March 08, 2018

Free Trade Merchantilism and the Trump Tariffs

Timothy Birdnow

Everyone is quite upset with Donald Trump's plan to impose increased tariffs on foreign commodities, and yet I doubt anyone has really thought this whole thing through for either good or bad. There is much wailing and gnashing of teeth largely because Trump suggested it, and because it does not comport with modern internationalism, and because some people take the gospel of free trade as absolute, holy writ. But are these opponents of the plan considered all aspects of it?

The first tariff in the u.S. was passed in 1789 and was the primary source of revenue for the Federal government until the Constitution was amended to allow for an income tax. America has always hada love/hate relationship with tariffs; the Revolution was fought in no small part because of British tariffs on foreign commodities, which cost the colonists a lot of money and helped prevent them from successfully competing against foreign businesses.

See, in the 17th and 18th centuries the dominant theory of economics/governmental organization was Merchantilism. This system originated with the invention of the Nation State, and it sought to create a self-sustaining economic system whereby a nation would be capable of providing everything it needed for itself and at the same time it would maximize it's economic power by imposing tariffs on foreign goods to thus increase the national treasury. The Encyclopedia Brittanica describes it: "Mercantilism, economic theory and practice common in Europe from the 16th to the 18th century that promoted governmental regulation of a nation's economy for the purpose of augmenting state power at the expense of rival national powers. It was the economic counterpart of political absolutism."

End excerpt.

The system was intended to maintain favorable trade balances for the nation and to accumulate gold and silver.

The Economic Library flushes this out:

" Adam Smith coined the term "mercantile system” to describe the system of political economy that sought to enrich the country by restraining imports and encouraging exports. This system dominated Western European economic thought and policies from the sixteenth to the late eighteenth centuries. The goal of these policies was, supposedly, to achieve a "favorable” balance of trade that would bring gold and silver into the country and also to maintain domestic employment. In contrast to the agricultural system of the physiocrats or the laissez-faire of the nineteenth and early twentieth centuries, the mercantile system served the interests of merchants and producers such as the British East India Company, whose activities were protected or encouraged by the state.

The most important economic rationale for mercantilism in the sixteenth century was the consolidation of the regional power centers of the feudal era by large, competitive nation-states. Other contributing factors were the establishment of colonies outside Europe; the growth of European commerce and industry relative to agriculture; the increase in the volume and breadth of trade; and the increase in the use of metallic monetary systems, particularly gold and silver, relative to barter transactions."

End excerpt.

And there were several important aspects to this. A colonial empire was necessary, as no individual European nation had the resources at home to accomplish this economic independence that allowed favorable trade relations in this way. Colonies supplied raw materials and purchased processed goods. Middlement made huge profits from this, and it was in no small part the thing that destroyed the ancient nobility of the Feudal era in favor of the wealthy Middle Class, the Bourgeois class so despised by Marx and other socialist radicals.

Also, with so much jockeying for position among colonizing nations wars were endemic, and the colonial empires had to be maintained to keep national economies afloat during times of war (which were constant in this era). How could you not have an economic collapse if, say, France was boycotting you? You had to have an alternative supply of what you needed. That would be in a colony, be it an old one or some new place you have dipped your toe into.

It was in this world that the American Revolution found roots. Britain wanted to support her sugar markets, protect the West Indian colonies - Jamaica, Barbados, etc. - and so Parliament imposed a tariff on sugar, the hated Sugar act. The North America colonies were not happy, as British sugar was more expensive than sugar from French or Spanish sources (since they had more land in production). Sugar was a vital commodity in those days because New England was a chief producer of Rum, and they needed lots of sugar to make it. Cheap sugar meant cheap rum, something everyone wanted. Sugar was also important for a lot of other reasons, such as it helped hide bitter or bad tastes in foods (and a lot of food was tough sledding since they did not really have much processing). The outrage against the Sugar Act led to some violence and eventually Parliament repealed it.

But by then they had their hackles up, and wanted to make the colonists understand they had the authority to tax them. They would eventually pass numerous tariffs, including the infamous Stamp Act, which would eventually lead to shots being fired in Boston and later on the road to Concord Massachussetts, the "shot heard round the world".

It was all a reaction against tariffs.

In fact, the chief financier of the Revolution was John Hancock, who made his fortune as a smuggler trying to circumvent the tariffs.

But nobody ever denied the right of government to impose tariffs on occasion. In fact, the Founding Fathers never granted the Federal government the authority to tax anybody directly; their principle funding came from tariffs, which everyone agreed were useful to a certain degree.

Adam Smith is generally thought to be the man most responsible for the death of Merchantilism. Again from the Economic Library:

"Smith made a number of important criticisms of mercantilist doctrine. First, he demonstrated that trade, when freely initiated, benefits both parties. Second, he argued that specialization in production allows for economies of scale, which improves efficiency and growth. Finally, Smith argued that the collusive relationship between government and industry was harmful to the general population. While the mercantilist policies were designed to benefit the government and the commercial class, the doctrines of laissez-faire, or free markets, which originated with Smith, interpreted economic welfare in a far wider sense of encompassing the entire population."

