I happened to be home for lunch when the Donald Trump interview at the Economic Club of Chicago was broadcast live. John Micklethwait, the editor-in-chief of Bloomberg News, a highly regarded business periodical, conducted the interview and did not hesitate to challenge Trump’s views with respect to tariffs and other economic matters.
Micklethwait repeatedly pressed Trump about his plans to impose a universal tariff on imports and his threats to impose tariffs on American companies that outsource their manufacturing to other countries.
Most economists believe that tariffs contribute to inflation. Contrary to what Trump appears to believe, tariffs are not paid by the country from which goods are imported. Rather, they are paid by the company that imports the goods. The importing company typically passes the cost of the tariff on to its customers by increasing the prices for the products that the company sells. That contributes to inflation.
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Micklethwait noted that critics of Trump’s tariff proposals for all imports have pointed out that this would amount to a national sales tax, with $3 trillion worth of imports affected and companies passing on higher costs to their customers. Micklethwait noted, “That is just simple mathematics.”
Trump replied, “It is but not the way you figured. I was always very good at mathematics.” He went on to suggest that higher tariffs would result in foreign companies building factories in the United States. Whether this would actually happen is far from certain.
Micklethwait told Trump that the greatest risk with tariffs might be on foreign policy as a result of hitting allies with economic penalties. He asked, “How does it help you take on China turning all of your allies against you?”
Trump replied, “Tremendously, because China thinks we’re a stupid country. They can’t believe someone got wise to them.”
Is Trump right? History is not on his side.
In 1922, the U.S. Congress enacted the Fordney-McCumber Act, which raised the average import tax to 40 percent. The act prompted retaliation from European countries. In 1928, Herbert Hoover, the Republican candidate for president, promised to increase tariffs on agricultural products, which faced declining prices because of overproduction. After he was elected, lobbyists from other sectors of the economy encouraged a broader increase in tariffs.
In response to the stock market crash of 1929, support for protectionism increased, with advocates, who supported an “America First” public policy, calling for higher tariffs to protect the domestic market for U.S. producers. The result was the Smoot-Hawley Bill, which called for increasing tariffs by 20 percent. Despite a petition signed by more than 1,000 economists, President Hoover signed the bill into law on June 17, 1930.
The Smoot-Hawley Act prompted even greater retaliation from foreign governments, which made a bad situation even worse. The unfortunate fact of life is that in trade wars there are no winners, only losers.
In 1934, President Franklin Delano Roosevelt, who defeated Hoover in the 1932 election, signed the Reciprocal Trade Agreements Act, which reduced tariff levels and promoted trade liberalization and cooperation with foreign governments.
Some argue that by igniting a trade war that deepened the Great Depression, the Smoot-Hawley Bill contributed to the rise of political extremism, enabling demagogues such as Adolf Hitler to gain power.
Trump seems to believe that by throwing his weight around, he can force other people to do what he wants them to do. That is a vanity that can cause an immense amount of harm if left unchecked. A trade war will not “Make America Great Again.” It will only disrupt the world economy and cause an immense amount of suffering in this country, as well as in other countries.
In short, Trump is not the right person to have in the Oval Office at this point in time. Guided only by his ego and his false belief that he has a better understanding of economic matters than anyone else has, including the highly regarded editor-in-chief of a prestigious business periodical, he is likely to make precipitous decisions that will make bad situations worse, as did the Smoot-Hawley Act.
Dan Lee, a regular columnist, is the Marian Taft Cannon Professor in the Humanities at Augustana College; danlee@augustana.edu.
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