Tariffs Versus Free Trade

Tariffs vs. free trade has shaped U.S. history, from the Boston Tea Party to the Revolutionary War and beyond. The Smoot-Hawley tariffs worsened the Great Depression, proving protectionism can backfire. Trump and tariffs reignited debate, with rising costs impacting consumers. While strategic trade sanctions help counter unfair practices, broad tariffs fuel inflation. The USMCA replaced NAFTA, promoting balanced trade. Understanding how it works, when to impose tariffs, and the history of tariffs is crucial. Instead of economic isolation, history shows targeted, temporary tariffs—coordinated with allies—work best. The ongoing trade war highlights the need for smart policies over reckless restrictions.



Sources and Citations:

1. U.S. Bureau of Labor Statistics - Historical unemployment data during Great Depression
2. World Trade Organization - Historical tariff rates and trade volume data
3. U.S. Trade Representative Office - Current U.S.-Canada trade relationship statistics
4. U.S. International Trade Commission - Steel tariff impact analysis
5. U.S. Census Bureau - Bilateral trade relationship data

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ABOUT COMMON SENSE FOR AMERICA:
Common Sense For America brings history and facts together to inspire non-partisan, common sense solutions to America's biggest challenges. Inspired by Common Sense a pamphlet written by Thomas Paine, 1776, Bruce Rutherford, political commentator and educator, dissects U.S. history, American finance, and global affairs, and shares insights in everyday language.

Thomas Paine's Common Sense argues that concentrated political power, whether in a monarchy or elite class, is unjust and undermines democracy. Like with Common Sense, we advocate for a government accountable to the people, emphasizing transparency, representation, and checks on power.

Transcript

I do believe the vast majority of Americans have no understanding of Tariffs and Free Trade. Do you have an alternative for that commodity in the United States? 

Pretend for a moment that we have no other way to buy shower sandals than from China. We impose an 100% tariff, so the price doubles from $3 to $6. Now... Oh no, we have a million alternatives to shower sandals. We are not going to pay six bucks for those rubber shower sandals. Forget that!

 Welcome Patriots to this edition of Common Sense for America. I am Bruce Rutherford, your host and commentator, coming to you from the Westwood Golf Club in Houston, Texas. Today we are going to examine the history and the common sense of tariffs and free trade for America.

Let's be clear on what we are talking about. Tariffs are a tax on  goods and services coming into our country. Free Trade is the unfettered movement of goods and services in and out of our country and other countries around the world, free of tariffs and free of quota limitations. Now, in a perfect world, free trade is preferred over tariffs and quota restrictions. The first Economics book: "An Inquiry into the Nature and Causes of the Wealth of Nations" advocated free trade to enhance the wealth of all nations. In this book, Adam Smith outlines a nation's comparative advantage: a nation's natural advantage to produce a good or services cheaper and or better than other countries. 

As an example, Saudi Arabia has a comparative advantage in producing and selling oil. Qatar has a comparative advantage in producing natural gas. The United States has a comparative  advantage in producing both... you get the idea. Even Singapore has a comparative advantage by virtue of its strategic location: a perfect location for international trade and logistics. 

Now as the largest economy in the world by far, the United States has a greater interest in free trade and avoidance of tariffs, more than any other nation. Economists use a thought experiment to explain free trade and tariffs. Pretend there are only two countries in the world. Each produces and sells a valuable commodity needed by the other country. Each country imposes tariffs on the other country to raise money to pay for its government operations. Because the consumers of each country cannot find the needed commodity anywhere else, they're forced to pay for the imported commodity at higher prices with the included tariff. 

Now, these higher prices increase the cost of living and lowers the standard of living in that country. If there were an alternative source in the economy that consumers can buy, they can avoid the high prices and buy the alternative. Now that would leave the receding and producing countries unable to pass the tariffs onto consumers. Eventually the leaders of both countries realize that their people are better off without the tariffs, and tariffs are abolished. 

The people of both countries now enjoy a lower cost of living and a higher standard of living with free trade and no tariffs. Had the consumers of one country had a viable alternative commodity, they could have bought that commodity, avoid the tariffs, and the trade agreement probably would not have been reached. So you see the issue of comparative advantage, alternative commodities, and tariffs are all linked in order to have the lowest cost of living and the highest standard of living.

Now, America has a long history of tariffs and free trade. One of the key issues leading to the revolution against King George III were tariffs imposed on all matters of goods imported by the colonies. The Boston Tea Party was a direct result of this dissatisfaction that led to "taxation without representation" as a war-cry of the revolution. 

