Gordon L. Weil
Many years ago, I found myself in the middle of an
international war.
As tough as each side was, I was fortunate that the
ammunition was not bullets. It was
chickens.
The U.S. was the major supplier of chickens to Europe, but
the organization now called the EU or European Union wanted to promote its own
production, mainly in Germany. So, it
increased its tariff on imported chickens.
American producers protested, and the government retaliated by raising
U.S. tariffs on several products. The
result was the “Chicken War.”
The most important U.S. tariff was placed on trucks with the
aim of cutting imports of VW vans. But
trucks from all over the world were affected.
Eventually, tariffs on other items, including chickens, were either dropped
or lost importance. But the tariff on
trucks remains, decades later, though some foreign producers learned how to
dodge it.
As the sole American on the EU staff, my role was to improve
understanding between the U.S. and Europe and help defuse the conflict. Eventually, EU President Walter Hallstein met
with President Lyndon Johnson. Acting on
behalf of the Europeans, I had the unusual opportunity of negotiating with the
State Department the joint statement of the two presidents.
The moral of the story is that tariff wars have
consequences. Trucks are probably more
expensive in the U.S. today thanks to the surviving tariff and because American
producers could raise their prices when faced with less competition from
abroad. The Chicken War was hardly just
chicken feed.
President-elect Trump likes tariffs. He sees them as both a threat and a
promise. He seems reluctant to accept
that they drive up prices and are likely to bring retaliation that will reduce U.S.
exports. Because other countries can sometimes
sell Americans essential products or have lower costs of production, he claims
the U.S. is subsidizing them.
Beyond economics, Trump clearly would use tariffs as an
instrument of foreign policy. If he wants
a country to halt the flow of immigrants or drugs or even to increase its own
military spending, he uses the tariff threat to force change. Trump’s surprising style, untethered to
tradition, can cause others to take his threats seriously.
Aside from the impact on exports and imports and on consumer
prices, the liberal use of tariffs may bring political and economic
change. Trading partners will look for
alternatives and not merely submit.
He threatens both Canada and Mexico with higher tariffs
unless they stop illegal immigration. As
a result, they may take action even before he takes office. But the U.S. depends heavily on Canadian
crude oil. If a 25 percent tariff were
added, U.S. refineries and their customers would pay more. And Canada can redirect some sales to Asia.
Trump may do a lot to boost European unification. Europe is equal to the U.S. as a market, so
it could absorb much of its production that can’t enter the U.S. Higher world prices created by the Trump
tariffs would be an incentive for the Europeans to step up their own production
to displace American imports.
The aspect of tariffs that holds promise for Trump is that new
federal revenues would be collected at the border. His assumption must be that imports will not
be slowed by higher tariffs, so they could create the income necessary to
finance the federal government, which meanwhile would be cutting income taxes.
For the moment, that’s pure theory. Tariffs drive up prices unless foreign
suppliers swallow them. In practice,
imports decline when imported goods cost more. Lower imports may produce lower
tariff revenues. The revenue effect is greater when the tariff increase is
greater. So, tariffs may not be quite as magical as Trump seems to believe.
Yet good reasons exist for raising some tariffs. That happens when Americans are willing to pay
more for goods through a tax disguised as a tariff to achieve national policy
goals.
If the U.S. is concerned about excessive dependence on
imports of essential goods, aiding domestic producers or ensuring worldwide environmental
standards, greater tariff protection may make sense. Labor unions oppose trade deals because jobs
may be shipped abroad. But helping
workers comes at a price.
China profits from exploiting its own labor and using its polluting
coal to produce low-cost goods for American merchants. Its gains pay for increased Chinese military
spending used to expand its influence, threaten Taiwan and to menace the U.S.
and its allies on the seas.
It makes sense to cut China’s sales to the U.S. to level the
playing field and reduce its funds for military expansion. Customers may willingly be taxed for this
effort.
Trump’s tariff threats may sometimes work, but their effect goes well beyond raising consumer prices. Higher tariffs have both economic and political effects, sometimes long-term and often not obvious.
