10 Interesting Facts About Protectionism and Supply-Side Economics

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Two of the main economic philosophies of the modern Republican Party are to support American businesses with trade deals and tariffs (i.e. protectionism) and to aid companies in their expansion by lowering their taxes and regulations (Supply-Side economics). It’s supposedly the one-two punch that will bring an estimated two to three trillion dollars in corporate profits that are sheltered untaxed overseas back to the United States of America.

But is it a winning strategy? To get a better understanding of their effectiveness, we’re going to go through the history of these principles and their nuances today, and see if we can come to any meaningful conclusions on where these methods of attempting to improve the economy will take us.   

10. First Recorded in Ancient China

The intuitive thought is that with relatively limited technology and more overtly institutionalized prejudices, global trade in ancient times would be rare and low profile. The truth was that the famous Silk Road, which connected the Roman Empire with Ancient China, didn’t just facilitate trade because it was practical for traders. It was created and maintained by multiple governments, indicating governments seeking to meet a demand for goods from distant lands is almost as old as civilization.

Despite this, circa 900 AD, China began heavily regulating their trade in peacetime, setting trade ceilings, port restrictions, and tariffs. This practice was utterly wiped out when China was absorbed into the vast, expansion-minded Mongol empire. After the Mongols were gone, the Ming Dynasty took control and after acquiring great wealth, stagnated their growth by instituting new protectionist policies. These policies didn’t just include banning all international sea trade: they required moving communities away from the sea to lessen the temptation for smuggling and other illicit business. Protectionism would forever be a self-imposed burden around China’s neck, and it was widely attributed with holding back the nation’s innovation. This eventually allowed an array of other powers to invade and dominate (Britain and Japan being prominent among them) despite China’s large population, rich resources, and cultural wealth.

9. Mercantilism vs. Adam Smith

By the 16th Century, European countries were dominated by protectionist systems known as Mercantilism. In the event of wars and blockades, they would all potentially need to have completely self-sufficient economies to keep going, even those with empires that spanned the globe. After all, who would know better what was best for the country: the government, or competing private enterprises looking out for the short term bottom line? It wasn’t until 1776 that a work was published that challenged that system for centuries to come: Adam Smith’s Wealth of Nations.

Wealth of Nations is not purely pro-free market. It favored regulation of goods and services and such things as the Navigation Acts, which required all American goods to have to go through Britain first. What it definitely advocated was that the government not interfere in areas where it could lead to crises such as a famine that Britain’s East India Company inflicted on Bengal in 1770. The work also discusses how extreme regulations will sometimes favor monopolies, which are bad both for the employees and the customers. Clearly his views are the prevailing ones today.

8. Alexander Hamilton and Thomas Jefferson’s Complicated Relationship with Protectionism

Lin-Manuel Miranda’s Broadway hit Hamilton pitted the titular founding father against Thomas Jefferson over how the new American nation should trade with other nations. It’s played that Hamilton was all about trying to keep rival economic goods out so that American businesses could get to their feet, while Jefferson was all about free trade, if for no other reason than Jefferson’s slaves made free trade more viable for him as an agrarian. As you might have expected, in real life it wasn’t so clear cut.

While during his time as America’s first Secretary of the Treasury, Hamilton unquestionably supported tariffs, such as the five percent tariff that he imposed in 1789. But Hamilton made a significant exception in that he didn’t want to tax raw materials entering the country. After all, having the materials with which to manufacture products still provided gainful employment to an extent distributing finished goods did not. He also wanted the tariffs left low enough to be cost prohibitive, but not to encourage smuggling or allow American companies a complete monopoly.

Jefferson’s relationship was more an evolving one. He changed from favoring free trade when he became Secretary of State to embargoing European goods when he became president following harassment of American ships. He also left behind a congress that in 1816 passed even more severe, openly protectionist tariffs that went as high as 30%. By 1828 they would rise to nearly 49%, far more severe than Hamilton had envisioned. It seems sometimes no one will go more extreme with something than someone who used to be a staunch opponent of it.      

7. Pre-American Civil War Tariff Fights

Pretty much all events in American history during the mid 1800s are completely overshadowed in popular perception by the Civil War, but there are some interesting lessons to be found in that period. In 1832, conflict between the federal government collecting tariffs and agrarian Southern states that wanted duty-free trade with Europe led to South Carolina issuing a nullification of the tariffs and threatening to secede 29 years before the Civil War started.

President Andrew Jackson responded by sending soldiers and ships to South Carolina, which squashed the effort, but also issued the 1833 Tariff which included plans to gradually reduce tariffs over the next 10 years. This meant that by 1835 the Federal government enjoyed one of its few tax surpluses (the entire National Debt was paid off) and that war was prevented for decades. There may be a lesson for future generations about how even high tariffs should be both temporary and gradually set to decrease.   

6. Role in the Great Depression

The common narrative is the Smoot-Hawley Tariff introduced in 1930 as a means of protecting US businesses and raising revenue worsened the economic collapse of the stock market and was a key factor in the Great Depression. Later historical review indicates that while it slowed down recovery, it was not nearly as devastating as you’d be led to believe.The tariff had an effect on one third of goods imported into the US by slapping a twenty percent fee onto them.

