Yellen Says Calls for High Tariffs Are ‘Deeply Misguided’
“Calls for walling America off with high tariffs on friends and competitors alike or by treating even our closest allies as transactional partners are deeply misguided,” US Treasury Secretary Janet Yellen warns during a speech at the Council on Foreign Relations.
Bloomberg
Mark Edelman is retired from Iowa State University as professor emeritus.He has 43 years of experience as a professional ag economist and public policy educator.He lives in Boone and the viewpoints presented are his own.
Iowa’s favorite son, Herbert Hoover, was campaigning for president 96 years ago. Agricultural leaders were calling for tariffs after enduring much of the 1920s in an agricultural depression. The U. S. government had provided price supports to expand farm production during World War I to supply Europe with food and supplies. U.S. agriculture stayed near full production as Europe’s ag production recovered by 1920. The U.S. withdrew wartime price supports. During 1920 to 1928, the price of corn ranged from $0.40 to $0.90 per bushel. The world was producing surplus agriculture production below costs. Many farm leaders were calling for tariff protection from import competition.
Hoover was elected president in 1928. The stock market crashed in 1929. In 1930, the president signed the Smoot-Hawley Tariff Act into law. Over 1,000 economists signed a petition against the Tariff Act, but it passed and was signed anyway. Smoot-Hawley levied 40% to 60% tariffs on a broad range of 20,000 imported items. Retaliatory tariffs were imposed by the world’s trading nations. A trade war resulted. Global trade declined by about 65%.
One infamous report in Don Paarlberg’s book “American Farm Policy” included a South Dakota market quote: “#2 shelled corn at 4 cents per bushel, #3 at 3 cents, #4 at 2 cents, and ear-corn 3 cents less.” Hoover’s administration set up a Federal Farm Board with price supports to buy grain reserves, but these policy responses were simply overwhelmed by the magnitude of the Great Depression. Many economic historians point to the Smoot-Hawley Tariff Act and monetary policy as two of the causes for the Great Depression in the early 1930s. At the time, monetary and trade policy was not globally coordinated. The Federal Reserve Board was not capable of managing a “soft” economic landing. Unemployment rose to 25%. Many farmers lost their land. Many banks failed. “The Grapes of Wrath” was published in 1939.
Extraordinary measures were approved in the 1930s by Congress and President Franklin Roosevelt to adjust agricultural supply, put workers to work, insure deposits in banks, and electrify rural America. But the U.S. economy did not fully recover until World War II demand picked up. Following the war, prevailing theory was that the Great Depression festered tensions that contributed to Hitler’s rise in Europe and then World War II. The notion was that nations talking and depending on each other for trade were less likely to go to war.
So the U.S. and Allies led creation of the United Nations, International Monetary Fund, World Bank and General Agreement on Tariffs and Trade (GATT). The GATT negotiations involved nations seeking to remove tariffs and trade barriers to create more open global markets and a level playing field for trade. Over the next 60 years, eight rounds of GATT negotiations were organized to reduce and harmonize trade barriers. The last GATT round organized a World Trade Organization, which 166 nations joined. The WTO continues to host discussions on removing tariffs and trade barriers. Over the years, the WTO has been augmented with more direct multilateral trade agreements and bilateral trade agreements when mutual interest in removing tariffs and trade barriers exist.
The long-term global trend toward removing trade barriers was reversed during Donald Trump’s first term, as the U.S. exited negotiations involving a dozen nations designed to buttress China trade practices. Instead, the U.S. imposed tariffs on steel and aluminum plus $360 billion on Chinese imports. China responded with tariffs on U.S. farm exports. The tariffs on steel and aluminum did stimulate more domestic steel and aluminum production. The tariff protection also contributed to price increases on products using steel and aluminum inputs such as cars and tractors. The Trump administration followed by negotiating agreements with the Chinese to buy more U.S. farm commodities. The Chinese did buy more farm commodities; however, they also started buying more from other global suppliers, such as Brazil.
More: Opinion: Tariffs on fertilizers are hurting Iowa farmers and consumers
The Biden administration continued the tariffs on steel and aluminum and Chinese imports. Once tariffs are imposed, they become difficult to remove, particularly when national security issues are involved. The tariff protection may focus on a specific industry, like steel. However, tariffs have tax impacts that spread as price increases through the economy. Tariffs contribute to inflationary pressures.
Both major-party presidential candidates have included tariffs as part of their economic policy proposals. However, Vice President Kamala Harris has more narrowly targeted tariff proposals on Chinese imports to protect domestic industries important for national security. Sanctions are currently imposed on Russia for invasion of Ukraine. Iran and North Korea also face sanctions. China, Russia, Iran and North Korea have nuclear capability. Harris prefers addressing national and global security issues by forming coalitions with allies in Europe, Asia and elsewhere. The U.S. still has the largest global economy with a $29 trillion GDP. China generates $19 trillion in GDP. Germany has $5 trillion. Japan, India, UK, France, Brazil, Italy, and Canada economies are $2 trillion to $4 trillion each. The Harris focus on coalitions like NATO and OECD can act in concert on economic and security issues.
Donald Trump has proposed “universal tariffs” of 10% to 20% and, according to recent statements, up to 50% on all U.S. imports — not just targeted industries like steel or aluminum. The risk is global retaliation by the major trading nations that results in uncertainty and chaos in global markets, similar to a century ago.
The universal tariffs might then be used as leverage in bilateral deals favored by Trump. When a nation’s trade practices meet Trump’s preferences, a deal is struck. However, this autocratic approach may create more market uncertainty and stifle currency values and investment. Trump has proposed tariffs of 60% on Chinese imports, and threatened tariffs of 200% or more on companies such as John Deere if Deere factories in the U.S. layoff positions that are shifted to Mexico and farm machinery imported back. This issue is more complex and difficult to sort out. John Deere is a global company and produces farm equipment in many countries. Layoffs in the U.S. are partly due to a slowdown in the U.S. ag economy. Mexico is a top-three ag trade partner. Half of ag trade imports are fruits and vegetables. Tariffs affect food budgets. Status as a reliable trading partner could erode, encouraging nations to seek other markets.
More: Donald Trump threatens 200% tariff if John Deere moves production to Mexico
The nonpartisan Tax Foundation reviewed several economic studies and found that some impacts may be passed back to the import source but that most of the recent tariff impacts have been paid by the domestic import firms and their consumers with higher prices. On Oct. 7, the nonpartisan Committee for a Responsible Federal Budget estimated the Harris economic proposals increase the national debt over 10 years by $3.5 trillion. The same analysis estimated the Trump proposals added $7.5 trillion to the national debt and possibly as much as $15.2 trillion.
Ag leaders and voters have a choice both before and after the election, regardless of who may be elected. Decisions regarding tariffs as well as democracy, global allies, independence of the Federal Reserve Board are important and all relate to our economic future. As Winston Churchill once said, “Those who fail to learn from history are doomed to repeat it.”
Mark Edelman is retired from Iowa State University as professor emeritus. He has 43 years of experience as a professional ag economist and public policy educator. ‘He lives in Boone and the viewpoints presented are his own.
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Publish date : 2024-10-26 23:23:00
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