The stupidity of tariffs

President Trump announced that he will impose tariffs on steel and aluminium, as a way of protecting local industries against foreign imports. This news didn’t go down well in steel-producing European countries, and has seemingly obligated the European Union to respond to the U.S. administration.

As a retaliatory measure, the European Union’s Commission is imposing tariffs on American products such as jeans, motorcycles and bourbon. Given the iconic nature of all of those products, it goes without saying that the measure is a political statement rather than an economic policy.

During a speech in Hamburg, Germany, Commission president Jean-Claude Juncker said, “So now we will also impose import tariffs. This is basically a stupid process, the fact that we have to do this. But we have to do it. We will now impose tariffs on motorcycles, Harley Davidson, on blue jeans, Levis, on Bourbon. We can also do stupid. We also have to be this stupid.”

It’s quite extraordinary that European leaders are willing to engage with Trump on the initiation of a trade war. Up until now, the EU was ever so keen to stand as a beacon of free trade against the economic regressivity of Trump’s protectionism. When he was railing against free-trade agreements, and how the bankrupted America, EU leaders were smiling for pictures with the Japanese Prime Minister, while agreeing on more free trade. Japanese Prime Minister Shinzo Abe called it “a strong message to the world.” European Council President Donald Tusk said“Although some are saying that the time of isolationism and disintegration is coming again, we are demonstrating that this is not the case.”

That was in July. Stupidity therefore seems to take about eight months to develop.

Juncker rightfully calls the process stupid, because there is no economic advantage to protectionism in recorded history. The tariffs of George W. Bush cost the U.S. thousands of jobs, and Barack Obama’s tire protectionism was a financial disaster as well. For European, this is even more apparent, because there is a longer-lasting history with this economically illiterate philosophy. King Louis the 14th of France was already practicing protectionism (he just called it “mercantilism”), by trying to keep gold and silver in his country and favour exports. He introduced quotas, tariffs, and monopolized complete industries. Historically, it’s hard to say whether it was the continuous wars he waged or his economic policy that bankrupted France more. One thing is for certain: the country was in bad shape by the end of his reign.

In the United Kingdom, the Corn Laws were a perfect example of pure protectionism during the 19th century: the conservative landowners in parliament decided that the UK should highly tax grain coming from abroad, with the intent to provide an advantage to local producers.

The result of this isolated trade policy: while the British producers profited, the price of grain exploded in the 1830’s. As soon as their competition was neutralised, large landowners were able to increase prices, which especially hurt working classes. On the Jan. 31, 1849, via a law which was voted in (1846), the economically catastrophic results of the Corn Laws were finally recognised, they were repealed and the import taxes disappeared.

The European Union has always revelled in the moral superiority it derives from understanding the advantageous nature of free trade. Jean-Claude Juncker calls the process of trade wars “stupid” because Europeans understand that the whole thing is stupid. It hurts both the economy of the country that we put the tariff on, and our own producers, because it reduces choices for consumers and competition on the market.

Tariffs are arbitrary and regressive taxes which hurt the poorest of the poor. A research paper on American tariffs exposed this as recently as January last year, “It appears tariffs are imposed in a regressive manner — in part because expenditures on traded goods are a higher share of income and non-housing consumption among lower income households, but also due to explicit regressivity.”

In plain English, tariffs fall disproportionately on those least able to afford them.

The paper concludes that the lowest income categories are burdened at 1.5 per cent of disposable income, which is exponentially higher than the wealthier elements of society. For high earners, this percentage is below 0.3.

Tariffs are damaging the economy and hurt the poorest of the poor. The idea that European leaders will convince Trump of the fallacious nature of this economic belief by engaging in a trade war is plain ridiculous, knowing Trump’s way of political thinking. Europeans should instead lead by example, and make a positive case for free trade in an era of Trump’s outdated ideas.

This article was first published by Newsmax.

Pictures are Creative Commons.

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About Bill Wirtz

My name is Bill, I'm from Luxembourg and I write about the virtues of a free society. I favour individual and economic freedom and I believe in the capabilities people can develop when they have to take their own responsibilities.

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