- Life & Money
- Growing Wealth
- Carl Engelking
- Jun 15, 2018
From Chicken Taxes to Flamethrowers: The Oddities of Trade Wars
International trade, typically a wonky, humdrum topic, has been plastered all over homepages of major news outlets lately.
That’s because the United States in March announced tariffs — basically, special taxes — on all imported steel and aluminum from China. Days later, China fired back with tariffs of its own on 128 items made in the U.S. On June 15, the U.S. imposed a 25 percent tariff on $50 billion worth of Chinese goods. China, again, promised to respond in kind. There’s more. Roughly a week before all of this, Mexico, Canada and the European Union, targeted by U.S. steel and aluminum tariffs, entered the fray and announced their own retaliatory tariffs on U.S. products.
It’s a veritable ping-pong match of international trade intrigue and there’s no telling what’ll happen tomorrow. But let’s gather ourselves and take a minute to examine the stuff that’s getting caught up in these tit-for-tat exchanges. You’ll find that this economic arm-wrestling match is getting bizarre.
FAKE TEETH AND FLAMETHROWERS
When the Trump administration originally announced a preliminary list of Chinese tariffs way back in April, it included fake teeth, flamethrowers, cassette tapes, rocket launchers and bovine serum. After getting pulled into the steel and aluminum fracas, the European Union promised to match U.S. tariffs with some of their own: blue jeans, motorcycles, tobacco and bourbon. They hit us right in the America.
In the annals of trade conflict history, this kind of stuff is par for the course. For a little perspective, here are a few times the machinations of international trade wars got kind of weird.
HOW HIGH ARE THOSE COWS?
The cause: Late in the 19th century, Russia and Germany were locked in a trade war with each other. Germany was an industrial powerhouse exporting its goods throughout the continent, while Russia was hoping to grow its industrial prowess. Imports from Germany were making it difficult for Russia to grow, so they moved to control the inflow of goods.
When things got weird: The most-favored-nation principle is sort of a golden rule for international trade that’s existed in some form for centuries. Basically, if you raise tariffs for a product from one partner country, that tariff applies to all other partners. If you lower the tariff on a product imported from one country, that reduced tariff applies to all other partners. It’s all about equality.
Germany slapped a tariff on imported cattle to handicap Russian cattle farmers, but needed to get creative to avoid harming its other trading partners. To do this, Germany made sure one special demographic of cow was eligible for lower tariff rates: large dappled cattle reared at least 300 meters above sea level and which have at least a month's grazing at a spot at least 800 meters above sea level. Umm, OK.
The only cows that could fit into the specific subset, of course, were from Switzerland. And that’s how Germany shielded Swiss cows from tariffs aimed at Russian cows, while honoring the spirit of the most-favored-nation principle.
The cause: In 1930, the United States passed the Smoot-Hawley Tariff Act, which taxed 3,218 imported items and increased the tax on 887 more. That included a stiff tariff on Swiss-made watches and clocks. Nations around the world responded; even Switzerland couldn’t remain neutral.
When things got weird: American typewriters were the top U.S. imports into Switzerland, as they were the preferred make for Swiss banks and railways. In retaliation, Switzerland boycotted U.S. typewriters and switched to domestic and German brands. In 1931, along with other products, Swiss imports from the U.S. fell by nearly 30 percent.
During those few years, global trade dipped 65 percent. U.S. egg exports to Canada, for example, dropped from 920,000 dozen to 14,000 dozen due to tariffs from our northern neighbors. Today, economists often point to the Smoot-Hawley Tariff Act as one of the major contributing factors to the Great Depression.
The cause: In 1994, the North American Free Trade Agreement (NAFTA) went into full effect, removing trade barriers between Canada, Mexico and the U.S. It also surfaced trade tensions that couldn’t be swept under the rug.
When things got weird: Two years later, NAFTA was blamed for strangling U.S. broom manufacturers — particularly in Arcola, Illinois (the Broomcorn Capital of the World). U.S. broom manufacturers saw sales fall 50 percent in the wake of the trade agreement; 200 broom workers lost their jobs, the U.S. Cornbroom Task Force reported. Though Mexico only exported some $7 million in corn brooms to the U.S., they could sell them for $1.92 compared to $3 or more for similar brooms made in America.
You might want to strap in and prepare for more volatile markets that could sharply rise and fall with every development on the trade front.
Enter Rep. Glenn Poshard, a Democrat from Illinois (he represented Arcola voters), who had inserted language into NAFTA that allowed lawmakers to restore a 32 percent broom tariff if U.S. manufacturers were harmed by Mexican imports. The U.S. International Trade Commission agreed, and tariffs were slapped on brooms. For our neighbors to the south, that was the last straw.
Mexico, as a counterpunch, boosted its tariffs on notebooks, wine coolers, brandy and Tennessee whisky (again, with the alcohol).
A GAME OF CHICKEN
The cause: Believe it or not, chicken was once a rare, expensive food. At the height of the Cold War in the 1960s, industrialized farming practices in the U.S. lowered the cost of chicken and it became staple food item on this side of the Atlantic. But in Europe, chicken remained a delicacy; that is, until the U.S. started shipping tons of its cheap, frozen chicken into Europe. European farmers grew incensed as they watched chicken prices tank. Chickens had become a weapon of economic destruction.
When things got weird: The Dutch accused the U.S. of chicken dumping. The French said hormones in chickens were affecting male virility. The Germans accused U.S. farmers of fattening their chickens with arsenic. Ultimately, European countries put steep tariffs on chickens from the U.S. to curb cheap imports.
In response, Lyndon B. Johnson passed the so-called “chicken tax” which targeted France and West Germany. The Johnson administration placed a 25 percent tariff on light trucks, potato starch, dextrin (a gummy, thickening agent) and brandy. Eventually three of the four tariffs were lifted, but that 25 percent tariff on imported light trucks remains in place. To this day, it is known as the “chicken tax” and U.S. automakers have fought hard to keep it on the books.
WHAT IT MEANS FOR YOU: CERTAIN UNCERTAINTITY
The World Bank on June 5 warned that a continued escalation of global trade tensions could have global consequences on par with the 2008 financial crisis. Trade policies directly affect the prices we pay for products and the jobs associated with making said products. But truthfully, no one really knows what’s coming next, and that’s the biggest factor to keep in mind. Sleeping bags, soybeans, lamps, candles, whisky and myriad other products are getting swept into trade discussions and that’s creating uncertainty, which is one of the primary drivers of volatility in the stock market.
So as these trade negotiations shake out, you might want to strap in and prepare for markets that could sharply rise and fall with every development on the trade front. And as you can see, just as they did in the past, things will probably to get a little weird for a while. In a potentially choppy market, it’s always a good idea to keep the bigger economic picture in mind rather than getting too wrapped up in the day-to-day drama. At the very least you can find peace in knowing we’ve been here before.
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