthy list of retaliatory tariffs designed to target the economic interests of the president’s base. In 2017, U.S. exports to the EU totaled $283 billion, including $12.1 billion of agricultural goods. According to a statement from the Nebraska Farm Bureau issued before the tariffs were officially announced, “President Trump’s plans to place U.S. tariffs on imported steel and aluminum presents a real and viable threat to the future of U.S. agricultural trade and the prosperity of American agriculture.”

In Shakespeare’s play, things didn’t turn out so well for Lady Anne. As in real life, second thoughts often come too late. 

Tom Saler is an author and freelance financial journalist in Madison. He can be reached at www.tomsaler.com.