Sunday, March 4, 2018

Economists letter on tariffs

Once per decade or so it is worth revisiting the famous 1930 economists' letter on Tariffs. (The link, at, has a concise history and links to more.) 1028 economists -- a huge proportion of the number then around -- signed the following, urging President Hoover to veto the Smoot Hawley tariff.

We know how it turned out. No, we did not win that trade war. Well, not until about 1945.

What will this one lead to? I see some hope in that President Trump is at last uniting the country. As Greg Mankiw points out
How often do Jeffrey Sachs and the Wall Street Journal editoral writers agree?
Perhaps, as with DACA, the President using the existing law, which allows and even encourages widespread protectionism, this action will spur Congress to pass trade laws that require a bit more than vague "injury" to industry or "national security" fantasies. But I am straining to find a silver lining.

The darker possibility. Many administrations start with some policy victories -- judicial nominees, deregulation, tax reform -- and then over reach. This may be the start of over reach.

Rereading the letter, it is impressive for stressing simple truths that apparently remain mysterious to many even today. If we buy a good from overseas, the dollar must come back, either as a purchase of American goods or investment in American capital. Conversely that purchase or investment cannot happen if we do not allow foreigners to sell us things. Open trade is important to peace and stability, not just prosperity. It  stresses the final effects on people who end up paying more and working less, not just downstream producers.

Plus ça change, plus c'est la même chose.
The undersigned American economists and teachers of economics strongly urge that any measure which provides for a general upward revision of tariff rates be denied passage by Congress, or if passed, be vetoed by the President. 
We are convinced that increased protective duties would be a mistake. They would operate, in general, to increase the prices which domestic consumers would have to pay. By raising prices they would encourage concerns with higher costs to undertake production, thus compelling the consumer to subsidize waste and inefficiency in industry. At the same time they would force him to pay higher rates of profit to established firms which enjoyed lower production costs. A higher level of protection, such as is contemplated by both the House and Senate bills, would therefore raise the cost of living and injure the great majority of our citizens.
Few people could hope to gain from such a change. Miners, construction, transportation and public utility workers, professional people and those employed in banks, hotels, newspaper offices, in the wholesale and retail trades, and scores of other occupations would clearly lose, since they produce no products which could be protected by tariff barriers.
The vast majority of farmers, also, would lose. Their cotton, corn, lard, and wheat are export crops and are sold in the world market. They have no important competition in the home market. They can not benefit, therefore, from any tariff which is imposed upon the basic commodities which they produce. They would lose through the increased duties on manufactured goods, however, and in a double fashion. First, as consumers they would have to pay still higher prices for the products, made of textiles, chemicals, iron, and steel, which they buy. Second, as producers, their ability to sell their products would be further restricted by the barriers placed in the way of foreigners who wished to sell manufactured goods to us.
Our export trade, in general, would suffer. Countries can not permanently buy from us unless they are permitted to sell to us, and the more we restrict the importation of goods from them by means of ever higher tariffs the more we reduce the possibility of our exporting to them. This applies to such exporting industries as copper, automobiles, agricultural machinery, typewriters, and the like fully as much as it does to farming. The difficulties of these industries are likely to be increased still further if we pass a higher tariff. There are already many evidences that such action would inevitably provoke other countries to pay us back in kind by levying retaliatory duties against our goods. There are few more ironical spectacles than that of the American Government as it seeks, on the one hand, to promote exports through the activity of the Bureau of Foreign and Domestic Commerce, while, on the other hand, by increasing tariffs it makes exportation ever more difficult. President Hoover has well said, in his message to Congress on April 16, 1929, “It is obviously unwise protection which sacrifices a greater amount of employment in exports to gain a less amount of employment from imports.”
We do not believe that American manufacturers, in general, need higher tariffs. The report of the President’s committee on recent economics changes has shown that industrial efficiency has increased, that costs have fallen, that profits have grown with amazing rapidity since the end of the war. Already our factories supply our people with over 96 percent of the manufactured goods which they consume, and our producers look to foreign markets to absorb the increasing output of their machines. Further barriers to trade will serve them not well, but ill. Many of our citizens have invested their money in foreign enterprises. The Department of Commerce has estimated that such investments, entirely aside from the war debts, amounted to between $12,555,000,000 and $14,555,000,000 on January 1, 1929. These investors, too, would suffer if protective duties were to be increased, since such action would make it still more difficult for their foreign creditors to pay them the interest due them.
America is now facing the problem of unemployment. Her labor can find work only if her factories can sell their products. Higher tariffs would not promote such sales. We can not increase employment by restricting trade. American industry, in the present crisis, might well be spared the burden of adjusting itself to new schedules of protective duties.
Finally, we would urge our Government to consider the bitterness which a policy of higher tariffs would inevitably inject into our international relations. The United States was ably represented at the World Economic Conference which was held under the auspices of the League of Nations in 1927. This conference adopted a resolution announcing that “the time has come to put an end to the increase in tariffs and move in the opposite direction.” The higher duties proposed in our pending legislation violate the spirit of this agreement and plainly invite other nations to compete with us in raising further barriers to trade. A tariff war does not furnish good soil for the growth of world peace.


