We decided to catch up with Selwyn Whitehead, after her engaging article on if bankruptcy is truly the end for businesses. This month, she touches on America’s history with tax, why tariffs were first implemented and how tariffs today will impact her country’s future.
Tariffs and trade: how has this affected (US) businesses so far?
Mightily, but before I go into the details, let me provide some historic context.
A brief history of tariffs and trade policy in the US:
Throughout our history, the US, as well as our predecessor individual colony/states, has waxed and waned between a protectionist and a “free trade” foreign economic policy stance, mostly landing on the side of protectionism, especially from our founding, through and to the end of WWII.
The rationale behind our erecting the initial trade barriers and implementing tariffs was two-fold. Firstly, the founders needed revenue streams to fund our post-founding central government, as had the individual colony-states. And after the War of Independence, the central government also needed the tariff-derived revenues to fund the debt service on the huge war debts we owed to counties such as France that had supported us during the War. Secondly, the founders, especially the faction led by our first US Treasury Secretary, Alexander Hamilton, as laid out in his Report [to Congress] on the Subject of Manufacturers (Hamilton 1791), believed that trade barriers and selectively high or moderate tariffs could and should be used to:
- Support the stabilization of the American central government using selectively high tariffs on a long-term basis to indefinitely fund government and underwrite a national bank and banking system and to create a national financial infrastructure as a tool to entice foreign investment;
- Support the growth of American Industry by using selectively moderate tariffs on a short-term basis to protect the American marketplace and fund subsidies to nascent American industries until these industries became able to compete with their foreign counterparts on an equal footing; and,
- Support both the stabilization of the American government and the growth of American Industry by using tariffs as needed to fund internal infrastructure improvements, such as roads, bridges and canals to increase domestic commerce.
The Hamilton faction believed this approach was necessary to grow the United States into a manufacturing powerhouse that was independent from the control of foreign powers through our sole reliance on the production of goods and services for our domestic consumption, especially defence supplies. As such, they believed this isolationist protectionist posture was a matter of sound national security.
Hamilton also believed these policies would provide diversified employment opportunities for the Americans, promote immigration of new people from diverse backgrounds with new energy and new ideas into the US, and thereby expand the application of science and technology into all sectors of our economy, including agriculture, which was the focus of the anti-Hamilton, pro-Thomas Jefferson faction of our founders. Ultimately, Hamilton’s policies did bring about the desired results and proved to be the catalyst that grew the US to become the largest economy in the world with the highest standard of living.
The US government maintained its tariff-based funding policy until the implementation of the federal income tax in 1913 (the 16th Amendment) and its protectionist trade barrier policy until 1945, when by the end of WWII, we had destroyed the means of production of most of our industrial competitors in Europe and Asia. It was only then that we became “free traders” in any meaningful sense, partially because we had won the war, but more importantly, I believe, out of the recognition that it was only through cooperative mutually beneficial multilateral global trade and commerce would there be a chance to circumvent and stave off another even more disastrous world war in the 20th Century, one that would certainly have been fought with nuclear weapons.
I believe the recent implementations of US tariffs and re-erection of international trade barriers are wrong-headed
Jumping forward to today, I believe the recent implementations of US tariffs and re-erection of international trade barriers are wrong-headed in that their implementation has not been based on sound intellectually-based economic reasoning and therefore have not and will not serve the purposes for which they have been advertised. Inasmuch as these particular tariffs fly in the face of the philosophical, political, and public policy constructs that formed the foundation of Hamilton’s American School of Economics, which was ultimately adopted by the Jefferson faction; that is to say that tariffs should be used selectively to enhance the natural evolution of free markets in order to either: a) fund and/or stabilize our government and promote sound fiscal and banking policy; b) fund and/or protect the growth of our future-focused industries, especially nascent ones with high domestic utility, security and employment potential, such as those that advance the use AI and Industrial IoTs while safeguarding our privacy and the inviolability of our voting booths , and/or, c) fund the implementation of innovative national infrastructures that will increase both domestic and international commerce such as the expansion of 5G-based communications systems, which in turn will lead to full employment in industries that provide high wages for our workers.
