A Brief History of Tariffs and Stock Market Crises


The most important and globally misunderstood aspect of tariffs is their impact on the stock market. History has demonstrated that tariffs can cause immediate market corrections and destroy investor capital. They also backfire on American manufacturers and consumers.

Tariffs may be aimed at foreign companies and governments, but their domestic consequences are often far greater. Advocates for protectionist measures on steel, lumber, electric vehicles, and other products fail to understand that everyone who invests in the stock market has suffered losses because of this policy. It isn’t just the approximately 60 percent of Americans who directly own stocks, often in their 401(k)s and individual retirement accounts, union pensions and teacher retirement plans will be affected, too. The minor bump in price protection for certain industries is more than wiped out by trillions eviscerated in the market capitalization in the major indexes and the domestic economic dislocation.

Depending on the economist or analyst, assessments regarding new policy proposals vary on the inflationary impact of tariffs on the American family. Estimates range from an annual impact of a few hundred dollars to well over $1,000. Making matters worse, once U.S. tariffs are in place, foreigners routinely retaliate against American exporters, causing earnings and stock prices to decrease further. Material shortages and job losses follow.

Markets react to tariffs. Three examples show the historical folly.

In 1928, Herbert Hoover campaigned on a protectionist platform, to support American agriculture. As the tariff movement grew after his election, many industries supported the levy. It grew to encompass a tax on 25,000 imported goods. In October 1929, rumors spread that the tariff bill might fail, which Sen. Reed Smoot of Utah promptly dismissed.

The stock market collapse began on Oct. 28, 1929, as news spread that the Smoot Hawley Tariff Bill would become law. The front-page New York Times article read: “Leaders Insist Tariff Will Pass.” Although the tariff bill didn’t become law until June 1930, its effects were felt eight months prior. Markets reacted immediately, as they discount future earnings. Most economists blame the gold standard for the crash, but this analysis misses the forward-looking nature of the human mind, which is the market itself. Markets need not wait for earnings to decrease due to imminent policies that will result in future losses. Hence the rapid nature of the crash. The use of leverage in the 1920s exacerbated the crash. Margin calls were made, further cascading the markets.

Once the bill became law, other nations retaliated. The agricultural sector was among the worst affected, as farmers couldn’t competitively export their crops. Hoover followed up with the Revenue Act of 1932, increasing taxes in the middle of the economic collapse. By 1934, global trade dropped 66 percent, back to the levels of 1905. The Great Depression continued, increasing economic nationalism, allowing radicals to come to power, resulting in World War II. The adage proved true: When goods cannot cross borders, armies will.

Much later, as we opened a new century, protectionist hawks still believed that tariffs protect American jobs. Recent history shows otherwise. President George W. Bush imposed steel tariffs on March 20, 2002. According to the Bureau of Labor Statistics, from March 2002 to March 2003, manufacturing lost 475,000 jobs, more than existed in the entire steel industry. Manufacturers were unable to pass along higher steel prices to their customers, as many fixed contracts were in place that prohibited price increases.

The tariff impacted the performance of the stock market. This fact is often missed due to the attention given to the dot-com bust over the prior two years. From March 2002 to May 2003, with tariffs in place, the S&P 500 lost $2 trillion in market cap. The Dow Jones Industrial Average reached a post-Sep. 11, 2001 peak on March 19, 2002 at 10,635.25. The steel tariffs took effect the next day. Lumber tariffs followed in May. The Dow didn’t fully recover until the steel tariffs were lifted on Dec. 4, 2003. The Bush administration lifted the tariffs after it learned that the European Union would retaliate. Had it, the American stock market could have suffered another severe downturn, as it had in 1929.

During the Trump administration, the stock market peaked in January 2018, when President Trump announced tariffs on China. China responded in kind. He also imposed tariffs on steel and aluminum imports from around the world, including Mexico, Canada and the European Union. Canadian lumber also received a tariff, resulting in higher domestic prices. The market retreated and didn’t reach its January high until August 2018. A minor setback, but a setback nonetheless.

As the Nov. 5 election nears, both parties are quietly grappling with the nightmarish reality that the government is paying $2 million a minute in interest to fund the national debt. The most recent policy proposal from the Republican Party involves replacing some of the current income tax with a 10 percent tariff on all goods and services entering the U.S. Democrats also favor tariffs, with the Biden administration keeping most of the Trump tariffs in place and recently instituting 100 percent tariffs on EV’s from China. Vice President Kamala Harris is expected to continue these policies should she win. Most observers believe that the tariff will be paid by the nation that exports the product into our country, but this isn’t the case. Domestic consumers pay for most tariffs, including on imports of raw materials, as they are imposed by the U.S. Government at the port of entry. No one doubts that there are many bad actors on the global stage. We need to address China and other nations’ behavior, especially when it comes to currency devaluation and subsidizing their own industries to unfairly compete with American firms. Free trade must be fair trade.

The free market and trade require an honor system that is rigorously enforced through existing bodies, developed to resolve disputes in front of panels rather than on battlefields. If a nation violates the rules established for fairness and integrity, it should be addressed. Denial of market access, import quotas, loss of most favored nation trading status, expulsion from the World Trade Organization, and repeal of foreign aid are only a few of many options.

