July 3rd, 2020

Trump

The Unprecedented Presidency: Protectionist Trade Policy

In his Inaugural Address in 2017, President Donald Trump announced his “America First” strategy, which included the goals of reducing the trade deficit and bringing back manufacturing jobs that had been outsourced to other countries such as China and Mexico. President Trump has taken the position that the trade deficit is a drain on American wealth, and that trade deals such as NAFTA and the pending Trans-Pacific Partnership (TPP) were damaging to the American economy and hurt American workers. He pledged that his policies would benefit American workers first.

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By June 2019, Trump had signed consequential revisions to NAFTA which are known as the United States–Mexico–Canada Agreement. The TPP was renegotiated and renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), following the U.S. withdrawal. It became effective on December 30, 2018 and resulted in 90% of tariffs on goods immediately eliminated by the six of the eleven countries that had already ratified the agreement. Concerns about the American refusal to sign the agreement have been expressed by U.S. Wheat Associates President Vince Peterson, who had stated earlier in December of 2018 that American wheat exporters could face an "imminent collapse" of their 53% market share in Japan, adding that "Our competitors in Australia and Canada will now benefit from those provisions, as US farmers watch helplessly." The National Cattlemen's Beef Association have also complained that exports of beef to Japan, America's largest export market, would be at a serious disadvantage, compared to Australian exporters as their tariffs on exports to Japan would be cut by 27.5% during the first year of CPTPP. The Trump administration has sought a unilateral trade agreement with Japan that would increase American agricultural exports, but in April 2019 Japan rejected greater access to its markets.

In January of 2018, the United States started imposing new trade barriers with China. As of January 7, 2020, the United States had imposed tariffs on 16.8 percent of goods imported into the country, measured as a share of the value of all U.S. imports in 2017. Some of those tariffs apply to imports from nearly all U.S. trading partners, including tariffs on washing machines, solar panels, and steel and aluminum products. A few countries are exempted from certain tariffs, such as Canadian and Mexican imports which were granted exemptions from the tariffs on steel and aluminum products. Other tariffs affected imports from China specifically, covering about half of U.S. imports from China and targeting intermediate goods (items used for the production of other goods and services), capital goods (such as computers and other equipment), and some consumer goods (such as apparel and footwear). In response to the tariffs, U.S. trading partners have retaliated by imposing their own trade barriers. As of January 7, 2020, retaliatory tariffs had been imposed on 9.3 percent of all goods exported by the United States— primarily industrial supplies and materials as well as agricultural products. As of January 7, 2020, tariffs were in-effect for $395 billion of U.S. imports and $143 billion of U.S exports (in retaliation). Almost all of this balance relates to China.

China has devalued its currency (the Yuan) by about 12% from the beginning of 2018 to the end of 2019, making its exports more competitive, in order to offset the impact on its economy from the tariffs. By August 2019, the exchange rate was the lowest in 11 years. The U.S. responded by declaring China a "currency manipulator" on August 5, 2019 although this designation was later rescinded in January 2020 as part of the Phase 1 trade deal. On January 15 of this year, President Trump and China's Vice Premier Liu He signed the US–China Phase One trade deal in Washington DC, called the "Economic and Trade Agreement between the United States of America and the People’s Republic of China", It took effect from February 14, 2020 and focuses on intellectual property rights, technology transfer, food and agricultural products, financial services, exchange rate matters and transparency, and expanding trade. The US–China Phase One agreement does not rely on arbitration through an intergovernmental organization like the World Trade Organization, but rather through a bilateral mechanism.

Recent figures from China showed its 2019 economic growth rate falling as a result of the trade war to a 30-year low. Data from the Commerce Department of the United States showed the US trade deficit falling amid the trade war for the first time in 6 years. On February 17 China granteds tariff exemptions on 696 US goods to support purchases, and on March 5, the United States granted exemptions to tariffs on various types of medical equipment, after calls from American lawmakers and others to remove tariffs on these products in light of the COVID-19 pandemic in the United States. By June, China had risen to become the United States' top trading partner again, although the pandemic has resulted in both countries not being on track to meet the targets from the trade deal.

