An Urban's Rural View

Everybody knows America's trade policy is about to change, but only the president-elect and his confidants have more than a vague notion of what the change will look like. The fear is it will have unintended consequences that will make exporting industries like agriculture squirm.

Will President Trump follow through on Candidate Trump's campaign promises to scrap NAFTA, impose 45% tariffs on goods from Mexico and China and withdraw from the World Trade Organization? Or will he merely use the threat of doing these things as negotiating leverage to wedge concessions from uncooperative trading partners? And if it's the latter, what will he do if the leverage proves insufficient to the task?

The U.S. has championed free trade these last 70 years or so but for much of America's first two centuries we were a high-tariff country. At times in the 19th century the general tariff rate approached 50%. By comparison, America's average trade-weighted tariff today is 2%.

From the very birth of the nation in the late 18th century the tariff was a divisive political issue. America was an agrarian nation. It did not have an income tax. Tariffs were the main form of government revenue and the key to protecting infant industries while they developed.

Those who favored an active role for the government in economic development -- men like Alexander Hamilton, Henry Clay and Abraham Lincoln -- pushed for high tariffs. Those who feared big government and preferred an economy based on agriculture -- men like Thomas Jefferson and Andrew Jackson -- wanted tariff rates set low.

Throughout the 19th century and into the early 20th, then, tariffs rose and fell depending on which side prevailed at the polls. Farmers were usually for low tariffs for some of the reasons many farmers favor free trade today. With a change in trade policy looming, those reasons deserve a review.

High tariffs make farmers pay more for the goods they must buy. And not just for foreign-made goods: Facing less foreign competition, domestic producers also raise prices.

High tariffs also dampen overseas demand for the products farmers sell. If we buy less from foreigners, they have less money to buy from us. More importantly, when we raise our tariffs foreign governments raise theirs in retaliation.

These days, with so many foreign countries so heavily dependent on trade, the danger of tit-for-tat tariffs spiraling into export-killing trade wars is real. Knowing this, Trump's trade team may well tread carefully. In a CNBC interview, his nominee for Secretary of Commerce, Wilbur Ross, was asked what would happen if the U.S. hiked tariffs on Chinese imports.

"Everybody talks about tariffs as the first thing. Tariffs are the last thing," Ross said. "Tariffs are part of the negotiation. The real trick is going to be increase American exports. Get rid of some of the tariff and non-tariff barriers to American exports." (http://cnb.cx/…)

Getting rid of tariff and non-tariff barriers to exports is, of course, exactly what the last several administrations have been trying to do. I spent a good deal of the 1980s and early 1990s in Tokyo covering the efforts of the Reagan and first Bush administrations to lower Japanese trade barriers. The experience taught me the limits of America's ability to push other countries around. Our negotiators were tough and smart, but every concession they won was grudging and acrimonious. The gains were usually a fraction of what we'd demanded and took years to achieve.

It's hard for Americans to accept that our negotiators have tried hard enough. Isn't the U.S. the biggest market in the world? Yes. Wouldn't simply threatening to close our market force the foreigners to play ball? Maybe, but the side that threatens the nuclear option must remember the other side has nukes, too.

Perhaps Trump's trade negotiators will prove more skillful than their predecessors. Exporters have to hope so. They'll be waiting eagerly to see which way the new trade policy goes.

Urban Lehner can be reached at urbanize@gmail.com

(ES)

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