These tariffs are harming American producers of goods that world markets currently have a need for and want to buy
Instead, these new tariffs have had the opposite effect. As a result of the implementation of these tariffs and the foreseeable retaliation of the countries towards whom they are targeted, our government has stated that it will soon provide tax-payer funded bailouts to our industries that have been harmed by foreign governments’ retaliation to these tariffs; hardly sound fiscal policy. In essence our government must now fund the mitigation of the harm it has caused by the implementation of tariffs it did not need to implement in the first place. And instead of protecting nascent forward-leaning future-focused American industries, these tariffs are geared towards reviving industries that have passed their prime or at least in their declining economic years. Finally, these tariffs are harming American producers of goods that world markets currently have a need for and want to buy and would buy from us, but for the need their governments perceive to be required in order for these governments to retaliate against us in what appears to be the beginning of a world-wide trade war.
There have been reports international businesses may suffer, or go bankrupt if tariffs change; what is your opinion on this?
Let’s use my home state of California as an example of the negative effects that could be brought to bear upon California businesses with an international reach as a result of these newly enacted tariffs and trade barriers. According to the 2 May 2018 analysis performed by the California Budget and Policy Center, a California-based think tank, California companies, as a whole, are not heavily dependent on the tariffs the Trump Administration has implemented. No strong positive or negative direct impact from the aluminum or steel tariffs on the state are expected, even though individual companies and projects may be affected. However, the same conclusion was not found for the retaliatory tariffs proposed by China. Their analysis found that these tariffs have “significant negative effect” on California companies and workers because of China’s designation as a key export market.
China accounts for $2 billion in exports for California’s agricultural industry, according to the California Farm Bureau Federation. Items like almonds, dairy, wine, cherries, and walnuts were notable exports that were impacted by the tariffs. Furthermore, these markets are not easily replaceable.
As such under this set of facts, many, if not most, of the California small family farmers growing these commodities may be forced into a Chapter 12 bankruptcy to salvage what they can from what may have been a multi-generation investment in the land.
According to the California Department of Food and Agriculture (CDFA), in 2016 California’s agricultural exports totalled $20.04 billion. The top three exports by value in foreign sales in 2016 were almonds worth $4.50 billion, wines worth $1.49 billion, and dairy products worth $1.41 billion. Focusing in on Chinese exports from the Golden State, in 2016 California farmers exported a total of $518.1 million in almonds (11.513…%), $161.0 million in wine (10.8054%), and $126.3 million in dairy products (8.957%) to China. So, the potential loss of $805,400,000.00 or more in sales per year to China will be very bad news for California farmers, especially small family farmers, even if they are fully compensated by the government on what will likely be a one-time basis, if at all, as this “compensation” will do nothing to assure these farmers that they will be able to recommence their exports to China if and when the retaliatory tariffs are lifted because in the interim China has other sources from which to buy these goods. Or worse, the end user consumer in China could acquire (or be instructed by her government to acquire) a change in her tastes for these commodities due to the lack of availabily of the products and no longer want them once their availably from the US returns. As such under this set of facts, many, if not most, of the California small family farmers growing these commodities may be forced into a Chapter 12 bankruptcy to salvage what they can from what may have been a multi-generation investment in the land.
LAW OFFICES OF SELWYN D. WHITEHEAD
4650 Scotia Avenue, Oakland, California 94605
Web Site: www.selwynwhitehead.com
Selwyn D. Whitehead Esq. is a San Francisco Bay Area bankruptcy and tax attorney whose practice focuses on helping her clients manage their wealth through effective estate and tax planning and/or manage their debt through debt restructuring or bankruptcy. Selwyn also helps her clients facing foreclosure and represents clients with emotionally and financially “taxing” issues before the Franchise Tax Board, the IRS and the U.S. Tax Court.
Prior to going into private practice, Selwyn managed a group of attorneys and paraprofessionals in Fireman’s Fund Insurance Company’s Claims Department, where she was responsible for auditing the claims and case handling practices, performance, fees, and expenses of outside defence counsel. And prior to that assignment, she worked for many years as a financial services industry consumer advocate.