Are Trump’s Tariffs a Good Idea or Not?

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Are Trump's Tariffs a Good Idea or Not? 1

I. DON’T. KNOW. 

Normally, when I don’t know about something, I try not to start a post about the subject. None of us knows everything about everything, and there is a reason why God invented the division of labor. Let people who know about how to do things do them. 

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But in this case, the REASONS why I don’t know whether Trump’s tariffs will help or hurt America are important, and I hope I can help clarify at least some of the reasons why people are lining up on different sides of the issue. 

ARE TARIFFS GENERALLY GOOD ECONOMIC POLICY?

All other things being equal–not that they ever are–tariffs are terrible economic policy. In principle, putting tariffs on foreign goods throws sand into the gears of any economy because more trade is better than less, and all tariffs do ECONOMICALLY is add to the price of goods. Either consumers wind up buying less of what they want–a loss for them–or pay more for the same goods–a loss for them. 

Imposing tariffs can make others retaliate–in fact, Trump says that he is retaliating for tariffs imposed on the US in many cases–which creates a “beggar thy neighbor” tit-for-tat that hurts everybody. More and more friction is introduced into the economy of the world, trade slows, and everybody gets poorer. 

In principle, everybody plays by the same rules, imposing the lowest tax and trade barriers possible and maximizing trade (which, after all, is people exchanging goods that each other value more than the money they have in their pockets) makes everybody richer. You have wheat that I want; I have money you want. We exchange and are both better off. 

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So, no, tariffs in purely economic terms are a bad idea. It amounts to everybody increasing prices on everybody else. Investment goes down and costs for everybody go up. 

ARE TARIFFS EVER A GOOD IDEA?

Absolutely. There may be some reasons why you may want less trade in some set of goods, or to subsidize domestic industry despite the economic costs of doing so. While industrial policies are generally a terrible idea for many reasons–government picking winners and losers is a recipe for corruption and self-dealing, harming consumers to favor friends or contributors, or channeling investments or research into suboptimal channels, there are times when the cost is worth it. 

Maintaining a defense industrial base, for instance, is important. Ensuring that you don’t become reliant on adversaries, such as our reliance on China for some defense products, pharmaceuticals, or other vital goods. Security is another good we purchase with our money, and higher prices due to tariffs (the same applies to embargoes, which hurt domestic producers) may be a price we have to pay for increased security. 

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ARE THERE OTHER NON-DEFENSE REASONS FOR TARIFFS?

Obviously so. Other countries may pursue industrial policies, picking winners and losers in their own economies for various reasons, and tariffs are a way they can do so–harming American companies and consumers. Subsidies in those countries may be aimed at undercutting American producers in the longer term, so that a foreign country can corner a market. Economists will often tell you that zero tariffs on incoming products are optimal, and in a sense, they are right, but in the real world, countries do see each other as competitors and may see harming America or American companies as in their long-term interests. 

America imposing tariffs is a way to fight back, and temporary or strategic tariffs may produce better long-term economic results even at a short-term cost. 

SO WHY ARE BOTH DEMOCRATS AND MANY REPUBLICANS UPSET AT TRUMP’S TARIFFS AND ECONOMISTS APOPLECTIC?

That’s easy. If you look at just the economics and economic efficiency, the best tariff regime is nobody having tariffs at all. Free trade is the most efficient way to ensure that places with comparative advantages wind up producing the most goods at the lowest prices in their areas of specialty. 

Comparative advantage is a simple concept. One place or group of people may have a special advantage in producing some good or service compared to another. Cities spring up around transportation hubs, manufacturing where labor or inputs are cheaper for some reason, or skills may be especially dense in some areas like Silicon Valley, or resources easy to get near a mine. 

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A simple example to make the point: the Great Plains are filled with farms because the soil is fertile, so you grow wheat, corn and soybeans there and not in the desert. Chicago is located where it is due to easy transportation, as is Minneapolis, which grew because of access to grain, mills, lumber, etc. These places exist where they are and have economies that focus on certain things because they have a comparative advantage over other places. 

Did you know that both Andersen and Marvin Windows are located in Minnesota? I bet you didn’t, and that happened because of easy access to lumber. Chances are good that if you have higher-end windows, you have a tie to Minnesota. 

All this is a result of comparative advantage. And comparative advantages can provide additional momentum to keep an industry where it started, even if the original advantage fades for some reason. 

ARE TRUMP’S TARIFFS A GOOD IDEA?

As I said at the beginning, I have no idea because Trump’s rhetoric and his tendency to use hyperbole often make it difficult to know what his strategy is. Does he just love tariffs as a good in themselves? Is his goal autarky, which means complete self-sufficiency? If he does, the inevitable result is that we will pay more for the same goods, get lower quality goods in some cases, or consume less than we otherwise would. 

Employment would indeed go up in industries that “benefit” from the tariffs, but the overall efficiency of the economy will go down. Labor will be misallocated, as will investments. It would be like trying to farm on marginal land. The farmer would get a “higher yield” than he otherwise would, but the cost per bushel will increase because the ratio of inputs to outputs will also increase. You get less per acre and input. 

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It would have been better to buy better land or let a different farmer do the planting elsewhere. Worse, the money invested in trying to eke out a bit more grain on marginal land would have been better invested elsewhere. 

However, I suspect that Trump’s strategy with tariffs is to use them as a combination of a negotiating tactic and a rebalancing of the American economy with an eye to better and more efficient longer-term outcomes. 

Many countries impose far higher tariffs than even Trump is proposing on American goods to subsidize local industries, harming everybody in the process. Remember, economically, all tariffs are bad for everybody concerned, American companies are hurt by tariffs hitting them, and consumers in those countries are harmed by higher prices for both locally produced and imported goods. 

Countries are falling all over themselves to renegotiate tariffs with the US because we are the largest and wealthiest economy in the world. America is their largest market, and getting shut out would be a disaster for them. If Trump is using tariffs as a negotiating tool it is working well. Investments are pouring into America as producers can’t afford to be shut out of the American market, and countries that want their local manufacturers to survive will make accommodations in order to maintain access to our market. 

Trump may also want to shift some of the tax burden from income taxes to what amounts to a consumption tax through the back door. Income taxes discourage work and investment–the more you make, the larger the percentage of your income you give up in a progressive tax system. Almost any economist will tell you that consumption taxes are more economically efficient in the long run than income taxes–they encourage rather than discourage work, encourage investment, and can be structured so that the increased tax burden (as a percentage of income) can be handled through more equitable tax policies that provide a rebate for lower-income people. 

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If you look at tariffs in isolation, they are horrible, but no policy is done in isolation. If the idea is to shift some of the tax burden to consumption through tariffs while lowering income taxes, that could be very smart indeed if done right. Tariffs are much more popular than a national sales tax because they seem to be a tax on foreigners, even though consumers are the people paying in reality. 

As you can see, I could go on and on and never come to a reliable conclusion about whether Trump is brilliant or a fool pursuing this policy. That’s because I am not clear on what the actual policy is. What is he trying to accomplish?

He is surrounded by brilliant economic minds, which gives me some comfort. But as with all things Trump, there both more and less going on than what Trump says. 

Posted in Republican News