The Tariff Act of 1930 was a law that implemented protectionist trade policies in the United States. The Act prompted retaliatory tariffs by many other countries. It is important to note that the consensus view among economists is that the Act did not cause the Great Depression, but worsened it.
Investors should note that tariffs are, in effect, a tax on consumption. Consumption taxes, such as sales taxes, value added taxes, corporate taxes, both income and other, and inflation (yes, inflation is a consumption tax) are eventually paid by consumers. When most of the country’s paychecks lose purchasing power, it can lead to declining sales, weakening GDP, layoffs, and worst case, a recession. If that isn’t bad enough, tariffs and other consumption taxes are also cruelly regressive.
Historically, the government has proven to be a poor allocator of capital. Taking money from consumers, and then redeploying those funds inefficiently, is an impediment to growth. Europe is a primary example of how high consumption taxes weaken economies.
All comments and suggestions are welcome.
Walter J. Kirchberger CFA