Protectionist tariffs are nothing new and from the administration of George Washington, tariffs were used both as a source of revenue, and as a means of protecting American goods from foreign competition. In the 19th century, it was the Whigs (from 1832–1852) and later the Republicans (after 1854) who wanted to protect American industries and by voting for higher tariffs, while Southern Democrats, whose states had very little industry but imported many goods, called for lower tariffs. Which ever party held power voted to raise or lower tariffs, though there were limits to this, given that the Federal Government always needed a certain level of revenues, and this was an era before there was income tax.

The United States public debt was paid off in 1834 and President Andrew Jackson, a strong Southern Democrat, called for reduction of tariff rates roughly in half and eliminating nearly all federal excise taxes in about 1835. His main opponent in Congress, Henry Clay and his Whig Party, wanted a high tariff, arguing that American factories that were playing catch up with their European competitors, would at first be less efficient and needed the advantage of reduced competition to sell their goods in American markets. American factory workers were paid higher wages than their European competitors. These arguments drew support in industrial districts, and Clay's position was adopted in the 1828 and 1832 Tariff Acts. Fierce opposition to high tariffs resulted in the Nullification Crisis, forcing a reduction in tariffs. But when the Whigs won victories in the 1840 and 1842 elections, taking control of Congress, they re-instituted higher tariffs once again, with the debate between free trade or protectionism continuing.

The election of James K. Polk as president shifted the balance to a lower tariff once again, as Polk succeeded in passing the Walker tariff of 1846 by uniting the rural and agricultural factions of the country to support lower tariffs. They sought a level of a "tariff for revenue only" that would pay the cost of government. The Walker Tariff led to increased trade with Britain and others and brought in more revenue to the federal treasury than the higher tariff. The average tariff on the Walker Tariff was about 25%. Protectionists in Pennsylvania and neighboring states were angered, while the South was pleased with the low tariff rates. Some argue that this forestalled the coming Civil War.

Tariffs were lowered yet again with the Tariff of 1857, setting an average rate of 18%. This was in response to the British repeal of their protectionist "Corn Laws". Democrats in Congress, dominated by Southern Democrats, kept reducing rates, and the 1857 rates boosted trade so overwhelmingly that revenues actually increased. The South had almost no complaints but the low rates angered many Northern industrialists and factory workers, especially in Pennsylvania, who were angered because low tariff rates created cheaper iron to complete with their growing iron industry.

The Republican Party replaced the Whigs in 1854 and also favored high tariffs to stimulate industrial growth; it was part of the 1860 Republican platform. The Morrill Tariff significantly raising tariff rates became possible only after the Southern Senators walked out of Congress when their states left the Union, leaving a Republican majority. This tarifff was signed by Democratic President James Buchanan in early March 1861 shortly before President Abraham Lincoln took office. Pennsylvania iron mills and New England woolen mills lobbied Congres for high tariffs. Increases were finally enacted in February 1861 after Southerners resigned their seats in Congress on the eve of the Civil War.

Many historians take the position that the tariff issue was not a cause of the war, noting that the tariff did not come up as an issue in compromise discussions to prevent secession. Secessionist documents do not cite the tariff issue as being significant. During the war far more revenue was needed, so the tariff raised again and again, though most of the wartime government revenue came from bonds and loans, not tariffs. The Morrill Tariff took effect a few weeks before the war began on April 12, 1861, while the Confederate States of America (CSA) passed its own tariff of about 15% on most items.

High tariffs were kept after the war for the benefit of Northern industrialists, and as a means of keeping low-tariff Southerners out of power. The iron and steel industry, and the wool industry, were the well-organized interests groups that lobbied most successfully for high tariffs through support of the Republican Party. Industrial workers had much higher wages than their European counterparts, and it was in their interest to support the tariff and vote Republican.

Democrats were divided on the tariff issue. President Grover Cleveland made low tariffs the centerpiece of Democratic Party policies in the late 1880s. He argued that high tariffs raised prices for consumers. William McKinley was a prominent supporter for high tariffs, claiming that they brought prosperity for all groups. The Republican high tariff supporters sought the support of farmers by claiming that high-wage factory workers would pay premium prices for home grown foods. This won over most farmers in the Northeast, but not so for southern and western farmers who exported most of their cotton, tobacco and wheat. Wool manufacturers wanted high tariffs because wool producers in Britain and Australia marketed a higher quality fleece than the Americans, and British manufacturers had lower costs than American mills. The result was a wool tariff that helped the farmers by a high rate on imported wool.