End excerpt.

But the concept of Laissez Fairez economics was almost immediately rejected in Europe as Jean Jacques Rousseau's concepts of Socialism were embraced by the poor and lower classes, who eagerly rebelled against the enormous wealth of the aristocracy. While the fledgling U.S. adopted it (as did most English speaking places at the time) the rest of Europe never did, because they preferred a controled, regulated system. That favors the ruling class and at the same time appeals to the lower classes as a tool to redistribute wealth. True capitalism was largely stillborn.

Now, that said, we must ask if this necessarily makes tariffs on foreign goods somehow a bad idea. Well, it can be, but is not necessarily.

Truly, Trump will be raising taxes, something that the Left should love him for doing. But liberals don't like this sort of tax because it does not directly impose the power of the central government over individuals and corporations. They want it done directly, so everyone will get used to the idea. Much like Parliament in the runup to the Revolution, the left today seeks to tax in no small part because they want to make their right to tax plain, and to manipulate in a merchantilist fashion the economy as they see fit. The merchantilist system was a huge, Byzantine mass of regulations and restrictions. The modern Left has reasserted this concept through endless regulatory schemes and direct taxation.

Sadly, America is not even as bad as many of our trading partners. American exports are being squeezed by Merchantilist and socialist policies across the globe, as well as by international ententes that pretend to be about other things. Environmentalism comes to mind here. Most of the nations on Earth eagerly signed on to the Paris accord, for instance, but they did it not out of concern for the environment but as a way to screw the United States, to restrain our economic power. I rathe doubt Adam Smith would have advocated unrestricted free trade in such an instance.

Oh, there are other things that fall outside of Smith's experience, too. Paper money, for example, is backed by nothing these days while in Smith's day gold and silver were the only real mediums of exchange. Currency manipulation is a powerful economic weapon, and one must ask how do you engage in free trade with a country that artificially props up her currency to create a trade deficit, like the Chinese have been doing to us for years?

It should be pointed out that neo-socialist systems like the Fascist or Nazi economic corporatism or the New Deal were ultimately ne0-merchantilist, and that this idea is still alive and well in the economic sense today. The crony capitalism of the Obama era was a classic example of Brownshirt economics, the stepchild of the failed merchantilist system.

(By the way, if one reads Dickens' A Christmas Carol one is struck by a scene where Scrooge is taken to the market to see the cornucopia that capitalism had produced. See, Scrooge was raised in the merchantilist era and thought more about saving money and taking it from others than about making it, and he never understood that wealth was not what you could accumulate but what you could make.)

So, is Trump's plan a good idea or not? Well, it is a tax increase, and that is never a good idea. Trump wants to blow a wad of cash on infrastructure, something we are forever being told is needed and yet even when they have the money it never gets done (remember Obama's "shovel ready jobs"? With a trillion dollar stimulus we saw no improvement on roads and bridges at all.) He's going to have to find money to do this, and either taxes are going to have to go up or we'llhave to print more money. IF taxes are going up, a tariff is probably a better answer than raising income taxes, since it is an indirect tax and does not dip directly into the pockets of Americans. But tax increases are never good.

And what of a trade war?

Americans have worried about that since Republicans raised tariffs and helped push the world into the Great Depression. But is it a real source of fear?

According to Lewis Morris:

"If other nations can use tariffs to protect their economies and workers, then surely America has a right to do the same. Charles Payne of Fox Business News points out that the EU is offended by America’s new tariffs on steel and aluminum, but levies 10% tariffs on all U.S. car imports.

Pat Buchanan likewise challenged the assumption that trade protectionism is a surefire recipe for disaster. He writes, "Under protectionist policies from 1865 to 1900, U.S. debt was cut by two-thirds. Customs duties provided 58 percent of revenue. Commodity prices fell 58 percent. Real wages, despite a doubling of the population, rose 53 percent. Growth in GDP averaged over 4 percent a year. Industrial production rose almost 5 percent a year.”"

End excerpt.

And of course one has little negotiating leverage without a stick to beat threaten an opponent. America has for too long been all carrot and no stick - and the carrot isn't even real, but rather an illusion, a moving of a decimal point on a chart. We are fianancing our carrots via the Chinese and other foreign countries and paying them back with interest, all the while mortgaging our children's futures. Perhaps it is time to threaten with a big trade stick, to make our trade partners quit treating us like chumps.

So is this a good idea? Honestly I don't know. I do know that what we've been doing for the last twenty years hasn't been working for the general public. Globalism has been the equivalent of Merchantilism on an international scale, a way for the elites to profit at the expense of the American public. Everyone is unhappy, although those on the Left don't understand that their own ideology has supported and promoted these things. But Occupy Wall Street and their ilk knows something is wrong, and they protest the corporations but miss the complicity of governments and international bodies. Be that as it may, the ratcheting up of political discourtesy and anger is in no small part a result of the globalist policies pursued by the Clinton and Bush and Obama Administrations over the last twenty years.

So maybe this is an old idea worth revisiting? You decide.

Posted by: Timothy Birdnow at 10:54 AM | No Comments | Add Comment
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