  1. About have the calculated American trade deficit is the result of tax avoidance schemes that result in exports being under reported. American borrowing from Europe and Asia makes up the rest.

    Even if one concedes that China (and possibly other Asian countries) are engaged in a predatory merchantilism, putting tariffs on Canadian steel and aluminum will not help change Asia's policies.

    Mexico is apparently running a net trade deficit with the world. It is entirely possible that what we are seeing with Mexico is: USA borrows from Asia, Asia ships consumer goods to Mexico, and Mexico ships car parts to USA to close the circle. I for one would like to see an analysis of capital and trade flows that could identify whether USA deficit with Mexico is just induced by capital flows from Asia and Europe to America.

  2. Free trade is peaceful evolution in the Darwinian sense. The deficit people lowering birth rates to accommodate surplus people.

  3. I do wonder if a nation's GDP can begin to drift too far from its GNI, it all the corporate assets (or other assets, such as property) become foreign owned.

    Sure, foreigners buy US assets----that means increasingly in the future, domestic labor is working to satisfy foreign desires. They will use the income from assets to buy US goods and services. Left unchecked, that will mean a lower standard of living for Americans.

    But set that aside. We are far that point (although from what I read, 1/3rd of Corporate America is already foreign owned).

    What really makes me wonder is why the same economists who scale the very pinnacles of righteous indignation when it comes global free trade…go mute on domestic property zoning, a much larger structural impediment to economic growth.

    Why no round robins, seminars, and big letter-signings advocating the federal government do something to counter growing and tighter property zoning?

    In the pantheon of conventional macroeconomic totems, "free trade" is center-stage, spotlighted, encrusted with jewels, genuflected to publicly and daily.

    Free property development? A footstool rear stage, behind some shrubbery.


  4. I get that free trade is better than protectionism, one can never win a trade war, etc., etc., etc. What I struggle with is this canard that we have something resembling free trade today, which Trump is now ending.

    Trade is NOT free today (even under NAFTA). Instead we have a highly complex regime, where prohibitive import duties can be avoided via costly structures/actions that few lay people understand. Against this backdrop, it's less obvious Trump's actions (on trade at least) are as harmful as described.

    1. Right.

      Freedom -in trade, and in anything- does not require thousands of pages of force-backed government regulation.

      It requires precisely zero pages of coercion; that is what freedom is.

  5. Where does one find credible research on all tariffs currently in-force?

    1. This comment has been removed by the author.

    2. you can sort the columns by country or product. Nice job on their website.

