In a column earlier this week, I looked to Ronald Reagan for the arguments for free trade, and how far U.S. President Donald Trump has departed from them. To which his supporters would likely reply: “Finally! Reagan was wrong then and wrong now, or perhaps right then, but his policy is wrong now.”
This is not an unreasonable argument and needs to be engaged, even if the manner of implementation is idiosyncratic. It is important to understand the policy’s rationale, against the background of our own history.
Trump says that “tariff” is the “most beautiful word in the dictionary.” I think “mellifluous” is a better choice, on both euphonic and etymological grounds. Nevertheless, tariffs have had a prominent place in both Canadian and American economic history. “Tariff” may not be beautiful, but it is not a dirty word.
A few points to begin. Before income taxes became the principal revenue source for government, tariffs were an essential source of government revenue. Trump himself has mused about how tariffs might replace the government’s reliance on income taxes. In the large-state 21st century, tariff revenue would not be adequate, as it was in the 19th century.
Tariffs are taxes. The 25 per cent proposed tariff on Canadian goods imported to the United States is a hefty tax — 25 cents on each imported dollar of goods — paid by American importers to the American government. It’s an odd kind of tax hike.
Tax increases are generally not inflationary. By reducing aggregate demand, prices should hold stable or even decrease. Tariffs are taxes that are inflationary, putting upward pressure on the price of foreign goods, production costs and retail prices. Who would have thought Trump would begin with tax hikes to fuel inflation?
Why, then, the attraction? The man is erratic but not insane.
In raising the prices of foreign goods, tariffs favour domestic producers. Protected from foreign competition, they can charge their customers more, thereby making their own domestic production feasible.
It’s sometimes called “economic nationalism.” In Canada, it was called the “National Policy,” which was advocated by Sir John A. Macdonald in the 1870s. Canada had high tariffs on foreign manufactured goods until the Second World War.
In 1891, Sir Wilfrid Laurier challenged the National Policy in favour of freer trade, but when in office, he kept the tariffs — though without the rhetorical emphasis. In 1911, Laurier advocated “reciprocity” (free trade) with the Americans, and was defeated by Sir Robert Borden, who defended the National Policy.
When Trump waxes lyrical about the tariffs of former U.S. president William McKinley, he is praising a policy that Canada had already had for some time. There is a good argument that McKinley favoured tariffs as a means to reciprocal free trade; he advocated as much in the final speech of his life, in Buffalo, N.Y., near the Canadian border, the day before he was shot and killed.
Nevertheless, tariffs are a common economic option for countries that want to protect their domestic industries. Over time in Canada, the policy came to be called “import substitution industrialization,” a less partisan term than the National Policy.
The Trump administration, aside from the vagaries of the last week, is firmly committed to what might be called “import substitution re-industrialization.” The claim is that cheap foreign goods — principally from China — have de-industrialized America, with bad social consequences for working-class families, and particularly working-class men.
It’s a valid argument when it comes to China. It’s a plausible reading of the last week that, while everyone was distracted by Trump threatening a trade war with his neighbouring allies, he imposed a 10 per cent increase in tariffs on China and eliminated its duty exemption without a peep of objection from anyone, and only modest protests from China itself. If that was the point, it was a win, heartburn to the north and south notwithstanding.
Economics is about trade-offs. And the principal trade-off in tariff policy is between the citizen as consumer and the citizen as producer/worker. For roughly the first half of Canadian history — with parallels in the United States — the policy emphasis was on producers and workers. More production and higher wages. McKinley had his tariffs; Henry Ford had his high-wage workers.
That produced admirable prosperity in a period of few foreign producers and abundant, cheap energy. A broad shift then took place, from a producer/worker policy toward a consumer policy.
Free trade makes goods cheaper, as they can be produced less expensively abroad, in part due to lower labour costs. The idea was that Canadian or American workers would benefit from lower prices, and gradually shift into more skilled, more productive jobs, which paid higher wages.
In the American context, call that the “Reagan approach.” The Trump critique persuasively argues that that did not happen for many workers. They got cheaper goods to be sure, but they ended up working at Wal-Mart, or dropping out of the workforce altogether.
The broader Trump critique is that a consumer-focused America becomes obese — call it the Robert F. Kennedy Jr. diagnosis — and drug-addled — the JD Vance diagnosis. Consumerism makes Americans poorer, idle, lazy, fat and sick — that’s the Vivek Ramaswamy diagnosis. And yes, all of those sit oddly in the wake of Trump himself, a branding magnate who profited from the consumer economy (casinos, TV) and (formerly) made his merch in China.
Can tariffs turn America from a consumer nation into a producer nation, where citizens are viewed through the dignity of work, rather the indulgence of consumption?
More to the point, will American consumers tolerate more costly consumer goods? If the last election turned on outrage over (historically modest) inflation, the appetite for higher prices appears limited.
Another question: if, as Elon and his Musketeers claim, the government is corrupt and incompetent from top to bottom, are there any grounds for confidence that it can manage a National Policy for the 21st century?
That’s for another day. But after tariff week, the issues are clarified. Trump wants Americans to work harder, get paid more, while consuming less at higher prices. It was a popular approach on both sides of the border in the 1890s. Can it be in 2025?
National Post