Like many of you, I first learned about tariffs and the impacts on international trade and global economies from my history books. Now, one of the most common questions I get from farmers who see the word “tariff” in the news almost daily is “how do tariffs really work?”
The basic principles behind tariffs haven’t really changed since first enacted in the early years of United States history. They are designed to protect domestic businesses—often specific industries like steel or agriculture—and can generate revenue for the government. Basically, they are a tax on imports and normally, they are calculated as a percentage of the price that a buyer pays a foreign seller.
Let’s say, for example, that a U.S. manufacturer wanted to buy a machinery part that is made in China. That specific part normally sells for $100. But now, the U.S. has imposed a 25 percent tariff on imports from China. Instead of $100, the price would be $125, with the tariff portion collected at one of our 328 official ports of entry. Eventually that tariff revenue would flow to the U.S. government. (Actual tariff rates and products vary.)
The opposite applies in countries like China, who have retaliated by imposing steep tariffs on U.S. products like pork and soybeans. A Chinese buyer would have to pay a higher price, or in most cases, simply stop buying from the U.S. and purchase elsewhere, like Brazil.
With China buying up all of Brazil’s soybeans, former Brazilian customers like the European Union will likely start buying from the U.S., the only other major supplier.
With tariffs in place, trade flows tend to reroute to the most cost-effective supply chains, but that doesn’t mean that some U.S. farmers won’t face steep losses in the meantime.
U.S. pork producers now face punitive tariffs of 62 percent on exports to China, a market that once represented 17 percent of total U.S. exports by value in 2017, according to the National Pork Producers Council. Iowa State University has estimated that from early March through May when trade disputes were escalating, producers lost $18 per hog, or more than $2 billion on an annualized basis.
Most economists will tell you tariffs have not worked well over the long-term. For example, the U.S. Congress imposed the Fordney-McCumber Tariff of 1922 to protect U.S farmers after World War I. At that time, Europeans were recovering from the war and producing more of their own commodities. U.S. agriculture was becoming more mechanized and productive. With low demand and relatively high production, commodity prices in the U.S. dropped dramatically. The measure gave President Warren Harding the power to raise or lower tariff rates as recommended by the Tariff Commission.
Not unsurprisingly, our trading partners complained and created or raised their own tariffs. Some formed new trading relationships to circumvent the U.S.
Over the short-term, the tariffs worked to bump up U.S. farm income a bit. But then farmers figured out that their production costs were increasing, too. “The average cost of a harness rose from $46 in 1918 to $75 in 1926, the 14-inch plow rose from $14 to $28, mowing machines rose from $45 to $95, and farm wagons rose from $85 to $150,” according to Edward S. Kaplan, who wrote, American Trade Policy, 1923–1995.
By 1927, there was growing recognition among global leaders attending a League of Nations’ meeting that tariffs needed to end. However, some countries, like France, moved to increase their tariffs.
Just a couple of years later with the Great Depression approaching, the interest in increasing tariff levels and applying even more tariffs increased again. Sen. Reed Smoot, a Utah Republican and the chairman of the Senate Finance Committee, sought to protect domestic sugar beets, a business at the heart of his state’s Mormon economy. He partnered with an Oregon Republican, Willis Hawley, who chaired the House Ways and Means Committee. Both men sought to protect agricultural interests and deliver on a promise that President Herbert Hoover made during his 1928 campaign to support farmers. Other industries quickly jumped on the tariff bandwagon, with promises of new prosperity to come. The Smoot-Hawley Tariff bill was signed into law in 1930, raising tariffs on over 20,000 products.
Then, the Great Depression smacked Americans from California to New York and all parts in between. There’s considerable disagreement among economists about whether Smoot-Hawley made the Great Depression worse, prolonged it, or both. However, voters decided they wanted a change in political direction. President Franklin Delano Roosevelt, a Democrat who won by a landslide in 1932, pledged to lower tariffs. He was able to negotiate bi-lateral tariff reductions and eventually work toward a multi-lateral trading framework.
Fast forward to 2018 and some economists predict that the history of tariffs is about to repeat itself.
But President Donald Trump and one of his top economic advisors, Peter Navarro, are convinced that their tariff strategy is the right one at the right time. Navarro has publicly argued that, while past tariffs are protectionist, this round against China is defensive and long overdue.
Editor’s note: Agri-Pulse Editor Sara Wyant can be reached at www.agri-pulse.com.
