The Federal tariff (a tax on imported goods) was the key issue of debate during the 1800s. It should again be an issue of concern, especially for lower and middle class people who don’t live in Michigan and work for the automakers there. Daniel Griswald, Directer of the Cato Institute for Trade Studies and author of the book Mad About Trade explains part of the situation in a recent podcast. As Griswald notes, one of the key trade trade issues now is the Republic of Korea-United States Free Trade Agreement (also known as KORUS FTA). This is being hailed as a major initiative by the Obama Administration and the ”largest free-trade agreement since NAFTA.” As could be expected, many labour union supporters (especially Northern Democrats in Congress) predict dire consequences and oppose the treaty (though the United Auto Workers have basically been bought off and now support the agreement thanks to changes in the initial agreement) while many at least nominally free-market supports favour the treaty as opening up markets. The irony is that this “free trade agreement” does not allow for free trade. A true free trade agreement could be very short and would basically say that henceforth there shall be no barriers to trade between the peoples of which ever states are involved. This is not what the KORUS FTA does. According to Daniel Griswald, South Korea is the number seven export market for the United States and of course in recent years the Koreans have made cars which are increasingly popular in the US. Under an agreement between the Obama Administration and the Koreans, South Korea would reduce some regulations on pollution emissions and mileage standards which will allow US auto makers to sell more cars in South Korea. Unfortunately, it would also delay the phasing out of US tariffs on South Korean imported cars and light trucks. The original agreement would have phased these tariffs out over the next 5 to 10 years. Griswald says that there is a massive 25% US tariff on light trucks and a much smaller 2.5% tariff on cars. What does this mean? A 25% tariff is a tax which amounts to an additional cost of 25% that is passed on to buyers. Here in the South trucks are very popular. The tariff means that Detroit automakers up in Michigan don’t have to compete with foreign truck makers the same way they would on the free market when selling trucks here in the South (remember also that this is an unproductive industry centered in the North, uses costly union labour, was losing lots of money and was recently bailed out by the Federal Government with tax-payer money and debt). If there were true free trade between the Southern States and South Korea cheaper trucks would be available to us. Because of the tariff, prices are higher on trucks. Also because of the tariff Northern manufacturing jobs (basically all of them union labour, which is heavily supportive of the Democratic Party – a party which is not popular in the South) are protected by the Feds. This is an incestuous relationship between the Feds, Northern industry, the major Northern political party and Northern union members – at the expense of people who buy trucks, who are disproportionately Southerners.
The situation is actually rather similar in many respects to the situation that existed in the early and mid 1800s. Back then Southerners primarily produced cotton (as well as other agricultural goods and raw materials) for export to the North and Europe. This cotton was used by industries in the North and Europe to produce clothes and other finished products. With the money that Southern farmers made from selling cotton they bought finished goods produced by Northern and European industry. So, all sides profited from the trade (as always happens with trade and voluntary human exchange). The big exception to this was the tariff. There was no income tax at that time in the much more libertarian Jeffersonian America. There was no Federal Reserve to just print money for the Feds. So the Feds needed money to operate their tiny military, the post office and the other minimal expenses it took to run the central government. The US Constitution provided for a general tariff to fund the Feds. The big issue of debate was how high this tariff should be. Tax bills begin in the House of Represenatives, according to the Constitution. Southerners were a minority in the House. Northern represenatives tied to Big Business in Northern States saw an opportunity – they could greatly increase the tariff on manufactured goods and then use the money to build roads, bridges, canals and other infrastructure in the North. The agricultural South had to buy nearly all its finished goods from outside the region. A high tariff on European imports meant that Northern manufacturers could raise their prices and make much bigger profits when selling their goods to Southerners. Since the South bought most of the imports, it mean that the South paid the bulk of the money to operate the Federal Government (as much as 80% of the cost). And with their majority in Congress, Northern States could allocate that tax money as they saw fit, funnelling it towards Northern projects. From Hamilton to Lincoln, this was the major issue for Northern centralists, as it benefited them greatly at the expense of the South. Naturally, Southerners didn’t appreciate this practice. They didn’t like paying higher prices and seeing their tax money sent outside of their region to benefit Northerners. In fact, the Tariff of Abominations in 1828 brough the issue to a head. South Carolina nullified that tariff, considering it unconstitutional and against the best interests of South Carolinians. The vote of Mid-Atlantic States was 57-11 for the tariff. Western States, allied with the North on the issue, voted 17-1 for the tariff. Meanwhile, the Southern States voted 50-3 against the tariff. The sectional nature of the struggle over the tariff is plain to see. The South favoured free trade and the North favoured restricting trade and increasing taxes.
The auto tariff is just one of many import taxes imposed by the Feds which drive up prices for working folks in the South. Aren’t you tired of Big Business and the Feds working together to take more of your money?
Click here for a ten minute audio piece by Lew Rockwell where he speaks about the Hamiltonians, free trade and the South.