Rationale for US Tariffs

I was curious about why Trump talks about the year 1913 when he refers to tariffs.

Apparently before 1913, the US relied entirely on tariffs and excise duties to fund the federal government. There was no income tax. Even then, the government recognised that tariffs impacted the population unequally. Tariffs and excise duties made the price of goods more expensive locally and this was a greater burden on the less well off. The well off would feel the impact of the higher prices but it had less of an economic impact on them.

A prime concern of the drafters of the US Constitution had been to prevent federal government overreach. And therefore the federal government was prohibited from collecting taxes directly from citizens. It could only collect revenue from states proportionately. Although it was recognised that tariffs and excise duties were unfair on the less well off and the wealthier people were not contributing their fair share, nothing could be done as the courts kept on striking down laws that attempted to collect individual taxes.

Until 1913. By the 26th Amendment passed in 1913, the US Constitution was amended to allow for the collection of taxes directly from citizens. Since then individual taxes and corporate taxes have been the main sources of revenue for the federal government. The level of tariffs came down after income tax introduced.

So when Trump refers to 1913, he is hoping to revert back to a period when tariffs would bring in sufficient revenue to the federal government and then taxes on individuals can come down. The idea is that since tariffs are paid by foreigners and foreign companies, there would be little resistance domestically to this.

To some extent this is true. But then the original problem of tariffs increasing the prices of goods within the US remains. This will push up inflation. Again the less well off will bear the brunt of the price increases. The wealthier will do better in this scenario because they will pay lower taxes.

When tariffs started coming down after 1913, it made sense to make goods in the cheapest possible place and then import it to the US. China became the beneficiary of this after it opened up and was, for a long time, the factory of the world. China prospered and its economic strength grew on the export dollars it was earning. By being the factory of the world, employment prospects for the Chinese population increased and its people and companies prospered. Correspondingly whilst consumers in the US and Europe benefited from the lower prices of goods, their manufacturing base was decimated. Making goods in the US and in many parts of Europe was no longer competitive. Factories shut down and manufacturing jobs, which had been the mainstay of US employment, were lost.

Trump hopes that if the tariffs are high enough, companies outside the US would invest in manufacturing facilities within the US to avoid paying the tariffs. This would then bring back manufacturing jobs to the US.

And of course tariffs would reduce the trade deficit the US has with many countries because either they would have less things to sell to the US or would have to pay taxes to the US to import them.

Another side benefit Trump might be focused on is the economic impact especially on China. Tariffs on Chinese goods will hurt its manufacturing base, create unemployment and reduce its economic strength.

The theory makes sense but will it work? The price of goods in the US and in the rest of the world would differ significantly. If the goods were manufactured in the US, the goods will be more expensive because the cost of manufacturing in the US is going to be higher not just because of labour costs but also because of the investment cost. With this price difference can the US be competitive? Also the less well off in the US are going to have to bear this higher burden of the increased price of goods. How will this pan out? The US no longer produces all the raw materials it needs to make goods. These will have to be imported. Wouldn’t the tariff on these raw materials also drive up the price of goods?

I wonder how long will it take to see if reverting to the pre 1913 position brings jobs and prosperity equally to all in the US?