President Donald Trump has just placed tariffs on Canadian, Mexican and Chinese imports and has declared his intention to place reciprocal tariffs on all other trading partners of the United States. This has led to loud criticism from the Democrats in Congress, the media and many citizens who don’t understand what tariffs are all about. The greatest complaint seems to be the fear that severe inflation will occur as importers add the tariff to the price of the imported item, thus resulting in higher retail prices. What is not discussed is that any price increase due to tariffs can easily be avoided simply by purchasing equivalent products manufactured in the United States.
Tariffs have traditionally been utilized to protect domestic manufacturers and producers from foreign competition. Secondarily, tariffs have also been the major source of revenue for the government prior to the introduction of the graduated income tax which was established by the ratification of the XVI Amendment to the Constitution in 1913. With that amendment’s passage, tariffs were radically lowered as the income tax became the government’s primary source of revenue. Tariffs continued to serve the purpose of protecting domestic enterprises.
With the massive destruction that occurred in Europe and parts of Asia during World War II, economic reconstruction became mandatory. High tariffs were obstacles to reconstruction, and the Theory of Comparative Advantage came to the fore. This theory, proposed by David Ricardo, had been studied and modified by other economists in the century and a half since its pronouncement. In October 1947, the General Agreement on Tariffs and Trade (GATT) was ratified in Geneva and became the primary rule book for trade, with the objective of ultimately reaching a tariff free world with free trade. Free trade is an excellent goal with the objective of each country producing what it has the best ability to produce, that is, the most economical or cost effective, thus producing a net gain for all parties concerned, namely a “win win situation”.
Multiple rounds of further negotiations under the GATT agreement took place in various venues and, in 1995, it was replaced by the establishment of the World Trade Organization (WTO). The WTO has world wide membership and functions in a quasi judicial manner to ensure that trade rules are followed. Its decisions have the force of law in the area of international trade.
If this is the case, why all the problems in international trade? Comparative advantage should rationally solve all problems and disagreements. The problem is that there are many factors which can distort or pervert the determination of just what is comparative advantage in any particular situation. One technique violators of the principle of free trade use is non tariff barriers to trade. Non tariff barriers to (free) trade are not anything new. Our so called European allies have been utilizing these subterfuges to harm American industry since at least the 1950s and the US government always turned away from confrontation, mainly because of the Cold War. There could be no tariffs or minimal tariffs on American made cars, certainly, but if the annual registration fee for the car would be based on its weight or horsepower or its length or width, these fees would remove any chance of American penetration of a market. Yet the Europeans could proudly state that they had no tariffs and we swallowed It. Another example is gun laws in the European Union (EU). There is virtually no ability to legally purchase a gun in the EU. The European market for guns is non-existent so American firearms manufacturers are totally excluded from the EU. Yet EU manufacturers flood the American market with guns, lobby extensively and contribute to gun lobbies. It doesn’t require a genius to think of a mechanism to exclude a product that you want to exclude, particularly when the target country has historically shown itself willing to accept this.
Another technique to violate the idea of comparative advantage is to manipulate the value of a nation’s currency, particularly to allow it to float downward. Currency manipulation has been the favorite technique of the People’s Bank of China, the central bank of the People’s Republic of China (PRC). Decreasing a currency’s value lowers the cost of all PRC products, making them more competitive abroad. At the same time, a depreciated currency makes imports more expensive, thus promoting exports and discouraging imports simultaneously. The PRC has mastered these techniques and run up trillions of dollars in a favorable balance of trade while impoverishing trading partners. Additionally, the PRC subsidizes domestic manufacturers, further distorting the true cost of Chinese products and promoting exports. These subsidies are illegal according to WTO rules yet the PRC routinely violates them with impunity
Trade is also distorted through intellectual property theft, copyright and patent law violations, slave labor utilization, and smuggling. The PRC has mastered all of these techniques and has also demanded technology transfer from those wishing to do business in the PRC. The WTO has been out to lunch in all of these areas.
The above problems associated with free trade are serious. American industry has been devastated. The rust belt has been devastated. The American auto and steel industries have been destroyed, as has the garment industry. America has become de-industrialized and a service economy has replaced a productive industrial economy. Good jobs and careers are in short supply. This situation must be rectified not tomorrow but now, today! Not one day of further delay can be tolerated. If tariffs are the only way to effect this change, to re-industrialize America and provide good jobs for American citizens, so be it. It’s time for our trading partners to make a decision. America has finally decided!
Garry S. Sklar
Las Vegas, NV
March 5, 2025