Rethinking the Tariffs Regime  

We are witnessing the death of economic principles as we make a weapon out of trade. “Pragmatists”—or perhaps “indifferentists”—with a conservative veneer embrace or ignore principles as needed in the pursuit of certain goals. Whether it is through Henry George’s 1886 book Protection or Free Trade, F. W. Taussig’s study of post–Civil War American protectionism, or Douglas A. Irwin’s analysis of the Smoot-Hawley Act, economic analyses prove that tariffs do not work. Yet here we are, trying them again.  

Various presidential administrations have imposed tariffs; for instance, President Obama’s tariffs on Chinese textiles, and President Trump’s tariffs on solar panels, washing machines, and steel during his first term. However, President Trump’s latest tariffs have reached the highest level in over a century, constituting not only a policy but a regime. To use economist Antony Davies’s analogy, tariffs are to the economy what leeches and humors used to be to medicine: we eventually learned that they did nothing to cure diseases, but they seemed like a remedy in the short term. The perennial assumption of tariff advocates remains that markets operating with minimal state intervention and within the context of the rule of law, limited government, and property rights cannot deliver. The hoi polloi must give way to the anointed.   

I sympathize with people who sincerely love their country and want to see it prosper. Many have a sense of having been taken advantage of by others and want a remedy. These sentiments are understandable, but perilous, because when people feel wounded, they may overreact or fall for anything that appears to be standing for one’s country. The bolder and more reactionary the proposal, the more it can whet the appetite. “About time someone did something!” they say—the operative word being “something.” As we speak, tariffs are presented as the solution. 

It appeared to be settled that trade deficits are not ipso facto bad, but the current administration has created a formula that attempts to impose an equilibrium in trade by assuming that the cause of a deficit must be the existence of trade barriers. When Trump unveiled his barrage of tariffs at what he called “Liberation Day,” what was presented was not merely a set of tariffs matching those imposed on the US. Instead, his formula to calculate tariffs deemed the existence of trade deficits evidence of exploitation, regardless of the extent of tariffs these countries imposed on us.  

Trade unfairness is now equated with the absence of trade equilibrium. The formula takes the trade surplus a country runs with the US, divides it by the total imports from the US, and halves the result to determine our retaliatory tariffs. This results in our imposing a tariff on a country that is many times higher than those they impose on us.  

Tariffs pose as corrections arising from the superior and concentrated knowledge of a few experts or a great leader at the top. They are based on the assumption that we can command the economy by imposing costs on imports so that our industries will flourish again. This fetish of interventionism assumes that those at the top, those with power, have some special insight into solving problems at the base of society, and that organic and undirected processes, left to themselves, cannot properly function without the state’s interference.  

After all, everyone is doing it. I understand and acknowledge that economic freedom works only when everyone abides by the rules of free exchange. But economic success is not dependent on a perfect scenario of free trade, and “shooting more holes in the floor of the boat,” to use Ronald Reagan’s description of tariffs, makes the boat go down faster. Joining the interventionists is acquiescing in the false belief, which dominates the policy of most nations, that protectionism is the proper response to protectionism. Protectionism makes us weak, because it reinforces the belief that political markets trump economic ones.  

Examples of the “dynamic costs” that insulate economic sectors from market forces are given in Frank Taussig’s The Tariff History of the United States, and they include the cronyism that accompanied the 1928, 1864, and 1867 tariffs on steel and other products. Additionally, a 1982 US International Trade Commission study showed how import relief before 1975 contributed to “contraction” and failure to modernize regarding products like sheet glass, stainless steel flatware, and carpets. Protectionism produces economic stagnation in the long run by shielding inefficiency. 

It would be unfair to blame the Trump administration for a policy agreeable to decisionmakers trained at many schools of economics around the world. Interventionism is the default approach of economic policy worldwide.  

Not that long ago, our friends on the right were railing against the interventionist frenzy of the left. Bernie Sanders claimed free trade was a Koch brothers plot. Now, however, some of the same people embrace and defend the interventionist ideas they used to excoriate.  

We have also been given conflicting justifications for the tariff regime. Some voices in the administration say this is all a masterful example of the “art of the deal,” a temporary tactical scheme to liberate the market, while others tell us that tariffs are here to stay. We might even eliminate taxation on Americans as we run the government with tariffs as a revenue source, empowering us to tackle the debt and reindustrialize America.  

To be sure, some special interests will profit under a tariff regime. They can be touted as evidence of success. As Samuel Gregg puts it, “We know that the question of who gets what form and scale of protection is largely determined by which businesses and economic sectors have the most political pull with legislators and public officials.” The destruction will remain hidden and unaccounted for. Certain economic actors possessing greater lobbying resources and political connections will benefit from a tariff regime, and they will assist in selling it as a solution by pointing toward their own gains. As a result, resources will be allocated by way of political pull instead of through the system that incorporates the effects of millions of undirected choices. Those in industries such as steel, aluminum, manufacturing, and shrimping have expressed support for Trump’s tariffs. Yet it is too early to see how this protectionism will affect these sectors.   

Under tariffs, prices of commodities and raw materials increase and the creation of new products consumes raw materials at a higher cost. If imported aluminum costs more, the price of American products containing aluminum will rise. Many, both foreign and domestic, will bear the cost. American importers will have to absorb losses to remain competitive, resulting in lower profits.  

It could be the case that foreign producers will not lower their prices and American consumers will have to pay more, as the tariff passes through to domestic consumers. The higher burdens will fall on the backs of people with lower incomes. As poorer households spend a greater portion of their income on trade goods, their overall lifestyle will suffer much more than that of wealthier households. Works like Douglas A. Irwin’s analysis of the Smoot-Hawley Act and F. W. Taussig’s study of post–Civil War American protectionism illustrate this. We also have recent empirical studies by Mary Amiti, Stephen J. Redding, and David Weinstein, who found that nearly all the cost of the 2018–2019 tariffs passed to US consumers and American importers, with an additional $3 billion per month in added tax costs.  

Another example is the 2018 Trump administration tariffs on washing machines. Economists Aaron Flaanen, Ali Hortaçsu, and Felix Tintelnot calculated the additional cost for the American consumer at $1.5 billion in the first year. They estimated the number of new jobs created by the tariffs at 1,600 and the amount collected by the treasury at $82 million. This shows that each job created came at a cost of $800,000.  Early in our history, the Founding Fathers used tariffs. The Industrial Revolution that transformed agrarian societies was in its infancy and largely confined to Great Britain. Adam Smith’s The Wealth of Nations had just been published, in the same year as the Declaration of Independence. The marginalist revolution in economics spearheaded by Jevons, Menger, and Walras would not happen until almost 100 years later. Economics was a science in development. But the Founders could not have known what we know now. Tariffs were an outgrowth of mercantilist economics, a state-heavy transition from feudalism to capitalism that remained influential into the nineteenth and twentieth centuries and gave us disasters such as colonialism. We should have abandoned those economic theories as examples of what not to do.  

Interventions can look like permanent solutions. But individual freedom and economic freedom are inseparable. Economic freedom is, in turn, inseparable from the ability to engage in economic transactions without government interference, even if that interference is predicated on a desire to eliminate external trade barriers.  

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