  6. Often when reading about what – those who call themselves economist – say are what tariffs, taxes, and such have on our economy, they never seem to look at the aggregate … the whole picture …content to look at some myopic observation, and from such make conclusions.
    When one is attempting to analyze the absolute mess of our economy – not just some economic academic presentation – the most important constructs are never mentioned. Why, is this fantasy of our artificial economy …subservient to the whims of our government … accepted as something normal?
    The amount of unfunded liabilities that exist – somewhere between $250,000,000,000,000 (two hundred fifty trillion dollars) and $300,000,000,000,000 (three hundred trillion dollars) that exists, has a cause. This is a pretty good estimate of the amount of wealth spent by this nation on altruism programs, since 1965 with the passage of Civil Rights …and government’s (not war on poverty) … using the largess of the national treasury to ‘BUY VOTES!’
    The second fallacy that is so remarkable is the fact that this spending – this $250-$300 Trillion dollar has been paid for by the magic of debauching the currency. Yet never do you hear those who carry the title of economist ever explain this reality. Sadly, Lenin of Soviet Russia understood economics of reality with much more insight than what our academic economist in this nation have. Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose—John Maynard Keynes, 'The Economic Consequences of the Peace!'
    To put it simply when a coke of the 60’s was a dime, why is the coke of today a $1?
    That’s how our government exists, they use monetary and fiscal policy to preserve the false and artificial economy we have today. They dilute, and destroy the wealth, the value of currency, using it to buy votes, the hell with the economic vitality of this nation.
    When a job is lost in this nation, by the costs imposed on the business, and the employees to pay for the whims of government, the jobs move to where there are less whims. The example are many, China, Mexico, and everywhere else where the government is not central planning as ours.
    When economist include the cost of altruism, The expense of all those who now don’t have jobs, caused by the loss of jobs by government design; then and only then, can any discussion be made about the reality this nation, must protect its self-preservation, in order to survive.

    1. The government does not practice monetary policy, only fiscal.

  7. Not the same.

    "If we buy a good from overseas, the dollar must come back, either as a purchase of American goods or investment in American capital." ...or as much costlier military competition, or as loss of the competitive edge, or as destructive political influence.

    "Open trade is important to peace and stability" - yes, but this is exactly what's missing in today's global economy, so what exactly do economists want to preserve?

    "The act raised U.S. tariffs on over 20,000 imported goods.[2]
    The "dutiable tariff rate" peak of 1932 was 59.1%, second only to the 61.7% rate of 1830. However, in 1933, 63% of all imports were never taxed which the "dutiable tariff rate" does not reflect. The "free and dutiable rate" in 1929 was 13.5% and peaked under Smoot-Hawley in 1933 at 19.8% which is significantly below the 29.7% "free and dutiable rate" that the United States averaged from 1821 until 1900.[25]

    The average tariff rate on dutiable imports [26][27] increased from 40.1% in 1929 to 59.1% in 1932 (+19%). However, it was already consistently at high level between 1865 and 1913 (from 38% to 52%). Moreover, It has also risen sharply in 1861 (from 18.61% to 36.2%; +17.6), between 1863 and 1866 (from 32.62% to 48.33%; +15.7%), between 1920 and 1922 (from 16.4% to 38.1%; +21.7%), without producing global depressions."

  8. Left out of this analysis is whether, by threatening tariffs, a country can induce bilateral free trade more so than today's largely unilateral free trade (where the USA has more open borders than the rest of the world). If countries do not retaliate vs tariffs and instead open their borders to more free trade, in exchange for dropping the tariffs, then what Trump is doing is 'more free trade than the free traders'. Far-fetched to imagine Trump has such a hidden agenda, but from a black-box, game-theory analysis, what Trump is doing is right.

    1. There are more restraints to trade than just tariffs. Example: I couldn't bring my car back from Germany when I was in the Army because it didn't have the correct type of windshield and the tires did not come with the embossed letters 'DOT' on them. There may have been something about emission controls, too; it was several years ago.

  9. If the federal budget had been in balance since 1980 than domestic savings would have exceeded domestic investments in every year except in a few in the late 1990s when the federal budget was in surplus and the economy was in a capital spending boom. When savings exceeds investment the US would have been running a current account surplus and exporting capital to the rest of the world rather than borrowing abroad. The actual data on savings and investment contradicts your premise about the federal deficit and borrowing abroad.


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