Liebrecht: Tariffs 101: Why they don’t work

During an oil change at Hines Tire in Fries, I was chatting with the guys there when one fellow, a former textile worker, remarked that tariffs will bring back manufacturing to the U.S.

This has become a popular idea in the current election. Donald Trump has most vigorously stated that he would impose tariffs of up to 45 percent on Mexico and China, but Democrats Hillary Clinton and Bernie Sanders have also spoken of restoring tariffs, albeit more obliquely than Trump, who has made tariffs a central issue of his campaign.

His message resonates with working-class Americans who have lost jobs to outsourcing, but there is good reason to be skeptical of politicians proposing tariffs as a means of bringing industry back here. One reason is that tariffs are a simplistic solution to a complex problem, and second, historically they have not worked.

Tariffs are more likely to result in the loss of domestic manufacturing than provide a stimulus to industrial growth.

Unquestionably, American jobs have been lost to China and other low-cost countries. Also, the losses have been greatest in labor intensive industries such as furniture making and textiles, which were the industrial backbone of Southwest Virginia.

The loss of American industry was not, however, solely due to cheaper labor and production costs overseas. While important, seeking lower costs may not even be the critical reason for moving production offshore, and it is important to understand this to know that jobs will not be brought back by imposing tariffs.

From 1980 to 1990, the U.S. lost approximately 300,000 manufacturing jobs. Coincidentally, the 1980’s was also an era of deregulation and revisions to the tax code favoring financial speculation. This fostered the business take-over craze of the eighties, which persists today. With the assistance of a compliant Congress who rewrote the government rulebook to favor big business, speculators bought, sold, resold and merged companies.

With each transaction, huge profits were made, but huge debts were also incurred. Finally, even previously profitable enterprises could not operate under burdens of accrued debt. First workers were terminated to save on labor costs. Then plants were closed or moved offshore.

Simply raising tariffs will not bring manufacturing back because cheaper foreign labor and production were not the sole reasons for offshoring. Rather than tariffs, we need tax and financial reforms that encourage investment in this country and discourage excessive speculation for short term profits.

Then we need to make necessary investments in education, research, products and innovation — in both the public and private sectors. This is the only real way to remain competitive and grow the economy.

It is appealing to think that raising the prices of imported goods via tariffs will restart American manufacturing, but historically this has not been so. Opponents of tariffs often cite the effects of the Smoot-Hawley Tariffs of 1930 as evidence that tariffs are counterproductive to economic growth and job creation.

In 1930 when President Hoover signed this bill, the U.S. unemployment rate was 8 percent. Two years later as a result of world-wide retaliation against the Smoot-Hawley Tariffs, factories were closed, the U.S. GDP was half of what it was in 1930, and unemployment stood at 25 percent.

Donald Trump has touted his education at the Wharton School of the University of Pennsylvania, a top business school, as one reason for his business expertise. When he proposes tariffs of 45 percent as a means of bringing manufacturing back to the U.S., I can only assume that he was cutting class when the causes of the Great Depression were being discussed.

Nancy Liebrecht | Liebrecht is a retired landscape architect and environmental scientist. She lives in Fries.