Will Tariffs Trigger the Next Great Depression?

Will Tariffs Trigger the Next Great Depression?

By Mark Nestmann • October 3, 2017

Every time the US economy hits a rough spot, there’s political clamor for Congress to impose protectionist measures – laws that impose tariffs or otherwise restrict imports.

With his multinational business empire, President Donald Trump has personally experienced the benefits of free trade. Yet, one of his primary campaign themes was a visceral attack on free trade agreements.

Here’s a sampling of what Trump has said about perhaps the most important free trade agreement the US has ratified: the North American Free Trade Agreement (NAFTA):

  • NAFTA is the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country

  • If we do not reach a fair deal for all, we will then terminate NAFTA.

  • NAFTA [is] a total disaster.

Statements like these provide political cover for protectionist trade policies. But the fact is, America’s longstanding free trade policies have been instrumental in sustaining the world’s largest economy.

Since NAFTA came into force in 1994, for example, US exports to Mexico have grown 106% and exports to Canada have increased 62%. Trade between the three countries now amounts to more than $1 trillion annually. In contrast, US exports to the rest of the world have increased only 36% since 1994.

In all, the 21 free trade agreements the US has ratified have led to the creation of 5.4 million American jobs and have increased our nation’s GDP by more than $300 billion.

Does that sound like a disaster to you?

What’s more, when Congress has imposed protectionist measures, the results have been – and continue to be – catastrophic.

Take, for instance, the infamous Smoot-Hawley Tariff Act of 1930. Enacted only a few months after the collapse of stock prices in 1929, the Act increased more than 800 import duties. Naturally, other countries retaliated against the US. Canada (then as now America’s largest trading partner), Great Britain, France, and Germany all enacted their own protectionist legislation.

The upshot was that by 1933 – four years into the Great Depression – global trade fell by about two-thirds. US exports fell by 61%.

Congress has dismantled most of the Smoot-Hawley Act, but another protectionist law, the Jones Act of 1920, remains in full force today. And the residents of Puerto Rico and the US Virgin Islands are paying the price for it as they try to recover from Hurricanes Irma and Maria. The Jones Act requires the movement of shipborne goods from the mainland US to other states or territories – Hawaii, Alaska, Puerto Rico, etc. –  be made on ships manufactured in the US.

In 1920, the US had a robust shipbuilding industry. But today, the vast majority of ships – more than 90% – are manufactured in Asia. So when US relief groups began chartering ships to send rescue supplies to America’s Caribbean territories, the Jones Act became a huge obstacle. On September 28, President Trump signed an executive order temporarily suspending the Jones Act, but the damage had already been done. For eight crucial days, relief efforts were seriously hampered by outdated protectionist law designed to protect an industry that no longer exists on a meaningful scale.

Opponents of free trade believe that trade is a zero-sum game: low or non-existent tariffs inevitably put domestic producers out of business and destroy US jobs. But that’s simply not true. Free trade allows nations to export the goods that they can produce efficiently and import those that they can’t. Far from being a job-destroyer, free trade has created – and will continue to create – millions of new jobs. Indeed, the main factor in job loss in recent decades has been the development and implementation of new technologies, not free trade.

Still, if Trump wants to withdraw from NAFTA, he probably has the authority to do so. Article 2205 of the agreement allows any of the three countries to end their participation with a six-month notice to the other two. Some experts believe that Congress would need to confirm the withdrawal; others don’t.  If President Trump unilaterally ends US participation in NAFTA, proponents of the agreement will go to court, arguing that Congress must confirm the withdrawal.

The bottom line: Protectionism benefits a select few politically connected industries at the expense of everyone else. Free trade, in contrast, benefits almost everyone, not just corporations and industries with armies of lobbyists in Washington.

It’s impossible to know if the end of NAFTA will trigger another great depression. But if President Trump wants to follow through on his campaign promise – to “drain the swamp” – the last thing he should do is to start erecting tariffs on imported goods.

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About The Author

Since 1990, Mark Nestmann has helped thousands of clients seeking wealth preservation and international tax planning solutions. He is the author of highly acclaimed Lifeboat Strategy and other books & reports dealing with these subjects.

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