Can Tariffs Actually Work?

Summary

This video explores the debate around tariffs, examining their potential economic impact and historical context. While tariffs were a cornerstone of U.S. economic policy in the 19th century, recent attempts to reinstate them have led to mixed results. The script delves into the effects of the 2018 tariffs, showing how they raised consumer prices and impacted various industries. It also highlights the complexities of modern global trade, suggesting that tariffs, when carefully targeted, can still be useful, particularly for national security. The video concludes by discussing the growing shift towards protectionism and its connection to rising nationalism and geopolitical risks.

Takeaways

• 😀 Tariffs became a significant topic in economic debates after Donald Trump's election, as a tool for economic nationalism and fixing perceived problems in the U.S. economy.
• 😀 Tariffs historically served as the U.S.'s primary trade policy, protecting domestic industries and generating revenue, particularly in the 19th century.
• 😀 Tariffs can create fiscal space for lowering taxes and reviving industrial employment, but they also have the potential to harm consumer purchasing power due to price increases.
• 😀 The effectiveness of tariffs depends on nuanced economic considerations; they are not inherently good or bad but need to be evaluated on a case-by-case basis.
• 😀 U.S. tariffs during the 2018 trade war demonstrated that consumers ultimately bore the brunt of tariff costs, as companies passed on price hikes for imported goods.
• 😀 Despite the short-term negative impact on consumers, tariffs can still create jobs, but they often come at a high cost. For example, creating 1,800 jobs in the steel industry cost $815,000 per job annually.
• 😀 Tariffs can lead to unintended consequences, such as damage to industries reliant on imported goods. For instance, a tariff on steel in 2018 hurt U.S. manufacturing industries that used steel as an input.
• 😀 Retaliatory tariffs from other countries, such as China’s tariffs on U.S. agricultural products, can offset the gains made from imposing tariffs, leading to greater fiscal costs.
• 😀 While tariffs can provide short-term protection, long-term benefits are uncertain, as factors of production are flexible and might shift toward more efficient global supply chains.
• 😀 Successful tariff policies need to ensure that the protected domestic industries are competitive to prevent complacency and maintain fair prices for consumers.

Q & A

What role did tariffs play in the US economy in the 19th century?

In the 19th century, tariffs were used to protect nascent US industries from foreign competition, particularly from Europe. They helped promote industrial growth and contributed significantly to government revenue, with tariffs making up 90% of federal income by the late 19th century.

Why did Alexander Hamilton advocate for tariffs despite supporting Adam Smith's free market ideas?

Hamilton believed that tariffs were necessary for the young US economy to become independent from Britain. He recognized that the US lacked the industrial infrastructure to compete in a free market and needed tariffs to foster domestic manufacturing.

How did tariffs contribute to the US government's early fiscal policy?

In the early days of the US, tariffs were the primary source of government revenue, which allowed the federal government to avoid imposing an income tax until 1910.

What were the economic downsides of tariffs during the US's industrialization period?

While tariffs helped industrialize the North, they negatively impacted the agrarian South, which suffered from retaliatory European tariffs on exports like cotton and tobacco. This created regional economic tension and contributed to the secessionist sentiment in the South.

How did the US shift its approach to tariffs after World War II?

After World War II, the US shifted from protectionism to advocating for free trade, as its industries had matured and global competitors were devastated by the war. This shift was reinforced by the formation of the World Trade Organization in 1995, promoting lower tariffs globally.

What impact did the 2018 US tariffs on washing machines have on consumers?

The 2018 tariffs on washing machines led to price increases, with businesses passing on the costs to consumers. The price of related goods like dryers also increased, leading to a net higher cost for consumers, effectively acting as an indirect tax.

What did the Federal Reserve's research on the 2018 washing machine tariffs reveal?

The Federal Reserve's research found that the full cost of the tariff was passed on to consumers, leading to a significant price increase not just for washing machines but for related products like dryers as well, which resulted in one of the largest indirect tax increases in recent decades.

What are some negative effects of tariffs on US industries that rely on imported goods?

Tariffs can raise the cost of inputs for industries that rely on imported goods, such as steel. For instance, the 2018 steel tariffs harmed industries like automotive and construction, leading to layoffs and higher production costs in these sectors.

How did China’s retaliatory tariffs impact the US agricultural sector?

China’s retaliatory tariffs on US agricultural products, particularly food, reduced demand for US exports, hurting farmers. The US government spent $61 billion to support these farmers between 2018 and 2020, which nearly offset the revenue generated by the tariffs.

Why might tariffs still be considered valuable despite their economic costs?

Tariffs could still be valuable in certain industries, especially for national security reasons. In sectors critical to defense or infrastructure, tariffs might help ensure self-sufficiency and reduce reliance on potentially hostile foreign countries, thus safeguarding essential supplies during geopolitical tensions.