Last week, President-elect Donald Trump announced that he intended to implement some of the tariffs he had threatened on his first day in office. The following quotes are illustrative of the relevant economic illiteracy, that is, ignorance of the economics of trade and protectionism that has developed over the past three centuries, but are not exhaustive (“Donald Trump , says it will impose new tariffs on Canada, Mexico, “Financial Times, November 25, 2024):
President Donald Trump has said he will impose a 25% tariff on all imports from Canada and Mexico, and an additional 10% on Chinese goods, saying those countries tolerate illegal immigration and drug trafficking. accused of being
In a post on his social media site Truth Social, President Trump announced on his first day in office that he would impose tariffs on Canada and Mexico on “all products imported into the United States and our ridiculous opening of borders,” and the tariffs would remain in place. He said it would be done. “Until we stop drugs, especially fentanyl, and all illegal aliens from invading our country.”
President Trump criticized the Chinese government for not following through on a promise to impose the death penalty on traffickers of the deadly synthetic opioid fentanyl, saying the tariffs on China would apply to all imports and would add to existing levies. He said that it would be added to the
The justification given for this protectionist effort seems absurd. Think about it: The president of the United States is forcing Americans to import many products in order to give foreign governments control (including the death penalty!) of the producers of another product that many Americans want (fentanyl). It will force you to pay taxes. Or they may incite foreign governments to stay away from the U.S. border if they suspect their neighbors are coming to the United States to work for Americans. It is not easy to find a sentence this long that is so full of economic absurdity.
Another point relates to an economic phenomenon that many people, and certainly many senior politicians, do not seem to understand. Taxes on imported goods are also taxes on domestically produced substitutes. However, the difference is that the latter tax is not paid to the government that imposes it. Instead, we provide domestic producers of these alternatives. I explained this phenomenon in the fall issue of Regulation (“Assessing Trump’s New Tariff Ideas”):
To better understand the full cost of tariffs, it is important to recognize that tariffs cause competing U.S. producers to raise their own prices. As the quantity demanded of a domestic product increases, its price is bid up by consumers until the domestic price reaches the taxable price of the foreign product. Imports would fall, domestic production would rise, and domestic buyers would pay the same price for both imported goods and domestically produced equivalents. For example, two cars of the same brand or quality produced in Germany and the United States. This is what “protection” means. Domestic producers are protected from the lower prices of foreign competitors. This tariff is a discriminatory tax that allows and even forces domestic prices to rise to the level of imported goods currently subject to tariffs.
Similarly, tariffs on inputs (e.g., steel) are paid by U.S. importers, who typically pass them through the supply chain to customers and ultimately to consumers of the final product (e.g., cars). For example, after President Trump imposed a special 25% tariff on imported steel in 2018, the CEO of Cincinnati steel company Byer Steel explained in a Wall Street Journal article: [July 1, 2018] How did the tariffs cause his company to increase production and raise prices?
“Demand increased so quickly that we had to raise prices, otherwise we wouldn’t have been able to provide anyone with a pound of steel.” .”
The article also featured a U.S. company hurt by the tariffs, Missouri-based Laclede Chain Manufacturing Co., which laid off workers and cut overtime due to rising input costs.
A common objection is that tariffs are simply a threat, but protectionist advocates question their legitimacy. Certainly, letting your negotiators know that you’re just bluffing isn’t part of the art of dealmaking. Additionally, while the first Trump administration actually enacted tariffs, most of the remaining tariffs have been maintained and, in some cases, increased by the Biden administration. Government intervention is not a faucet that individuals can turn on and off at will.
Speaking of economic illiteracy, let me close by reminding you of a disturbing argument in James Buchanan’s book, Why I’m Not a Conservative either. This applies more to politicians than ordinary people. In a regulatory review of Mr. Buchanan’s book, I summarized his argument as follows (before explaining why it is disturbing):
Other conditions [are] It is necessary to maintain a free democratic society. Individuals need to understand “simple principles of social interaction,” which requires a “general understanding of basic economics.” Otherwise, Buchanan argues, one must demonstrate a “broad willingness” to follow the views of others who understand.
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Economically ignorant Martians are perplexed by the behavior of buyers and sellers.
