Tariffs

The last month has been filled with headlines of new tariffs being imposed from one country to another.  It began with the US imposing a new tariff to protect the American steel industry and soon shifted to tariffs on China.  Threats of retaliation came quickly from other countries, the consequences of which are unknowable, but the end result is extremely likely: inefficiencies will arise and consumers around the world will pay a higher price for a variety of products.  We’ve seen this before.  Let’s examine.

Smoot - Hawley Tariffs

US farmers were struggling to make money in the late 1920s.  Rather than focusing on oversupply, imports were blamed for the falling prices.  Senator Reed Smoot and Representative Willis Hawley had a plan to help.  They proposed an additional tax on imported crops and produce from overseas to help protect the US farming industry, known as the Smoot-Hawley Act.  This tariff would push prices higher and protect the American farming industry.

In order to win support for the bill, Smoot and Hawley compromised with the requests of more and more congressmen as each lobbied to protect industries in their hometowns. 

“Why just protect farmers, when we can protect other industries?” the congressmen argued.  By the time the bill made its way through Congress, the total number of proposed tariffs had grown to 890, impacting more than 20,000 imported goods.     

Canada responded to the new tariffs by imposing a collection of harsh tariffs on American imports.  Europe followed suit as well, and soon the Smooth Hawley tariffs escalated into a full-blown trade war.  Global trade of goods and services fell nearly 66% in the five years following the enactment of the tariff in late 1929, coinciding with the depths of the Great Depression.

Tariffs didn’t disappear completely after the failure of the Smoot-Hawley, but the push for protectionism slowed tremendously as tariffs decreased around the world following the passage of the Reciprocal Trade Agreement in 1934 by President Roosevelt, which was aimed at reducing tariffs and barriers to trade.

Playing Chicken

One of the more fascinating tariffs that remained was the tax imposed by European countries on imported chicken from the United States.   Shortly after World War II, advancements in the chicken farming industry in the US increased supply tremendously, transforming the food from a delicacy to a low-cost dining option.  European chicken farmers had a hard time competing at the lower prices as the cost of poultry plummeted. 

France was the first European country to impose a tariff on imported chicken in 1961, but other European countries soon followed suit to protect their own chicken producers.  The US responded with tariffs on imported European goods like brandy, and ‘light’ trucks. The brandy tax was a direct shot at France, while the ‘light’ truck tax was aimed directly at Germany.  Volkswagen’s truck sales plummeted in the United States, and the additional hike in prices for French brandy caused Americans to look elsewhere for their nightly toddy.

To this day, the chicken tax on American imported chicken remains in effect.  While most of the tariffs imposed in response to the chicken tax have disappeared, the tariff on ‘light’ trucks and delivery vans also remains.  Ironically, this has also created complicated production issues for many of the US automakers. 

As globalization took hold in the 1990s, it became advantageous for US automobile companies to take advantage of cheap labor abroad.  Ford, for example, found a booming business for pickup trucks in Thailand, where they opened a factory in the mid-1990s.  The factory in Thailand specializes in smaller vehicles, such as lightweight pickup trucks and delivery vans.  Ford, however, can’t import delivery vans into the US from their Thai factory without incurring the 25% tariff still in effect from the 1960s.  In order to circumvent it, Ford reportedly imports passenger vans equipped with seats and seatbelts, then converts them into delivery vans by removing the seats and seatbelts and opening up the cargo hull. 

The end result is that American consumers still pay a premium for delivery vans because of a tariff on chicken imports to Europe imposed in the 1960s. 

Needless to say, tariffs have historically created inefficiencies that distort free markets and raise prices for consumers.  Unfortunately, these tariffs will likely do the same.

 

Sources:

Fred McMahon.  History is clear—high tariffs and trade wars devastate countries.  October 3, 2016. Fraser Forum Fraser Institute.

If You Aren't Worried About A Trade War, You Don't Know About The Chicken Tax.  Mar 3, 2018.  Bryce Hoffman. Forbes Magazine.

To Outfox the Chicken Tax, Ford Strips Its Own Vans. By Matthew Dolan. Updated Sept. 23, 2009 12:01 a.m. ET