AS CONGRESS desperately tries to bring the budget deficit down, the delectable idea of taxing foreigners begins to shimmer on the horizon. How to tax them? By collecting large duties on the goods that they sell to Americans. Imports last year came to $340 billion, and a tax of, let's say, 20 percent would raise a swinging sum of money. As the case for this gigantic tariff goes, the foreigners selling these goods are making high profits because of the U.S. dollar's high exchange rate -- and therefore would be glad to absorb the tariff without raising their prices. An inviting proposition, no?
No. Watch out for this one. It's a poisonous idea that promises real damage to the American economy. But it's very seductive, and it's beginning to circulate widely here in Washington. In response, the Institute for International Economics convened a group of politicians and economists the other day to examine the proposal carefully. One conclusion that emerged from the discussion was that the consequences of a high American tariff would be extremely unpredictable. The costs, and where they might actually lie, cannot be reliably calculated.
As the proposal is now circulating, with no very clear sponsorship, it calls for a tax on imports at 20 percent for one year, fading away to zero over the following two years. The logic here is that the temporary character of the tax would induce the foreigners to pay it rather than passing it on to their American customers. But as logic goes, that's a pretty poor effort. If the tariff were understood by everyone to be temporary, no one would have any reason to adjust to it. After three years the country would be right back where it began, with American trade as far out of balance as ever, the revenues gone, and the budget deficits still gaping.
Applying the tariff indiscriminately to all imports would be, in any case, impossible. It would be a wanton act, amounting to a declaration of economic war, to levy it on goods coming in from Canada and Mexico, this country's two neighbors whose economies are now deeply interwoven with its own. It would be unconscionable to levy it on the developing countries. For the best of reasons the list of exemptions would have to be long -- and it would grow rapidly.
If a temporary tariff is a delusion, how about a permanent tariff? That points to a path that the United States has traveled before. When Franklin D. Roosevelt was running for president in 1932, he denounced the Smoot-Hawley Tariff of 1930 as a major contributor to the Depression. He was right about that. Current developments keep reminding you that there is now a generation of politicians who do not remember the Depression and how the world fell into it.