By the 1880s American industry and agriculture had become the most efficient in the world by the 1880s and took the lead in the worldwide Industrial Revolution. They had the industrial capacity, large market, high efficiency, low costs, and the distribution system needed to compete in the vast American market. The British watched cheaper American products invade their markets.

But American manufacturers and union workers demanded the high tariff be maintained. This was at a time when railroads needed vast quantities of steel. Tariffs raised steel prices, making possible the U.S steel industry's massive investment to expand capacity. In 1881, British steel rails sold for $31 a ton, and if Americans imported them they paid a $28/ton tariff, giving $59/ton for an imported ton of rails. American mills could charge $61 a ton and make a huge profit, to be reinvested into increased capacity, higher quality steels and more efficient production. By 1897 the American steel rail price had dropped to $19.60 per ton compared to the British price at $21.00. The U.S. steel industry became an exporter of steel rail to England selling below the British price. From 1915 through 1918, the largest American steel company, U.S. Steel, alone delivered more steel each year than Germany and Austria-Hungary combined.

William McKinley campaigned heavily in 1896 on the high tariff as a positive solution to depression of 1893. The Republicans passed the Dingley Tariff in 1897, boosting rates back to the 50 percent level. Economic recovery followed and McKinley won reelection by an even bigger landslide and started talking about a post-tariff era of reciprocal trade agreements. But Republicans split bitterly on the Payne–Aldrich Tariff of 1909. Republican President Theodore Roosevelt saw the tariff issue was ripping his party apart, so he postponed any consideration of it. William Howard Taft. He campaigned for president in 1908 for tariff "reform", which everyone assumed meant lower rates. The House lowered rates with the Payne Bill, but the Senate lowered the protection on Midwestern farm products, while raising rates favorable to his Northeast.

By 1913 with the new income tax generating revenue, the Democrats in Congress were able to reduce rates with the Underwood Tariff. When the Republicans returned to power in 1921 they returned the rates to a high level in the Fordney–McCumber Tariff of 1922. The next raise came with the Smoot–Hawley Tariff Act of 1930 at the start of the Great Depression. Canada, Britain, Germany, France and other industrial countries retaliated with their own tariffs and special, bilateral trade deals. This caused American imports and exports to go into a tailspin. Franklin D. Roosevelt and the New Dealers responded by lowering tariffs on a reciprocal country-by-country basis hoping this would expand foreign trade.

In 1934, the U.S. Congress, in a rare delegation of authority, passed the Reciprocal Tariff Act of 1934, which authorized the executive branch to negotiate bilateral tariff reduction agreements with other countries. Seven tariff reduction rounds that occurred between 1948 and 1994. After the war the U.S. promoted the General Agreement on Tariffs and Trade (GATT) established in 1947, to minimize tariffs and other restrictions, and to liberalize trade among all capitalist countries. In 1995 GATT became the World Trade Organization (WTO).

American industry and labor prospered after World War II, but fell on hard times after 1970, faced with stiff competition from low-cost producers around the globe. Toyota and Nissan threatened the giant domestic auto industry and in the late 1970s Detroit and the auto workers union combined to fight for protection. Quotas were agreed to as an alternative to high tariffs. By limiting the number of Japanese automobiles that could be imported, quotas caised Japanese companies push into larger, and more expensive market segments. The Japanese producers, limited by the number of cars they could export to the US, increased the value of their exports to maintain revenue growth. This action threatened the American producers' historical hold on the mid- and large-size car markets.

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During the Reagan and George H. W. Bush administrations Republicans abandoned protectionist policies, and came out against quotas and in favor of minimal economic barriers to global trade. Free trade with Canada came about as a result of the Canada–U.S. Free Trade Agreement of 1987, which led in 1994 to the North American Free Trade Agreement (NAFTA). President Bill Clinton, with strong Republican support in 1993, pushed NAFTA through Congress over the vehement objection of labor unions. In 2000 Clinton worked with Republicans to give China entry into WTO and "most favored nation" trading status (i.e., the same low tariffs promised to any other WTO member). Opposition to liberalized trade came increasingly from labor unions, who argued that this system also meant lower wages and fewer jobs for American workers who could not compete against wages paid in China.

Tensions over trade policies and protectionism vs. free trade are nothing new. While President Trump's trade policies are a divergence from those espoused by recent administrations both Democratic and Republican, there is nothing unprecedented about strong disagreement over trade policies between Democrats and Republicans.