Just Tariff Theory

If there is one thing that economists know, it is that tariffs are bad. You don’t have to take my word for it: Adam Smith noted this in 1776, and four decades later, David Ricardo demonstrated the problems with tariffs in detail. But you don’t have to believe them either. Karl Marx, John Maynard Keynes, and Friedrich Hayek all thought tariffs were bad. Yes, Milton Friedman too. It is safe to say that, in economics, the idea that tariffs are bad is as close to a fact as we can get.

Yet here we are, in 2018, in the midst of a trade war. Obviously, economists and other people are not on the same page.

The Benefits of Free Trade

Why are economists so convinced that tariffs are bad? It has to do with the immense benefits of trade.

Consider this thought experiment. Pick your favorite group—let’s say readers of Public Discourse. Let’s imagine we want to help the people in that group be better off. From now on, we will only trade with people in that group. We will only buy things from people in that group and sell things to people in that group. Would that be an improvement in your economic status? First, it would be good to know: does anyone here know how to grow food? (When I ask this of undergraduates, I am always pleasantly surprised if there is one student who understands how agriculture works.) Can anyone here build a reliable shelter? (I have yet to find a student who has any idea how to build a house.)

It doesn’t take long to realize that no matter how much you like the group in question, you really don’t want your economic activity to be constrained to interacting only with members of that group. You would be worse off—much worse off. How about if we expand the circle to include everyone in the town in which you live? A bit better, perhaps, but still not ideal. Who builds the cell phones, let alone the cell phone network? So, let’s include everyone in your state. Better. What about everyone in the whole country? Better yet. What about everyone on your continent? Whoa. Wait just a minute. Being able to freely buy and sell goods with someone on the other end of the country is great, but surely that doesn’t imply anything about buying and selling goods with someone in another country. Does it?

The fact that you and I both benefit if we trade with each other is a foundational statement in economics. (Again, Adam Smith noted this, as did everyone afterwards.) It really makes no difference who the “you and I” are in that sentence. I always benefit from every free exchange in which I participate, or else I would not trade. If you are selling a product I want at a price I’m willing to pay, it is in my own benefit to buy it.

Why Tariffs are Bad

Now think about tariffs. A tariff is simply a tax on an imported good. To see the effect of a tariff, ask this: would you be better off if your town decided to levy a special tax on all goods you purchased that were not produced in your town? Such a tax unambiguously makes all consumers in your town worse off. Would anyone in your town be better off? Yes. Producers who are selling goods within your town but who face competition from a producer from another town would benefit. How? Those producers in your town can now sell their goods at a higher price to people in your town. Note, however, that this only applies to the goods the producer sells in your town. If they try to sell in other towns, the tariff does them absolutely no good. Firms in your town whose markets are in other towns derive zero benefit from the tax. The only benefit of the tax is the ability to sell for a higher price to people in the firm’s own town.

So, the effect of the tariff is that the consumers in your town now will pay more for the goods they buy, whether they are produced within your town or outside your town. The only beneficiaries are the firms in the town who want to avoid that messy competition thing and be able to sell for a higher price. Seen this way, the tariff discussion is exactly the same as the Wal-Mart discussion. Wal-Mart, with its excellent distribution center, is able to sell more goods at cheaper prices than all those mom and pop stores that used to be the staple everywhere. Would people be better off buying at stores with lower variety and higher prices than they are buying from Wal-Mart or Amazon? We don’t have to dig through mounds of data to know: obviously people prefer what Wal-Mart or Amazon or Home Depot has to provide.

To stop this “unfair competition” from large retailers, would you advocate what we can call the Big Box and Online Store tax? Every time you purchase something at Wal-Mart or Amazon, you have to pay an extra ten percent tax. Little mom and pop stores in your town won’t have to pay the tax; they can just raise their prices ten percent and stay in business. Would you move to a town that did that? That is exactly what a tariff is.

Do Politicians Just Not Understand Economics? Or Can Tariffs Be Like War?

There is nothing in the above argument that is in any way novel. We know how bad tariffs are. It has been explained not only in every introductory economics textbook, but in countless other books, newspapers, magazines, and television programs.

Yet, here we are in 2018 in the midst of a trade war. How did this happen?

Recently I had an epiphany. In early August, President Trump suddenly announced a doubling of the tariffs on steel and aluminum from Turkey. Sigh. But wait: what was the reason for the new tariffs? To put pressure on Turkey to release Andrew Brunson, the American pastor being held in Turkish prison on absurd charges of terrorism. That, to put it mildly, was a curious juxtaposition. Why was the Trump Administration levying a tax on American consumers in order to convince Turkey to release an American pastor from prison?

The epiphany: what if a discussion about tariffs has absolutely nothing to do with economics?

Imagine an argument for tariffs along these lines. Yes, tariffs are a tax on domestic consumers and are very bad for the domestic economy. However, for geopolitical reasons, we are levying tariffs in the hopes that the damage caused by tariffs in the domestic economy will find a parallel in the foreign economy, and we can then get the other country to amend its political practices. In other words, we acknowledge how bad tariffs are for economic reasons, but we assert there is a non-economic argument for those tariffs. Can such a case be made?

That sort of argument for tariffs has an interesting parallel. War is clearly bad for domestic consumers. War diverts resources from things I can enjoy into armaments that I do not enjoy. The battles themselves destroy valuable infrastructure, factories, and people. But even though war is bad for consumers, we still have war. That’s because the argument for war is not that it is economically beneficial. War is an element of statecraft.

Can we think about tariffs that way too? Is taxing American consumers when they purchase Turkish goods a legitimate way to try to achieve the release of an American pastor in a Turkish prison? Even more curious: did it actually work? Andrew Brunson is free; was it due to the tariffs? How far does this generalize? Can we tax Americans to try to induce another country to stop theft of intellectual property? Can we tax domestic consumers to protest religious or political persecution?

The Rules of Just Tariff Theory

If we are going to think about using tariffs in this fashion, we need some rules. War has those rules; we call it Just War Theory. What about tariffs? Can we develop a Just Tariff Theory, a set of rules that would govern when the use of tariffs is justifiable?

This would need a great deal more thought and reflection, but a first attempt at a Just Tariff Policy might look something like this:

1. The harm done by the tariffs must be less than the harm the tariffs are meant to correct.
2. The harm done to people must be justly distributed. (For example, a tariff on goods primarily purchased by the poorest or most vulnerable members in society may be unjustifiable).
3. The tariff must have a reasonable chance of accomplishing its aim.
4. There needs to be a clear, viable condition under which the tariff will be removed.

Do any of the current uses of tariffs fit into that category? Does this work as a justification for the current trade war with, say, China? I am skeptical. I am not at all convinced that in any of these cases where tariffs are being used there has been adequate consideration given to whether the tariff policy is effective, the harm is appropriately distributed, or the tariff does not cause harm greater than the good being sought.

The benefits of a Just Tariff Theory, however, are not merely providing a means to evaluate current tariff policy. A Just Tariff Theory is a different way to frame the debate. If we started having a discussion about Just Tariff Theory, a discussion that does not begin with “economics proves tariffs are bad, and you are ignorant if you disagree,” then maybe those people who unthinkingly believe that tariffs do an economic good will also start realizing that maybe tariffs have costs. But, by the same token, by recasting the discussion in these ways, even a recalcitrant economist like me can suddenly realize that maybe, just maybe, in some cases, tariffs might be a good idea.