Donald Trump Versus Adam Smith

March 9, 2018

by Mark Franke

When I was a college freshman taking my first political theory class, my professor explained why some government policies are good (meaning popular) and others are scorned. The answer is simple: It depends on whose ox is being gored.

Tariffs are exactly that kind of policy. In a free-trade environment struggling domestic industries being undercut in price or otherwise losing market share to foreign imports see their oxen getting readied for the barbecue.
With import tariffs it’s the intermediate and end consumers who get roasted with higher prices and restricted choices in the market place.

President Donald Trump, who has an uncanny ability to jump out of whatever ideological bucket his opponents try to stuff him into, did it again by confounding conservative supporters with imposition of a 25 percent tariff on steel and aluminum. Aren’t conservatives for free trade (aside from Patrick Buchanan and the America First movement)? Free trade is a doctrinal bedrock in Adam Smith’s theory of economics, isn’t it?

Trump understands economics at the micro level, the level it applies to business firms. Nor is he totally ignorant of macroeconomics, the level of the overall economy. Witness his willingness to push for reduced tax rates to stimulate investment and job creation. But push come to shove, his sympathies will lie with the business owner.

So whose ox is being gored here? Ask the President and he will tell you the domestic mills suffering from predatory Chinese pricing. Ask Adam Smith, metaphorically, and you will get a different answer entirely. (Hint: It’s everyone else.)

Tariffs are generally used for one or more of three purposes: to raise revenue, to protect domestic industries for economic or strategic reasons or as a negotiating tactic in a trade war. Our nation has seen all three uses for tariffs.

A brief layman’s history lesson about tariffs in U.S. history might help to understand how these reasons have been used to meet a national goal.

In early American history it was the revenue argument that was most important until the passage of the XVI Amendment to the Constitution legalizing direct income taxes on citizens. Alexander Hamilton’s brilliant plan to establish a firm financial basis for the new government was based on tariff revenue to pay off the states’ war debts. It worked, until Thomas Jefferson and James Madison cut off all imports in a terribly misguided attempt to pressure Britain. The public treasury went bankrupt and the young economy was put into a tailspin.

Increasing pressure for protection by manufacturers resulted in bizarre political maneuvering that produced the “Tariff of Abominations” during John Quincy Adams’ last year in the White House. This provoked the nullification movement in South Carolina and across the agricultural south. The Civil War could have happened several decades earlier when Adams’ successor Andrew Jackson mobilized troops to enforce the law.

The Civil War was financed in large part by borrowing and issuing greenbacks. An attempt to reign in the inflated money supply by redeeming paper money pushed the economy into deflation and recession. The Free Silver movement and William Jennings Bryan’s notorious “Don’t crucify me on a cross of gold” speech at the 1896 Democratic convention was the result.

William McKinley, who defeated Bryan, ran his brilliant campaign by downplaying the gold versus silver issue and focusing on . . . you guessed it, protectionism. He proposed and passed large tariff rates to protect and stimulate domestic manufacturers, many from the states in the upper Midwest that elected him. Even he, though, acknowledged a need to moderate tariff rates later during his administration.

One last anecdote in the tariff story is the ill-advised Smoot-Hawley Tariff of 1930, designed to help both manufacturers and farmers but which did more to shove America into the Great Depression than the 1929 crash of the stock market.

Since then our nation has mostly gone the tariff route when trying to establish a negotiating position in international affairs or to retaliate against what is seen as unfair practices by a foreign nation, usually a controlled economy that subsidizes exporters with government funds. This is when tariff implementation passes from the economic sphere to the political. Our nation tends to use tariffs in this situation as a retaliatory measure. To paraphrase Clausewitz, trade war is simply politics by another means.

What is Donald Trump’s motivation in this case? He makes the national defense argument that we are importing too much of these strategic metals used in making our weapon systems. And he pointed to the closed factories in the Rust Belt as further rationale for taking this action.

What does that mean for Indiana? Even though the era of Gary being a U.S. Steel town is long gone, steel is still an important industry there. Northwest Indiana’s politicians and newspapers have praised the tariff.

But let’s look closer to my home in Fort Wayne. We have several steel mills in northeast Indiana, mostly in the business of reprocessing scrap steel for new uses. These are mid-size employers with high wage rates, so they deserve and receive consideration from local politicians. But are they the backbone of our economy as President Trump claims?

Indiana’s manufacturing sector employs just over 500,000 workers. And according to MarketWatch, approximately 22,000 of these work in the steel-producing industry. More important, over 300,000 workers are employed in industries that consume steel.

Seem high to you? Just try to image a factory with no steel or aluminum-based machinery or equipment.

Now look around your house and garage for things made with steel. Start with your automobiles. Think how much more you will pay if the Trump tariffs remain in place. Then look for aluminum. You will find products made with these metals in every room.

Expect to pay more for these items on your next shopping trip. After all, somebody has to pay that 25 percent surcharge and it usually is the end consumer. It comes down to the immutable law of supply and demand. Artificially force a price up and expect less of it to be demanded, hurting the very group you ostensibly wanted to help. If the product is important enough for the buyer to pay the higher price, then expect that to affect final pricing.

So my professor knew his stuff. While I have no bone to pick with any of the steel mills in my region, I also have to remain true to my principles. The scrap-steel mills have been successful due to their owners’ innovative approach to a market in which America could not otherwise compete. We don’t need to repress this entrepreneurial spirit by hobbling their competitors. These business leaders have a genius for entrepreneurial success. We need to encourage this spirit, not apply artificial supports that discourage it.

As for me, I buy steel and aluminum products; I don’t produce them. In other words, it is my ox that is being gored.

Mark Franke, an adjunct scholar of the foundation, is formerly an associate vice chancellor at Indiana University-Purdue University Fort Wayne.


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