What Would Ronald Reagan Do?
He wouldn’t be levying tariffs, for sure
Ronald Reagan and George H.W. Bush championed low tariffs and free trade. And now Donald Trump is busy imposing tariffs. That’s a problem. Here’s why.
A tariff is a sales tax on products sold between nations, but it’s not paid by the nation. Not even close.
When a vehicle part is sold by a foreign company to a domestic manufacturer (even a subsidiary of the same company), the foreign company pays the U.S. import tariff, but then charges the U.S. company the price of the part, plus the tariff.
The U.S. auto manufacturer pays the increased price then sells the vehicle to us, including the cost of the tariff.
Sometimes the tariff doesn’t get added in total as the company absorbs some of it. In most cases, however, it’s passed along in total.
But we don’t see the tariff because it’s not listed as a line-item like a sales tax or an upgraded interior.
Who pays the tariff? It’s not the foreign nation. It is the foreign manufacturer. They then pass the cost of the tariff tax back to the American importer, who passes it along to us, the consumer. So, we consumers pay the tariff just as we pay for the transmission.
The punishment to the foreign nation, if you will, is that their manufacturers sell fewer things, decreasing the manufacturer’s sales as well as the foreign country’s Gross Domestic Product. Unless they sell the capacity to someone else, that is.
A byproduct is tariffs increase the price of domestic products as well. If a $200 tariff is slapped on a $1,000 import, then the domestic manufacturer may allow their price to rise to $1,100 and still be cheaper, which they often do.
So, what good are tariffs?
Tariffs protect domestic industries. By making imports cost more, consumers are encouraged to buy domestic and that bolsters our industry and economy.
It’s often a developing nation strategy to protect infant industries while they grow to be competitive in international markets.
And it is used to protect domestic industries from unfair competition (dumping). Some nations subsidize certain industries, so it is possible they sell here at less than cost. That allows the foreign industry to gain customers and drive our producers out of business. Then they raise prices when our producers are gone.
Free traders like Ronald Reagan and George H.W. Bush, argue that removing tariffs reduces costs for consumers and allows competitive domestic manufacturers to expand their market to the world and creates more domestic jobs. Less efficient domestic industries disappear, but the economy is better off as domestic consumers pay less.
Ronald Reagan quoted Adam Smith’s “Wealth of Nations” and said it, “... exposed for all time the folly of protectionism [tariffs].” He argued that the 1930 Smoot-Hawley tariff resulted in the Great Depression, although some economists disagree.
He further said, “In recent years, the trade deficit led some misguided politicians to call for protectionism, warning that otherwise we would lose jobs. But they were wrong again. In fact, the United States not only didn’t lose jobs, we created more jobs than all the countries of Western Europe, Canada, and Japan combined. The record is clear that when America’s total trade has increased, American jobs have also increased. And when our total trade has declined, so have the number of jobs.”
“Our peaceful trading partners are not our enemies; they are our allies. We should beware of the demagogues who are ready to declare a trade war against our friends — weakening our economy, our national security, and the entire free world — all while cynically waving the American flag. The expansion of the international economy is not a foreign invasion; it is an American triumph, one we worked hard to achieve, and something central to our vision of a peaceful and prosperous world of freedom.”
We should listen to Reagan and not use tariffs as a weapon. Not only is it un-American, it’s un-Republican.