Season Investments


Shades of Gray

Posted on May 22, 2018

"In so complicated a science as political economy, no one axiom can be laid down as wise and expedient for all times and circumstances." – Thomas Jefferson

2018-05-22_Shades_of_gray_rock.jpgOn Sunday night, the White House announced that it would temporarily suspend its plan to impose sweeping tariffs on China as the two nations continue their trade negotiations. The tariffs were first announced back in March as part of President Trump’s economic plan to protect American jobs and level the playing field with foreign countries…specifically China. When the tariffs were first announced, there was much criticism from many economists who argued that free trade creates more prosperity for a nation than protectionism. But as Thomas Jefferson pointed out in the opening quote, when it comes to matters of the economy, “no one axiom can be laid down as wise and expedient for all times and circumstances.

The first tariff law was passed by Congress shortly after the Constitution was ratified in 1788. The goal of the Tariff of 1789 was to generate revenue for the federal government in order to sustain its operations and pay its debts, as well as protect nascent US businesses. At the time, domestic manufacturing, particularly the production of war materials, was seen as a matter of national security (for obvious reasons). Many of the founding fathers including George Washington, Alexander Hamilton, and Thomas Jefferson believed that the US needed tariffs to become economically viable and endure as an independent nation.

The reason behind the Tariff of 1789 and many of the subsequent tariffs over the next century was not unlike the situation the US faces today, but instead of China the culprit was England. At the end of the 18th century, England was the dominant world power with a highly developed manufacturing sector and robust industrial exports. As such, they had a significant competitive advantage over the newly formed United States whose businesses were burgeoning at best. As such, there was a huge trade imbalance with England where the United States was importing significantly more than it was exporting.


In the mind of a free trade economist, this is great because goods are being produced and consumed at the lowest marginal cost, but the founding fathers had a different view which we now refer to as protectionism. They believed that if the US became too dependent on the goods of any single trading partner that the U.S. would run the risk of becoming an economic colony to the exporting nation. In other words, they saw trade as dependency to another foreign power. As such, they implemented tariffs to stimulate domestic growth and self-sustainability. In their view this was an economic approach that focused more on long-term economic success at the potential expense of some near term pain (higher cost of goods).

And this belief more or less played out as predicted. Protectionism was the United States’ de facto policy from the birth of our country all the way through the end of World War II after most of our industrial competitors had been wiped out from the war. Tariffs were the main source of revenue for the government up until the federal income tax was first introduced in 1913. According to Alfred Eckes Jr., who was chairman of the U.S. International Trade Commission under President Reagan, up until this time, "the average U.S. tariff on dutiable imports never fell below 38 percent [and] gross national product grew 4.3% annually; twice the pace in free trade Britain and well above the U.S. average in the 20th century." A long list of US Presidents from both political parties supported tariffs including several notable names.

It is time we should become a little more Americanized, and, instead of feeding the paupers and laborers of Europe, feed our own, or else, in a short time, by continuing our present policy, we shall all be paupers ourselves.” – President Andrew Jackson

"Give us a protective tariff and we will have the greatest nation on earth." – President Abraham Lincoln

“Our past experience shows that great prosperity in this country has always come under a protective tariff.” – President Theodore Roosevelt

As previously mentioned, it wasn’t until after World War II that the US changed its stance on tariffs in support of free trade. One reason was that the US now enjoyed a competitive advantage over the rest of the industrialized world, but another reason was because countries began to retaliate by levying their own tariffs on US goods, which led to a variety of trade wars. It was around this same time that Congress actually ceded its Constitutional authority to levy tariffs to the Executive Office (President Franklin D. Roosevelt at the time) after determining the process had become too partisan as evidenced by the Smoot-Hawley Tariff Act (“Anyone…Anyone”) which preceded the Great Depression. Ever since that pivotal moment in our nation’s history, the President (not Congress) has had the power to levy and rescind tariffs, which is why President Trump has unilateral authority on this matter today.

When it comes to tariffs, it all comes down to whose interests are being considered. If one is simply looking at their own interests and those of their fellow laborers, then protectionist policies and tariffs may make complete sense. This was the attitude shared by many of our former Presidents and is one of the reasons the United States is the economic super-power it is today. This is the view President Trump and many of his constituents share. In the President’s mind he is simply trying to level the playing field for the American worker.

But if you think about the greater good in a broader sense, then free-trade policies make much more sense. After all, if someone halfway around the world can produce widgets for half the cost of what they can be made for here, then both sides can benefit from allowing that producer to sell their widgets at lower prices in your country. I personally see the validity in both arguments, which is why we will go full circle and refer back to the opening quote by President Thomas Jefferson to remind everyone that when it comes to economic policy there is no black and white, only many shades of gray.

elliott_headshot_bw.jpgAuthor Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.

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