Since Trump announced for President in June 2015, one area where he has faced increasing criticism from Republicans, many of them “Never Trumpers,” is in the area of international trade. They scream the oft used swear word “Protectionism” whenever he talks of negotiating better trade deals, something he’s talked about for decades.
Now that Trump is the President, the critics have only gotten louder, as he vows to re-negotiate several US trade deals including NAFTA and one with South Korea. Nebraska Senator Ben Sasse has criticized the President for an “18th century view of trade,” which Trump sees “as a zero-sum game.”
An adjustment in trade doesn’t necessarily mean protectionism, however. Across-the-board protectionism for protectionism’s sake is not a good policy. A thousand times agreed. As Ronald Reagan once said, we must not engage in “kamikaze protectionism.”
But we can’t engage in kamikaze free trade either. Sometimes actions are necessary to stop foreign predators. Using “fair trade principles” at certain times, as Adam Smith recommended in his massive economic treatise, The Wealth of Nations, even for what he termed “revenge,” can benefit the nation. Reagan used tariffs and import quotas to great effect in the 1980s but only on specific instances when it was needed.
Free traders may frown on such acts, but not all tariffs are bad. Tariffs come in two types, at least historically speaking: low tariffs for revenue and high tariffs for protection.
Throughout American history, at least the first 125 years, the federal government gained the bulk of its revenue via a tariff. In the mid-19th century it accounted for 90 percent of US revenue. In 1913, however, it all changed with implementation of the nation’s first permanent income tax. Tariffs, which were of the high protective variety at the time, were substantially lowered. The income tax would make up for any loss in federal revenue and now is responsible for the majority of federal monies.
Over the next century, tariffs were lowered further – today we average around 3 percent – and the income tax grew higher and higher, topping out at 94 percent in 1944 and today at nearly 40 percent.
Congress should serious consider a return to a revenue tariff and lower other direct taxes substantially. Using the principles of the “Laffer Curve,” we can formulate a tariff that derives maximum revenue with minimal effect on trade.
The best example we have from history is the 1846 Walker Tariff Act, named after Secretary of the Treasury Robert J. Walker of Mississippi. His idea was to maximize revenue with the least negative impact on trade. And that rate was set at 25 percent, from the previous level of 32 percent, and trade expanded as a result, as did revenue, increasing by 50 percent in 3 years. Serious free traders of the day, like Senator John C. Calhoun, were pleased with the policy.
Revenue tariffs, like the Walker Tariff, are designed specifically to bring in funds yet not injure trade. The idea is to maximize imports, for the more imports that flow into US ports, the more revenue is raised, and the more revenue is raised via the tariff, the less tax is placed directly on the people and on businesses.
Of course the free traders of today, who are nothing like those of yesteryear, would scream “protectionism” at the mere thought. It will raise prices on goods, they say, so it’s still passed on to consumers.
But foreign nations like China and Japan, whose governments have worked tirelessly, and spent extravagantly, to gain market share in the United States, the largest, most lucrative market in world history, do not want to sacrifice it. Those companies would most likely absorb a small rate – 10, 15, 20 percent – to keep their share of the market.
Protective tariffs, though, are another story. They are designed specifically to raise prices to help domestic industry compete with cheap foreign imports. Overseas companies can’t absorb 40 to 50 percent tariffs and must pass at least a good portion onto the consumer, which is what it’s designed to do. Revenue tariffs are not for that purpose.
What would the benefit be for us today? Revenue. Currently we import around $2.5 trillion in imported goods, at a current rate of $200+ billion per month. Though it might need some adjustment one way or the other, just consider what a 20 percent revenue tariff would mean with those numbers – $500 billion, which can be used to close the deficit gap and to cut taxes on the people or small businesses. Think of what that would do to our economy to lower taxes on small business by that amount!
Would it hurt us, as the global free traders contend? No. It didn’t hurt us from 1789 to 1913 (and the rate was still at a revenue level for decades after that), and it won’t hurt us now.
And it’s not designed to hurt foreign companies, or even US companies that choose to move production outside the country. If they choose to move production that’s their business but why should they be able to use our market, purchased with the blood, sweat, and tears of countless generations of Americans, for free? They shouldn’t. It’s time to charge an entry fee and lighten the load on the people and the great small businesses of America that create 2 out of every 3 new jobs.
A small revenue tariff would show that we mean business and aim to put America First!