by Steve G. Parsons, Ph.D.

The Power of Trade.  One of the most fundamental, and powerful, concepts in economics is that of comparative advantage.  One key lesson from this concept is that the business or country that is able to produce a good at the lowest cost is the business or country that should, in fact, produce that good.  The other key lesson is that you can’t be best (or even good) at everything.  Recognizing this is at the heart of the business concept of “core competency”; you should find out what you do best and focus on that.

With free trade both parties to the trade are better off.  Trade is what allows goods to be produced at their lowest cost and then consumed across the populations for which trade exists; trade is an amazing engine for economic growth.  It was a major factor in the growth of most civilizations and it continues to be a key factor for economic growth around the world.

Trade Restrictions.  For any business, it is best (selfishly) to convince government to restrict your competitors (but not yourself); this includes international competitors.  Such international trade restrictions can take different forms but three are most common.  First, full prohibition on the importation of specific goods.  Second, a quota limiting the volume of importation allowed.  These first two are sometimes called nontariff barriers.  And third, and most commonly used, a tax on imports (called a tariff).

President Trump claimed that U.S. tariffs on Chinese goods were paid by the Chinese.  This is a bit like claiming the cost of the U.S. border wall will be paid by Mexico.  U.S. import tariffs are paid by Americans who import foreign goods. In the vast majority of cases, these are American companies paying the tariff and then passing these taxes along to the American consumers of their goods.

In explaining how imports help American businesses the U.S. Chamber of Commerce notes that: “Companies’ imports of intermediate goods, raw materials, and capital goods account for more than 60% of all U.S. goods imports – lowering the cost for manufacturers and other businesses and helping them hone their competitive advantage.” (Available at, The Benefits of International Trade | U.S. Chamber of Commerce (uschamber.com)).  Therefore, tariffs may help some American businesses (by protecting them from competition), but hurt others who rely on imports for their business.

Are Imports Bad?  Some people seem to believe that exports are good, but imports are bad.  This illustrates a fundamental misunderstanding of trade.  With ancient trade there was an exchange of one good for another; by definition, there was simultaneous “importing” and “exporting” of goods.  Modern trade requires both a buyer and a seller.  International trade, again by definition, requires both imports and exports to exist; both imports and exports make the relevant parties better off (otherwise they would not engage in trade), hence they are both “good”.

Consider what else the U.S. Chamber of Commerce has to say about the “Benefits of Imports” (beyond the benefits quoted above): “Amid a renewed focus on boosting U.S. exports, it is important to bear in mind that imports benefit Americans as well.  They bring lower prices and more choices for American families as they try to stretch their budgets. Imports give us access to products that would not otherwise not be available – such as fresh fruit in the winter.  Access to imports boosts the purchasing power of the average American household by about $18,000 annually.” (Available at, The Benefits of International Trade | U.S. Chamber of Commerce (uschamber.com)).

The Costs of Restrictions – Smoot-Hawley Tariff 1929/30 an Example

In May 1929, looking to curry favor with farmers, the U.S. House passed a bill to greatly increase international tariffs.  In the U.S. senate there was pressure to greatly expand the number of goods on the tariff list.  Initially, a group of free-trade senators seemed poised to block the bill, however, on October 27, in a test vote on the bill the free-trade group switched and voted for the expanded tariffs.  U.S. stock prices dropped in the last hour of trading and the following day, October 28, is christened Black Thursday – the start of the stock market crash. (Reynolds 1979) 

Prior to Herbert Hoover signing the Smoot-Hawley tariffs more than a thousand economists from 179 colleges and universities signed a statement that was codified in the Congressional Record, May 5, 1930, pp 8327-28.  The statement includes the following language: “We are convinced the increased protection duties will be a mistake”  … By raising prices … and compelling consumers to subsidize waste and inefficiency in the industry.  … Our export trade, in general would suffer.” (Irwin 2011).  Their predictions came true.  Many major countries retaliated with tariffs on U.S. goods while others simply boycotted U.S. goods.  Within three years U.S. exports fell to only 35% of their pre-tariff levels (U.S. total imports, exports and trade balance 1790-1970 | Statista).  A substantial portion of this decline was caused by Smoot-Hawley tariffs.  In 1988 the Economic Report of the President described the tariffs as “… probably the most damaging pieces of legislation signed in the United States.” (p. 147).

The Costs of Restrictions – 2002 Bush Steel Tariffs – an Example

In 2002, George W. Bush implemented tariffs on certain steel imports.  This raised the cost of steel for American companies using steel to produce their products and was particularly costly for small companies. “Ninety-eight percent of the 193,000 U.S. firms in steel-consuming sectors, at the time of the Bush steel tariffs, employed less than 500 workers.” (Lessons from the 2002 Bush Steel Tariffs | Tax Foundation.) This also triggered imports of steel-containing products (since American companies had to use higher-priced steel).  As a consequence of the tariffs about 200,000 Americans lost their jobs in those steel-consuming sectors – this is greater than the total number of employes in the U.S. steel manufacturing sector at the time. (The Unintended Consequences of U.S. Steel Import Tariffs: A Quantification of the Impact During 2002).

