On Trade and Trump’s Tariffs – Part 2

“Arguments in support of protectionism enchant only two sorts of people. One is individuals who have something to gain from it at the larger public expense; the second is individuals who have yet to think seriously about the matter.” That’s what economist Donald Boudreaux wrote in one of his many brilliant pieces meant for the general public.

Since we don’t belong to the first set — people who seek to gain at the public’s expense — we should avoid being in the second set — people who have not thought seriously about trade. Let’s start with a brief note on protectionism.

(Read the previous part of this post.)

Protectionism

Protectionism in the context of international trade refers to government policies and actions designed to shield a country’s domestic industries, businesses, and workers from foreign competition.

It typically involves imposing barriers to trade, such as tariffs (taxes on imported goods), quotas (limits on the quantity of imports), subsidies (financial support to domestic producers), or other regulations that make imported goods less competitive compared to locally produced ones.

Benefits of Tariffs

The benefits of tariffs for the importing country are context-dependent. In the short term, they can safeguard jobs and industries, boosting local economies and reducing dependence on foreign goods. For example, a country with a tariff on imported automobiles might see its domestic car manufacturers thrive.

Tariffs can also correct trade imbalances by discouraging excessive imports. However, these advantages come with trade-offs.

Costs

Higher prices for imported goods often translate to increased costs for consumers, reducing purchasing power and potentially fueling inflation. Moreover, industries reliant on imported raw materials—like manufacturing sectors using foreign steel—may face higher production costs, undermining their competitiveness.

In the long run, tariffs can stifle innovation and efficiency. Protected industries, insulated from competition, may lack the incentive to modernize, leading to economic stagnation.

Retaliatory tariffs from trading partners can also harm exporters in the importing country, as seen in the U.S.-China trade war, where American farmers faced reduced demand from China due to reciprocal tariffs. Empirical studies suggest that while tariffs benefit specific sectors, their net effect on the broader economy is often negative.

One important effect of tariffs is that they can generate significant government revenue. For example, in the 19th century, tariffs were a primary income source for the United States before the advent of income taxes. However, global average tariffs for industrialized economies have been steadily declining.

Tariffs are a double-edged sword, offering economic protection and political leverage while risking higher costs, inefficiency, and international friction.

U.S. tariff history oscillates between protectionism and liberalization, shaped by economic needs and political pressures. Sectors like steel, agriculture, textiles, and manufacturing have been perennial tariff targets, reflecting their strategic or electoral importance. as bargaining chips in a globalized economy.

Trump is clearly using tariffs as a bargaining chip with US trading partners. Economic policy is downstream of political and geopolitical calculations.

Trade is Good

All trade is good. Trade brings good things to life. The classical economists realized that over two hundred years ago. And over that time, we have empirical evidence that it was the mechanism that led to the great enrichment of the world. We are better off because we live in a world of people who trade.

This is not self-evidently true. We have to have analytical reasons to be persuaded of its validity. Fortunately, the above-mentioned Don Boudreaux has a wonderful EconLog article that is a must read. Go read “Trade Has No Losers.” July 2024. Quote:

. . . the common claim that “trade has winners and losers” is emphatically not correct.

One way to see the flaw in this claim is to recognize that trade is merely one among countless different sources of economic change. There’s nothing unique or special about trading with foreigners that causes some businesses to lose profits and some workers to lose jobs. Every change in economic activity has these effects. If Americans have fewer babies, Americans buy fewer diapers, thus causing profit and job losses among American producers of diapers. If Americans come to enjoy taking more meals at home, they buy fewer restaurant meals, thus causing profit and job losses in American restaurants. Improvements in automotive technology over the years have reduced the demand for neighborhood garage mechanics.

Be well, do good work, and keep in touch.

{Continue to read Part 3 of this series.}