Earlier this week, President-elect Donald Trump announced that he plans to implement some of the tariffs he had threatened on his first day in office. The following quotes illustrate, but do not exhaust, the economic illiteracy involved, that is, the ignorance of the economics of trade and protectionism as it has developed over the past three centuries.Donald Trump says he will hit China, Canada and Mexico with new tariffs,” Financial timesNovember 25, 2024):
Donald Trump has said he will impose tariffs of 25 percent on all imports from Canada and Mexico, and another 10 percent on Chinese goods, accusing the countries of allowing illegal migration and drug trafficking.
In one after On his social media site Truth Social, Trump said that on his first day in office he would impose tariffs on Canada and Mexico “on ALL products entering the United States, and its ridiculous open borders,” which would remain in place “until such time as drugs, especially Fentanyl, and all illegal aliens to stop this invasion of our country.”
Trump said the tariffs on China would apply to all imports and would be on top of existing duties as he criticized Beijing for failing to keep promises to impose the death penalty on people trafficking fentanyl, a deadly synthetic opioid.
This onslaught of protectionism is absurd. Consider: the President of the United States would force Americans to pay taxes on their imports of many products to induce foreign governments to control their producers (including with the death penalty!) of another product (Fentanyl) that many Americans want, or to incite foreign governments to prevent neighboring countries from approaching U.S. borders even if they are suspected of coming to America to work for Americans. It is not easy to find another sentence so full of economic absurdities.
A related point that many people and apparently many high-level politicians do not seem to understand is this. A tax on imports is also a quasi-tax on imports domestically produced substitutes–except that this latter tax is paid not to the government that imposes it, but to the domestic producers of these substitutes. I explained the phenomenon in the fall issue of Regulation (“Evaluating Trump’s new tariff ideas“):
To better understand the full scope of a tariff’s costs, we must realize that it induces competing U.S. producers to raise their own prices. As the quantity demanded for the domestic product increases, its price is increased by consumers until the domestic price reaches the taxed price of the foreign good. Imports will have decreased, domestic production will have increased, and domestic buyers will pay the same price for both the imported good and its domestically produced equivalent – for example, two cars of the same brand or quality, produced in Germany and in the United States . This is what ‘protection’ means: domestic producers are protected from the lower prices of foreign competitors; the tariff is a discriminatory tax that allows – and even encourages – them to raise their own prices to the level of the imported goods now subject to tariffs.
Similarly, a tariff on an input (e.g., steel) is paid by the U.S. importer, who typically passes it on down the supply chain to its customers and ultimately to the consumers of the final good (e.g., a car). For example, after Trump imposed a special 25 percent tariff on imported steel in 2018, the CEO of Byer Steel, a Cincinnati steelmaker, explained in an Wall Street Journal article [July 1, 2018] how the tariff had caused his company to increase production and raise prices:
“Demand came up so quickly that we had to raise our prices or we wouldn’t have had a pound of steel for anyone. We raised prices to the point where the market said enough was enough.”
The article also mentioned one American company hurt by the tariffs: Missouri-based Laclede Chain Manufacturing, which laid off workers and cut back on overtime due to higher input costs.
A common objection is that the tariffs are only a threat, but their validity is questionable. It is certainly not part of the art of negotiation to let a negotiating partner know that you are only bluffing. Be that as it may, the first Trump administration did impose tariffs, and most of them were maintained and in some cases increased by the Biden administration. Government intervention is not a tap that you can turn on and off at will.
Finally, speaking of economic illiteracy, let me recall it from James Buchanan’s book Why I’m not a conservative eithera disturbing argument, which applies even more to politicians than to ordinary people. In one Regulation review of Buchanan’s bookI summarized his argument as follows (before explaining why it seems disturbing):
Other conditions [are] necessary to maintain a liberal-democratic society. Individuals must understand “simple principles of social interaction,” and that entails “a general understanding of basic economics.” Or else, Buchanan claims, they must demonstrate “a widespread willingness” to submit to others who do understand.
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An economically illiterate Martian is amazed at what these buyers and sellers are doing