Tariffs backfire on American investors, consumers, and businesses. Repeating the failed trade policies of the past will only result in lower performing equity markets and massive economic distortions.

This article originally appeared in Barron’s September 19, 2024.

 


Originally Posted at https://mises.org/


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    Authored by Linnea Leuken & H. Sterlin Burnett via RealClearPolitics,

    When electric power was a novel idea and just beginning to be adopted in urban centers, the industry had a Wild West feel to it as multiple companies strung wires, opened power plants, and sold electricity on an unregulated market. Competition was fierce, but state and local governments concluded that the inefficiencies and redundancies endangered the public and imposed higher costs.

    So states set up service territories with monopolistic or oligopolistic service providers, who were entrusted with providing reliable power and sufficient reserve for peak periods in return for being guaranteed a profit on rates proposed by the utilities but approved or set by newly established state public utility commissions (PUCs). These commissions were charged with ensuring public utilities served the general public universally within their territory, providing reliable service at reasonable rates.

    Much has changed since then. Politicians began to supplant engineers to decide, based on self-interested calculations, what types of power should be favored and disfavored, and what types of appliances and modes of transportation Americans could use. As the 21st century dawned, a new consideration entered the picture: Climate change.

    Under the banner of combatting global warming, utilities were at first encouraged and then coerced into adopting plans and policies aimed at achieving net zero emissions of carbon dioxide. The aim of providing reliable, affordable power – the rationale for the electric utilities’ monopolies in the first place – was supplanted by a controversial and partisan political goal. Initially, as states began to push renewable energy mandates, utilities fought back, arguing that prematurely closing reliable power plants, primarily coal-fueled, would increase energy costs, compromise grid reliability, and leave them with millions of dollars in stranded assets.

    Politicians addressed those concerns with subsidies and tax credits for renewable power. In addition, they passed on the costs of the expanded grid to ratepayers and taxpayers. Effectively, elected officials and the PUCs, with a wink and a nod, indemnified utilities for power supply failures, allowing utilities to claim that aging grid infrastructure and climate change were to blame for failures rather than the increased percentage of intermittent power added to the grid at their direction.

    Today, utilities have enthusiastically embraced the push for renewable (but less reliable) resources, primarily wind and solar. PUCs guarantee a high rate of return for all new power source (wind, solar, and battery) installations, which has resulted in the construction of ever more and bigger wind, solar, and battery facilities. The costlier, the more profitable – regardless of their compromised ability to provide reliable power or the cost impact on residential, commercial, and industrial ratepayers.

    A new report from The Heartland Institute demonstrates the significant financial incentives from government and financiers for utilities to turn away from affordable energy sources like natural gas and coal, and even nuclear, and instead aggressively pursue wind and solar in particular. All of this is done in the name of pursuing net zero emissions, which every single major utility company in the country boasts about on their corporate reports and websites. Reliability and affordability come secondary to the decarbonization agenda.

    Dominion Energy is a good example, as they are one of the most aggressive movers on climate-focused policy. Dominion CEO Robert Blue speaks excitedly about government-forced transitions to a wind- and solar-dominated grid in interviews. During one interview with a renewable energy podcast, he said:

    [S]ometimes the government needs to focus on outcomes. We’re trying to address a climate crisis, and we are going to need to move quickly to do that.” In the same interview, he expressed enthusiasm about federal policy that would achieve a government-directed transition.

    And why wouldn’t he? Dominion, like most utilities, is granted government tax credits and guarantees on returns for investing in large, expensive projects like offshore wind, the most expensive source of electric power. The bigger the project, the bigger the profit with guaranteed returns.

    Also, onshore wind companies have received special “take limits” from the Fish and Wildlife Service to kill protected bald eagles and golden eagles, while prosecuting oil companies if birds are injured or killed on their sites.

    Net zero policies are not the environmental panacea that climate change activists proclaim.  Industrial-scale wind and solar use substantially more land than conventional energy resources, disrupting ecosystems and destroying wildlife habitats in the process.

    And despite recent technological advances, wind and solar are still not dispatchable resources, meaning they cannot provide consistent power at all times needed. Refuting claims made by environmentalists and utilities that wind and solar are the cheapest sources of electric power, costs have risen steeply as the use of wind and solar has increased. Customers of Duke Energy in Kentucky, for example, are paying 78% higher rates in the wake of coal-fired plant closings.

    Politicians and utilities are pushing for even more electrification for appliances and vehicles despite the fact that Federal Energy Regulatory Commission officials have repeatedly warned in recent years that adding more demand for electric power while replacing reliable power sources with intermittent renewables is destabilizing the power system. 

    It appears that the utilities prioritize short-term profits over grid reliability or keeping costs reasonable – and the government officials who are supposed to keep them in check are only encouraging them. It doesn’t need to be this way. The U.S. grid was not always this way. Only in recent years, with the obsessive pursuit of net zero, have rolling black and brownouts become so common.

    Today, utility companies are sending lobbyists to conservative policymakers in order to convince them that the utilities have our best interests in mind. Their track record tells another story. Meanwhile, Americans have less reliable electricity at higher costs.

    Linnea Lueken (llueken@heartland.org, X: @LinneaLueken) is a research fellow with the Arthur B. Robinson Center on Climate and Environmental Policy at The Heartland Institute. 

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