The Costs of Restrictions – Trump 2018 Tariffs another Example

In 2018 President Trump implemented a series of tariffs and tariff increases on a variety of products including solar panels, washing machines, steel, and aluminum.  Eventually the tariffs were broadened to cover thousands of other products from China.  As with the Smoot-Hawley tariffs nearly 90 years earlier these U.S. tariffs triggered retaliatory tariffs by other countries. 

The Tax Foundation summarized the effects of these tariffs as follows: “The Trump administration imposed nearly $80 billion worth of new taxes on Americans by levying tariffs on thousands of products valued at approximately $380 billion in 2018 and 2019, amounting to one of the largest tax increases in decades.” “Trump Tariffs & Trade War: Details & Analysis of Economic Impact (taxfoundation.org).  Remember, tariffs are taxes and taxes cause higher prices for consumers.

The Costs of U.S. Tariffs.  There are two categories of costs that occur with such increases in tariffs.  First, American companies pay the tax on imports.  This increases their costs which they will tend to pass onto American consumers.  This also means that there will be pressure on these American companies to scale back on production as American consumers respond to the higher prices.  At the margin, some employees will be laid off; this is particularly true for companies facing elastic (price responsive) demand for their services.  The Tax Foundation estimates that the U.S. tariff imposed by Trump led to a loss of 166,000 American jobs (Trump Tariffs & Trade War: Details & Analysis of Economic Impact (taxfoundation.org)).  

“New research by economists from the Federal Reserve Bank of New York and Columbia University found U.S. companies lost at least $1.7 trillion in the price of their stocks due to increased U.S. tariffs against imports from China.” Trump’s Trade War Cost U.S. Company Stock Prices $1.7 Trillion (forbes.com) June 1, 2020.

The Costs of Retaliatory Tariffs by Other Countries.  Second, when other countries retaliate with higher import tariffs of their own on American-produced goods the foreign companies importing our goods respond by cutting back themselves as the cost of using American goods rises.  American exporters sell less and face pressure to scale back production.  At the margin, some employees of American exporting companies will be laid off.  The Tax Foundation estimates that in response to U.S. 2018 tariffs retaliatory tariffs by other countries caused the loss of 29,000 jobs at American companies attempting to export their products. (Trump Tariffs & Trade War: Details & Analysis of Economic Impact (taxfoundation.org).  For example, agricultural imports to China dropped about $15 billion due to the tariffs (Impact of the Trade War on U.S. Agriculture — EMORY ECONOMICS REVIEW). This triggered a $28 billion proposed farm bailout by Trump. (Farmers Say Trump’s $28 Billion Bailout Isn't a Solution - Bloomberg)

“Based on 2022 import levels, these tariffs currently impact over $350 billion of imports and exports and increase consumer costs by roughly $51 billion annually.” (The Total Cost of U.S. Tariffs - AAF (americanactionforum.org)) 

Conclusion.  Tariffs are taxes that are universally recognized as a bad economic policy.  Indeed, why else would over 1000 economists from 178 universities agree to sign the same document – condemning the Smoot-Hawley tariffs.  Tariffs, or other trade restrictions distort trade and comparative advantage – the low-cost producer of a good may no longer be producing that good (at least for some consumers, who pay a higher price). Tariffs (or other trade restrictions) increase costs for American businesses and increase prices for American goods and lead to the loss of American jobs. U.S. tariffs can trigger retaliatory tariffs by other countries leading to reduced exports and more losses of American jobs. They raise prices and reduce productivity and efficiency in America.

Consider the advice from the fiscally conservative Cato Institute: “International trade is generally driven by the ability of people in various countries— through comparative advantages—to deliver lower‐​priced goods to consumers. If policymakers want to lower consumers’ costs [to cut inflation], they can encourage more trade by eliminating tariffs and nontariff barriers.” (What Should the Fed (and Congress) Do Now? | Cato Institute).

References

American Action Forum, The Total Cost of U.S. Tariffs, Tom Lee & Jacqueline Varas, May 2022, https://www.americanactionforum.org/research/the-total-cost-of-tariffs/#ixzz8XNj4reTg

Economic Report of the President, Council of Economic Advisors, 1988, US Government Printing Office

The Great Depression: An international Disaster of Perverse Economic Policies, Thomas E. Hall and J. David Ferguson, University of Michigan Press, 1998 (1st ed). (Hall & Ferguson 1998)

Peddling Protectionism: Smoot-Hawley and the Great Depression, Douglas A. Irwin, Princeton University Press, 2011.

The Smoot-Hawley Tariff and the Great Depression | Cato at Liberty Blog Reprinted with permission from Alan Reynolds, “What Do We Know about the Great Crash?” National Review, November 9, 1979

The Tax Foundation:  The Economic and Distributional Impact of the Trump Administration’s Tariff Actions, Dec 2018, Tariffs Imposed by the Trump Administration | Economic Analysis (taxfoundation.org) (The Tax Foundation 2018)