Tariffs are nothing new for banks, but that doesn’t make them welcome

Bankers have always been subject to government tariffs, a form of indirect taxation, except that when it comes to banks, they are called regulations. Some, like anti-money-laundering rules are more costly than others, but like other businesses, banks typically pass these costs to consumers. Usually, the result is higher borrowing costs and/or lower deposit rates, neither of which is good for consumers or the economy.

President-elect Trump has promised to reduce banking regulations, which are in effect a tax on lending similar to a “bank tariff,” and such deregulation would be a positive for the industry.

However, many bankers are concerned about the negative effect of Trump’s proposed import tariffs.

The two industries most negatively affected by foreign tariffs are agriculture, especially exporters of soybeans, dairy and pork, and manufacturing such as automotive, heavy machinery and consumer electronics. Banks across the U.S. have many customers in the agricultural and industrial sectors.

Agricultural and commercial lenders are closely evaluating the likely impact of such tariffs on their borrowers. Different firms in the same industry, like retail or e-commerce, may be impacted differently depending on their reliance on imported consumer goods like clothing, electronics and toys.

Bank tariffs, again, in the form of regulation, have been around forever, because banking is one of the most heavily regulated industries in the world.

This is also the case for tariffs on foreign imports, which can be traced back to our founding fathers generating government revenue in the name of protecting American companies. In fact, so-called “duties” to regulate foreign commerce are written into our Constitution.

Prior to the imposition of federal income taxes in 1913, tariffs were the primary source of government revenue, representing 90% of U.S. Treasury revenue from the country’s founding until the 1860s.

This fact helps clarify a common misconception that the tariff-targeted country or firm pays the tariff. Rather, American firms pay the tariffs to the U.S. Treasury, thus they are a form of tax. Like all good capitalists, instead of having reduced profits, companies usually pass this increased cost to consumers, which, among other things, is inflationary.

While China is today’s top tariff target, Great Britain was one of America’s first tariff targets for undercutting American steel and other companies. It is no surprise that the two biggest proponents of tariffs in the second half of the 19th century were Andrew Carnegie of U.S. Steel and Joseph Wharton of Bethlehem Steel, both of whom lobbied their friends in Washington to impose tariffs on foreign steel producers.

“Protectionism was Joseph Wharton’s great passion,” so much so that when he contributed $100,000 to the University of Pennsylvania in 1881 to found a “School of Finance and Economy,” he requested that the new school’s faculty advocate economic protectionism. He demanded that the “fungus” of free trade economics be removed from the new school’s curriculum.

Although this is no longer the case with Wharton’s free trade faculty, this was obviously the case for at least one of its students, Trump, who is now in the position of greatest power and believes “tariffs are the greatest thing ever invented.”

Trump, the self-proclaimed “tariff man,” recently defended some of his proposed tariffs by discussing their history, pointing to some successes in the late 19th century.

As was the case then, Trump believes tariffs can become a significant source of government revenue offsetting his proposed tax cuts, so much so that he has proposed an External Revenue Service as distinct from the Internal Revenue Service collecting domestic income taxes.

Both Trump and Wharton were first and foremost successful businessmen who, like good capitalists, maximized profits for their firms. This means using any competitive advantage to reduce input costs and/or increase output prices, again passing increased costs to consumers to maintain or increase profit margins.

Once Trump entered the political arena, his goal was not making money but hopefully strengthening America’s weakened foreign trade position the best way he knew, namely tariffs.

While Trump has and will likely continue toward this goal by directly using tariffs as a blunt economic tool, this Wharton dealmaker has taken tariffs to the next level by indirectly using them as a negotiating tactic. Trump’s tariff “jawboning,” namely the threat of tariffs, often results in his desired fair-trade goal without imposing tariffs.

This may also be the case in banking where Trump’s deregulatory goal of “ten rules out for every one rule in” plus the proposed Department of Government Efficiency, which could streamline or even abolish some existing bank regulators, may make them think twice before pursuing further regulations.

Every economist understands the downside of import tariffs and other obstacles to competition and free trade. Wharton’s own budget model, for example, equated Trump’s previous tariffs to a tax increase, and this was well before inflation reared its ugly head.

A comprehensive Fed study of the effects of the 2018-2019 Trump tariffs found they reduced manufacturing employment and increased producer prices with the impact of traditional import protection being offset in the short run by “reduced competitiveness from retaliation and higher costs in downstream industries.”

While the impact of Trump’s proposed foreign tariffs on the banking industry and economy are unclear at this point, his planned reduction of banking regulations, aka bank taxes or tariffs, will likely have a positive impact on the banking industry and economy.