After the revolution, the colonies organized themselves under the Articles of Confederation. Now these Articles provided for a very weak central government and the individual states were strong and they proceeded to impose tariffs on each other. The practice absolutely wreaked havoc. 

The Constitution of 1789, (I think the first full Constitution in the world, and the best in the world), corrected the problem in its Article 1. Sections 9 and 10., making it illegal for states to impose taxes or duties on imports or exports to or from the individual states without congressional consent.   

With this free trade was established with the United States and the economy flourished. Now let's fast forward to 1929. Keep in mind that until about 1913, most of the revenue that operated the federal government was from tariffs and excise tax. 

In 1929 the Smoot - Hawley tariff act was enacted to protect and support, primarily, American farmers and small businesses. Now, that act raised tariffs on about 900 products by 40-60%. The law came into effect by June 17, 1930, but it was credited with triggering the stock market crash of October 1929, and it is credited with exacerbating the global recession. 

Tariff retaliation by other countries forced tariffs to decline by 65%. That meant the economy of the United States declined by 65%. Smoot - Hawley tariffs are therefore considered the primary cause of the Great Depression. Now remember, unemployment of the Great Depression was somewhere between 24 - 33%. Farms and businesses were lost forever; families were destroyed. Ultimately the Great Depression created the conditions that lead to World War II. For your family's sake, we must not make those mistakes again. 

When are tariffs appropriate and when are they not appropriate? When our country was founded. Tariffs were the primary source of revenue to support government operations. Now, that's not the case today; although, tariff revenue has increased significantly under the first Trump administration and under the Biden administration. 

Trump promises to increase tariffs across the board,  and he expects tariff revenues to increase significantly. Tariffs are necessary tools to negotiate trade policy agreements with other nations. They are also necessary to retaliate against unfair trade practices by other nations. We also use tariffs as a part of the sanctions that we and our allies impose on rogue nations. 

The point of entry tariffs are taxes to pay for the operation of ports necessary for the importation and exportation of goods in and out of the country. These point of entry tariffs are incidental and are not material to the cost of the goods when they are finally purchased by our citizens. 

President Trump increased tariffs significantly during his first administration. President Biden increased them even more. The inflationary impact of these tariffs and the legislation implemented by Biden, during his administration, ultimately lead to 9% percent inflation in our country during the Biden administration. 

Now, please remember, inflation is a very regressive tax and it falls heavily on the poor and the middle class. Rich people can avoid inflation or don't even notice it. $4 gasoline and $3.50 for a dozen eggs are minor issues for a rich person, but they are very significant for the average family. This explains why tariffs have very important implications for American families. 

How do we decide on when to use tariffs and not free trade? anytime the economic costs to the American consumer is greater than the economic benefit to the government, we should avoid the tariff. Now, economists today, with their sophisticated mathematical tools, can measure the impacts of tariffs and tell us if they are positive or negative, and whether or not they are inflationary. 

In 1994, we eliminated most tariffs with Canada through NAFTA, and our trade relationship flourished, supporting over 14 million American jobs. That's what happens when we use targeted, strategic trade policies instead of broad-brush tariffs.

Generally speaking, tariffs that retaliate against unfair practices of other nations, tariffs that are used to negotiate trade agreements, tariffs that are a part of sanctions against rogue nations... none of these are a problem for consumers. Tariffs can be implemented very precisely, very selectively. It is not necessary to apply tariffs across the board or across a broad spectrum of goods as the Smoot - Hawley tariffs did. Smoot - Hawley tariffs were a terrible idea, and across the board tariffs, in my opinion, are a terrible idea, and they are threatening the American economy. Let's not make that mistake again. 

So how do we move forward? History and data show us that targeted, strategic tariffs work when they're:

1. Time-limited

2. Focused on specific unfair trade practices

3. Coordinated with our allies

4. Designed with clear goals

Now, thanks for joining us today on the discussion of tariffs and free trade. This topic is not well understood by the general public, and I hope you will discuss what we said today, along with your opinions, with your colleagues and help other people understand the issues associated with tariffs and free trade. Please let us know what you and your colleagues think about this issue. We love to hear from you. Just click on the comments button below and tell us what you think. 

Do not hesitate to subscribe to Common Sense For America, so you can be informed of topics like this. Join us next time, until then God Bless You and God Bless America.