by Henry Oliner
Trump’s trade tariffs have restored memories of the Smoot Hawley Tariffs.
Smoot Hawley was passed in 1929. It severely damaged our economy on three related levels.
By raising the prices on Swiss watches and blankets among hundreds of other products, consumers had less money to spend on other items, hurting overall demand. It raised the prices on raw materials for our own manufactured goods. Retaliatory tariffs caused our exports to drop from $7 billion in 1929 to $2.5 billion in 1932.
Automobile sales plummeted from 5.3 million in 1929 to 1.8 million in 1932; hit with a combination of higher raw material costs and selling prices, and retaliatory tariffs in Europe.
Most significantly, the US extended substantial credit in WWI largely to European nations. With the new tariffs our debtors were denied the means to raise the funds to repay their debt. When we talk of a trade deficit we fail to consider what our trading partners do with the funds they receive from selling us their goods. In the 1920s they used it to repay their war debts. Today they use it either buy our treasuries or invest in our domestic markets.
Over one thousand economists wrote to Hoover to veto this bill, which he was inclined to do, but folded for political reasons.
There were other causes of the Great Depression. The Federal Reserve restrained liquidity at the wrong time, and the gold standard caused strains in Europe. The Smoot Hawley Tariff, however, clearly made it worse.
When Mnuchin claims that the steel and aluminum tariffs will only add a few cents to a beer can or a few dollars to an auto he displays as much ignorance as Nancy Pelosi who contends that a raise of only $20 a week is crumbs. It is the classic broken window fallacy of Bastiat, the inability to understand and acknowledge what is unseen.
From the editors of the Wall Street Journal The Trump Tariff Layoffs Begin:
American Keg Company is the only remaining U.S. manufacturer of stainless steel beer kegs. Despite competition from German and Chinese firms, American Keg has only used domestic steel. But now it’s being punished for this domestic sourcing as Donald Trump’s steel tariffs have forced the business to lay off a third of its workforce.
Since it began manufacturing kegs in 2015, the Pottstown, Pennsylvania-based American Keg has operated on a narrow margin. The 15.5-gallon keg is a staple in bars and fraternities, and the American-made version currently retails for $115 while a German or Chinese keg costs about $95. American Keg has survived by selling to craft breweries that want to support U.S. workers and American steel, even at a small premium. “But there’s a limit to what people would pay to have an American product,” says CEO Paul Czachor.
Mr. Trump has imposed the tariffs in the name of national security. But in practice they punish American steel users by giving the American metal industry the opportunity to raise prices while still undercutting foreign steel and aluminum.
Since the tariffs were announced domestic steel producers have raised prices over 35%. I have seen this play before. If you have a project about to come out of the ground you have little choice and you pay the price, but somebody – the contractor or the investor- is paying that price. That is money no longer available for other projects. But what about the developer who is planning to build three new warehouses to serve a local need. The market will bear a narrow range of rental per square foot. When the dramatic increase in the price of steel is reflected in the new price the warehouses do not get built. The marginal cost of the tariff in this case is 100%. Imagine the cost of this scenario played out thousands of times.
There are often more dollars’ worth of steel than concrete in a prestressed concrete beam.
Small distributors and fabricators often have difficulty buying competitively from domestic mills and rely on imports. Tilting this advantage to domestic producers hurts the competitiveness of small companies.
Trade issues are best addressed individually which is the way it worked before the tariffs. The United States currently has over 100 cases before the World Trade Organization. Blanket tariffs are dangerous.
Hoover had the background of a slowing economy to rationalize Smoot Hawley. Trump has a growing economy and low unemployment. American steel companies are profitable already. The tax cuts are a great stimulus. It makes little sense to reduce it with this reckless tariff.