Like him or dislike him, Donald Trump isn’t afraid to express his opinion. Throughout his campaign he has been promoting the idea of higher tariffs on goods, particularly from China, but also other countries he feels may not be playing fair. This trade strategy has proven to be risky at best and downright devastating to an economy at worst.

After World War I, agriculture production in Europe took off and was a big part of the European recovery. This increase in production along with the U.S. production led to an oversupply of most agricultural products and falling prices. U.S. farmers were hurting and began screaming for price protection for their goods. During the 1928 Presidential election, Herbert Hoover, promised the farmers help and in 1930 the Smoot Hawley Tariff Act was passed into law. The act was originally set up to provide some price protection for American farmers against cheaper European farm product imports, but as the law was being written special interest groups managed to wrangle in price protection for their goods too. The objective was for the tariffs on foreign good to make them actually higher priced than the same U.S. goods, so people would buy U.S. products and that would help our economy. In retaliation, European countries passed tariffs of their own against U.S. products imported to their countries to protect their industries. So basically everyone ended up buying “locally.”

Smoot- Hawley passed in the beginning of the Great Depression. People in the U.S. were hurting and couldn’t afford to buy any more than necessary. Producers of goods here in the U.S. saw decreasing demand from U.S. clients and couldn’t sell their products overseas because the tariffs other countries had put up in response made the U.S. products not competitive. So with no place to sell their products, companies laid off workers, shut down factories and this only made the Great Depression worse.

Now fast forward about 85 years to today. If we raise tariffs on Chinese goods coming into the U.S., what do you think China will do? Yep, they will raise tariffs on U.S. goods shipped to China. U.S. cars have been selling like hotcakes in China, particularly GM. China has been a big part of Caterpillar’s business in the recent past. We sell a good deal of our agricultural products to China. Ask Apple how many smart phones they have sold in China. If these goods cost more because China retaliates to our tariffs with higher tariffs of their own, then less of these products will be purchased and it will have negative economic repercussions here in the U.S.

I’m not naïve enough to believe that everyone will just play fair because it’s the right thing to do. And China (along with a few other countries) is certainly pushing the meaning of fair play in the wrong direction, but tariffs aren’t the answer. They will only exacerbate the problem and make trade negotiations even more difficult.

 

Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.

Copyright ©2016 Mike Berry. All Rights reserved. Commercial copying, duplication or reproduction is prohibited.