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/

zerohedge
Economics , News , Politics , Science
December 7, 2024
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The Miserable Cost Of An Open Border

Authored by Seth Barron via RealClearPolitics,

The Biden-Harris experiment in dissolving the U.S. border has wrought massive changes to American society, most of which will not be understood for years, if not decades. Since 2021, U.S. border officials have had at least 10 million “encounters” with migrants, many of whom were allowed to enter the country. There is no telling how many more aliens entered the country without encountering enforcement agents. The population of the United States may have increased by as much as 15 million people in just a few years.

This massive flow of humanity crosses multiple national borders, involves every mode of transportation, accounts for billions of dollars paid in fees to smugglers, and describes a fantastically complex economy of suffering and hope. In an effort to get a handle on this human tide, noted muckraker James O’Keefe – known for his hidden camera “gotcha” interviews with abortionists, media executives, progressive nonprofit executives, and other degenerate types – traces the migrant onrush from its source, and seeks to trace the machinery of profit and influence that is conducting it from great removes.

“Line In The Sand,” the resulting documentary, is a remarkable and humane exposition, revealing perspectives and images American audiences have mostly been prevented from seeing. O’Keefe and his intrepid team begin on the U.S. side of the Mexican border, where we witness migrants crossing the border through holes that their guides have cut in a fence that serves as a target as much as a barrier. Infrared cameras show dozens of illegal aliens streaming toward “pick-up” vehicles on the U.S. side while smugglers – presumably cartel members – a few feet away taunt O’Keefe and his group. “What if I were to run up to them right now, what would happen?” O’Keefe asks his guide. “I would highly advise you against that,” he is told, in a classic understatement.

The fact that coyotes and other human traffickers are paid to assist northbound migrants with their passage is no scandal; we all know what their motivations are and why they are doing what they do. But O’Keefe documents multiple examples of U.S. Border Patrol agents standing idly by while illegal aliens cross, virtually under their noses. “Why aren’t you doing anything?” he asks. “Have a good day, guys,” a border agent desultorily responds before driving off in the general direction of the episode. Later, a migrant stands in front of a Border Patrol truck, clearly trying to alert the agents of his intention to surrender, but is studiously ignored until O’Keefe and his team call their attention to him.

There is a kind of sad comedy in the operations of U.S. border security, and O’Keefe is not unsympathetic to the absurd position that border agents have been put in. Trained to defend the national border and to serve as the first line of defense of American soil, these agents have been recommissioned as a perverse Welcome Wagon for illegal aliens, charged with making their undocumented and uninvited entrance to the United States as commodious as possible.

Looking to get deeper into the heart of this migratory avalanche, O’Keefe went deep into Mexico, to the city of Irapuato, about 150 miles northwest of Mexico City. Irapuato is a popular railway junction where thousands of migrants climb aboard “La Bestia,” or “The Beast,” a cargo train that chugs northward toward the United States. In the film’s most remarkable footage, O’Keefe and his team join with migrants, mostly from South and Central America, to ride The Beast, also known as “el Tren del Muerto,” or the Train of Death. O’Keefe talks to the migrants without condescension, asking them their destinations and what they plan to do when they get there, and their concerns about the perilous nature of the journey. We see the film crew race to jump on a moving train and clamber on top to sit in a pile of coal; O’Keefe is shocked at how truly dangerous this small element of the trip is and sympathizes with the migrants’ difficult choices. These scenes are among the film’s most affecting, along with the crew’s random encounter with a little girl who had just crossed the border after journeying from Guatemala by herself. There is a human dimension to illegal immigration, and O’Keefe does not ignore it.

However, there is also an impersonal dimension to this massive population transfer, and O’Keefe determinedly aims to uncover it – to put a face to the institutions and administrators that benefit from the rough injection of millions of people into American society. From government agents to bus companies to nonprofit resettlement groups to private contractors running huge, walled compounds housing thousands of children, O’Keefe doggedly tries to penetrate the mechanics of a system that resolutely hides itself behind a screen of silence, usually in the name of “safety” and “privacy.”

Some of the film’s more comical moments pertain to these segments, such as when the team follows some just-arrived Chinese migrants in San Diego to an employment agency, where other Chinese aliens, already in the country for several months, complain that it’s much harder to live in the United States than they had imagined. O’Keefe tries to sniff out a connection between the owner of the agency and more powerful actors, but it emerges that there really isn’t much going on; in fact, the owner asks O’Keefe if he knows of a way to apply for government grants.

Elsewhere, O’Keefe tries to get information about the operations of several huge residential centers for unaccompanied minors and tries to spin their refusal to give him access to the centers or submit to interviews as evidence of the existence of vast, government-funded child sex trafficking networks. But it seems more likely, though no less troubling, that the open borders policy of the last four years has created a tremendous humanitarian crisis of alien children roaming the continent by themselves, and the government is probably trying to keep them from becoming prey to sex traffickers while they sort out where to send them. Though O’Keefe does not uncover a salacious network of child predators, his vigorous pursuit of the truth does reveal the existence of a large, shadowy, government-funded, and lucrative system of child “welfare.”

So, “Line In The Sand” is correct in the larger sense that billions of dollars are being spent managing this human flow, and many people are getting rich off of it. The last thing these parasitical administrators of the nonprofit industrial complex want is for the border to close. O’Keefe does a great job of capturing in real time the corruption of a local New York City nonprofit called La Jornada, whose leader, Pedro Rodriguez, evidently perpetrates fraud, demanding fees for services that the city provides for free. O’Keefe also sends a Spanish-speaking reporter undercover into the Roosevelt Hotel, New York City’s main processing center for newly-arrived migrants, which offers him free housing, medical care, and even airplane tickets, even though the reporter explains that he has no identification of any sort. How, O’Keefe asks, in our post 9/11 security-obsessed era, are we to make sense of a system that admits millions of unvetted foreigners into the country, and then offers to fly them anywhere they care to go?

“Line In The Sand” is rough in parts, but intentionally so. Its subject is so sprawling and tangled that a neat and clean representation would be a lie. Even with a nine-figure budget – which this film assuredly did not have – a documentary about the border and the 30 million-footed human swarm that has crossed it would be messy and incomplete. But James O’Keefe and his small team have done something remarkable. They have taken on the decade’s biggest story, given it form, and preserved the humanity of its subjects. It is worth watching.

Seth Barron is a writer in New York and author of the forthcoming “Weaponized from Humanix.”

Tyler Durden
Sat, 12/07/2024 – 17:30