The tariff had enough of an impact on overseas trade that of that one third of goods, international companies only reduced their sales by 16%, meaning there was a five percent drop in total imports. Even that might sound significant, but imports only equalled 1.4% of the total GDP in 1929. In the end it was a policy that affected a relatively small portion of one sector of the economy at the time, and thus couldn’t have had the sweeping destructive power that has been ascribed to it. It still attracted disproportionate publicity as a symbolic gesture of America distancing itself from Europe.

5. Arthur Laffer’s Momentous Dinner

You would likely expect an economic theory that becomes government policy to involve numerous graphs and charts, prepared for weeks (if not months). That wasn’t how it worked for Arthur Laffer, who outlined the concept on a literal napkin during a dinner in 1974. It was such a significant dinner because the people for whom he was doodling on a napkin (to explain how higher taxes eventually led to lower tax revenues) were none other than two people who’d worked as insiders for the Nixon Administration: Dick Cheney and Donald Rumsfeld. Laffer was quick to realize how well he’d pitched the concept that would become Supply-Side economics that he kept the napkin for decades.  

Incidentally, something Laffer was not involved in was naming his economic principle. Some sources attribute it to journalist Jude Wanniski when she was reporting on it in 1975. Others attribute it in 1976 to Professor Herbert Stein, one of the economists who helped sell business lobbyists on it. Whichever of them it was, they had to wait a few years before it became effectively the law of the land.   

4. China’s 2016 Supply-Side Reform

In March 2016, the New York Times reported that President Xi Jinping of China had announced that China would be implementing “supply-side structural reform.” These plans had been in development since 2013, but even in 2016 critics were skeptical that the Chinese government would yield much state control over such vital interests as its steel industry. Said steel industry, it was estimated, would lose more than 1.8 million workers from losing government control. But there was still an unsustainable amount of debt being incurred by the government as it artificially stimulated its economy to keep industries going, so something needed to be done.

By September 2016, it was clear that state cutbacks were taking place. The Chinese steel industry alone had been cut back 48% (although analysts were saying it was still over-producing steel at an extreme rate even after those reductions). However, critics continued to point out that the cutbacks, deregulation, and restructuring were still being done under tight government control. Bloomberg was hardly alone in saying that China’s supposed “supply-side” economic model is really just rebranded expansion of central government.      

3. German Economic Success

We’re used to thinking of Germany as the greatest economic powerhouse in Europe, considering that as of 2017 it has the fourth largest economy in the world. But this period of economic prosperity is relatively new. Vox reported that from 1995 to 2005 Germany was actually one of the European Union’s underperformers, averaging an annual growth of only about 1.4%, less than half of what the United Kingdom was managing in the same time period.

What raised Germany’s economic growth were reforms introduced by Helmut Kohl, which were announced in 1996 but took time to fully raise the economy. He announced that there would be $46 billion in government spending cuts and massive deregulation. One of the most significant effects of this decision was that by 2004 it facilitated a rise in total German imports by 65% while simultaneously raising exports by a staggering 90% increase. With this much activity it was inevitable that joblessness also plummeted and stocks soared. As of 2017 there are signs of economic downturn, but it still was wildly successful there for years.    

2. Ireland’s Tax Haven

In 2017, one of the most significant economic decisions under discussion became the proposal of cutting corporate tax rates from 35% to 15%. The argument for this centers around the way that many of the most lucrative American companies have been moving their headquarters to places such as Ireland to prevent having to pay relatively high tax rates. Among the best known of these companies are Google, Adobe, and Apple. Ireland’s 12.5% is particularly tempting, and based on its success the UK intends to lower theirs from 20% to 15%. It seems reasonable that a nation’s tax revenues would benefit from receiving a lower amount of a wealthy company’s revenue, than receiving nothing from the same company.

But the thing about this is that even when tax rates are low, corporations will still use legal loopholes to avoid the lower rates, and thus the economy can often expect to see vastly less than the tax rate even though their GDP gets amplified on paper. Indeed, in 2013 the European Union ruled that Ireland should collect $14.5 billion from Apple, and the Irish government actually appealed the decision, not wanting to chase Apple away by collecting their rightful taxes. Multinational corporations consistently pay less to the Irish government than local companies. The Atlantic for one suggested this means tax rates would seem to be less effective in generating tax revenue than closing loopholes.   

1. US Tax Revenue Growth was Lower in the ’80s than the ’90s

In America, Arthur Laffer’s economic theory for yielding more tax revenue by lowering taxes was put to the test in 1980 when Ronald Reagan began cutting taxes for the top earners. It seemed to be vindicated when during the the 1980s total US tax revenue rose roughly 0.7% annually.

During his term of service in the 1990s, President Bill Clinton raised taxes back up and average annual tax revenues went up 6.5%. In 2001 George W. Bush reintroduced tax cuts. This time it didn’t work for tax revenue at all, and for his terms as president there was an average of one percent a year. While this certainly doesn’t debunk Arthur Laffer’s model, it indicates that it’s hardly the silver bullet some might claim it is.   

Dustin Koski can be followed on Twitter.


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