Make America Free Trade Again
For much of his political career, Trump has had a bizzare obsession with tariffs. This comes from a misguided understanding of trade deficits, a belief that tariffs will boost the manufacturing industry in the United States, and perhaps a “good idea in theory but unrealistic in practice” idea to replace the income tax with revenues from tariffs.
On a podcast appearance right before the election, Trump told Joe Rogan that “the most beautiful word in the dictionary today is the word tariff.” Tariffs are quite the opposite. Free trade has been one of the main drivers of free-market institutions, which has led to vast improvements in well-being across the world. His plan is ironic since the high cost of living seen over the last few years in the US helped him to get elected.
I sense that de-growthers might be jealous about his tariff plans, since much like Trump’s proposal, they suggest policies that would increase the cost of living, reduce production, and fight the globalization that has been one of the key drivers of economic prosperity around the world.
Tariffs are akin to taxes, and a plan to make them a flat 10% and 25% for Mexico and Canada is incredibly dangerous. Despite the vast differences of opinions between economists, very few topics bring economists towards consensus than tariffs. According to a survey by Robert Whaples, 87.5% of economists oppose tariffs and other trade barriers. A counterpoint is that we can replace income taxes with tariffs, which (according to pro-Trump arguments) will on net lead to more money in citizen’s pockets. Taking the feasibility of such proposals aside, there are no rich countries that rely on tariffs for most of their tax collection. Furthermore, high tariffs in general are only used by extremely poor countries. According to the World Bank’s data on effective tariff rates, 25 countries have an effective tariff rate of 10% or more. This includes countries like Bangladesh, Belize, Ethiopia, Gambia, Venezuela, and Zimbabwe—not exactly a list of star-studded countries that we should try to emulate. The effective tariff rate in the United States as of 2021 is just 1.47%, which would mean an almost seven-fold increase in tariffs.
Below, I show the average tariff rate in the US from 1821 to 2016. Tariff rates have fallen well below 10% for the last 70 years; over that same time frame, US real GDP per capita has increased by over 450%. Why? Because free trade is mutually beneficial and allows us to produce where we have a comparative advantage. (Of course, trade is not the only reason we have seen an increase in GDP per capita).
Source: https://www.usitc.gov/documents/dataweb/ave_table_1891_2016.pdf
Tariffs make consumers considerably worse off. This is because consumers bear the burden of such tariffs, not the foreign governments that Trump likes to claim. A study from the Journal of Economic Perspectives that was published during Trump’s first term found that the incidence of tariffs equates to a decrease in real income of $1.4 billion per month by the end of 2018. While the stated purpose of such tariffs was to bring manufacturing jobs back to the US, a study from two economists at the Federal Reserve found that “manufacturing industries more exposed to tariff increases experience relative reductions in employment” and also revealed that higher tariffs (unsurprisingly) accompany an increase in costs to the producer. The Tax Foundation collected a variety of studies from different groups, and the answer is clear: a 10% universal tariff would make us drastically poorer and increase our cost of living.
The proof of the dangers of Trump’s tariff proposals can be seen in the stock market. When he won the election, the S&P 500 rose from 5,712 to a high of 6,144, a 7.5% increase in just a few months. However, once the tariff proposals appeared that they were going to take place, the S&P 500 has crashed and now sits at 5,606. This is lower than it was when he won the election, meaning these tariff plans have removed all of the gains the market has experienced since his electoral win.
Even if this proposal is a “4D chess move” from Trump and his team and the tariffs do not get fully enacted, even the threat of tariffs increases costs. Why? Because businesses make decisions based on future expectations, not just what is happening today. If there’s an expectation that goods will be more expensive in the future, this increases the demand for products today. The boost in demand for goods today (in order to avoid higher priced goods in the future) raises the price of those good.
On an international scale, tariffs from the US will also assuradly cause a trade war. A recent op-ed from trade economist Douglas Irwin in the Wall Street Journal made a clear case that doing so reduces American sovereignty by allowing other countries to determine our own policies. For example, Canada has proposed retaliation tariffs on the U.S. This is a bad idea for both countries— the U.S. should not have started this, and Canada is only doubling down on our dumb trade policies. Should we also have child labor because other countries do? Should we implement massive expansionary monetary policy because other countries do? To “beat” China, should we also purposefully devalue the dollar to make it more “even.” What does this logic of thinking end us up with?
We should also be fundamentally concerned about the future of economic freedom, given these trade policies. I concur with the recent op-ed from Matthew Mitchell of the Fraser Institute/Knee Center at WVU and Meg Tuszynski from SMU that rejecting free trade threatens the other regulatory and tax policies Trump has proposed. According to economist Russell Sobel in a 2017 Journal of Institutional Economics article, free trade is often the first mover for broader economic reforms. Pushing back on these can threaten the institutional environment that has allowed for prosperity.
Make American Free Trade Again.