Pub. 15 2018 Issue 3

16 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S By Mark Anderson, Legal and Legislative Assistant, New Mexico Bankers Association Tariffs and Trade Wars: Examining the Consequences I n the past several months, vast swaths of Americans have become increasingly familiar with the terms “trade war” and “tariff”, words that have been largely relegated to the pages of economic textbooks, away from news headlines. The increasing importance of these terms has to do with President Trump’s ordering of tariffs on certain imported goods due to his concern over the United States’ large deficits with particular trading partners. Trump, at various points, has declared that, “Trade wars aren’t so bad” and that they are “easy to win”. Despite the frequency of reporting on the subject in recent months, it is a remarkably complicated issue that must be viewed with a great deal of nuance. The first step is to simply define what a tariff is and what exactly a trade war entails. A tariff is a tax imposed on im - ported goods and services. The purpose of a tariff is to raise the prices on goods purchased from overseas, thus making them less attractive to consumers. The ultimate goal of a tariff is to protect domestic industries from foreign competition by making domestic products more attractive. Presented in a vacuum, tariffs sound like a net positive for a country in that they ostensibly protect domestic industries and workers. However, tariffs can often have unintended negative con - sequences. A lack of competition can make domestic indus - tries less efficient and raise the prices of consumer goods. There’s also the possibility of tariffs benefitting certain industries over others. Tariffs can lead to a trade war, which begins when one country perceives another country’s trade practices to be unfair. It’s essentially a cycle of retaliation, which leads to a drop in production. Not only will a trade war affect the two countries involved, but it can affect coun - tries not involved from the outset. Trump’s protectionist policies have seemingly been done in an effort to bring back more manufacturing jobs to the U.S. But it must be asked if the potential gain from such policies will outweigh the possi - ble negative ramifications. A historical examination of trade wars is certainly not encouraging for any of the parties involved. The most notable trade war of the 20th century was caused by the Smoot-Haw - ley Tariff Act of 1930. According to The New York Times, “the act imposed steep tariffs on roughly 20,000 imported goods. Led by Canada, America’s trading partners retaliated with tariffs on United States exports, which plunged 61 percent from 1929 to 1933. The tariffs were repealed in 1934. His - torians and economists continue to debate the extent of the damage to the global economy, but there is little disagreement that Smoot-Hawley and the ensuing trade war exacerbated and prolonged the hardships of the Great Depression. The consensus among most economists is that no one wins a trade war. The only way a trade war can be won is if it’s waged between a country with a high-powered economy and a country with a much smaller economy, with the more powerful country able to exert its influence over the weak - er country. However, the principal focus of Trump’s trade gripes has been China, a country with a remarkably powerful economy. Trade wars of this kind often aren’t won by either party. Ultimately, the real losers of a trade war will be the consumers who are forced to pay higher prices for goods, thus reducing their participation in the economy. The American industry that has received the most pro - tection from tariffs since World War II is the steel industry. According to John Conybeare, professor emeritus at the Uni - versity of Iowa and a top authority on trade, “They (the steel industry) just used the protection to raise prices, fatten profits, and pay their executives. They didn’t use the breathing space they gained to modernize. So, much of the U.S. steel industry is using obsolete technology, which is why they can’t compete.”