Imposing higher tariffs will have a tremendous economic cost on Americans.
Trump recently claimed that “tariffs are the greatest thing ever invented,” while discussing his proposal for a 60 percent tariff on Chinese imports and across-the-board tariffs of 10 to 20 percent. However, tariffs will have huge economic costs for the American people.
The first problem with Trump’s tariff policy is that he fails to understand the basic economic principle of comparative advantage. Contrary to Trump’s zero-sum-game view of international trade, we should not try to specialize in what other countries are best at. To produce everything domestically in the name of protecting US jobs and manufacturing is not economically advantageous. That’s an economic myth.
Basic economic theory shows us that if we were to be self-reliant in all things, the opportunity cost would be way too high. However, if we specialize in what we do best at a lower cost than our competitors, we are better off. The reality is that free trade allows people to access a wider variety of goods at a lower cost than if they tried to produce everything domestically. So why does Trump fail to understand a basic economic principle that we all learned about in high school?
A second problem is that Trump looks at our trade deficit as a zero-sum game, but it is an economic myth that importing more than we export makes us worse off. It actually means we are rich. It was once believed that a nation’s wealth comes from the supply of gold and silver that the country holds, and therefore countries should boost exports and resist imports in order to maximize this metal wealth. Adam Smith proved this wrong in his Wealth of Nations. He proved that there is a problem when you only look at the deficit or surplus in the international balance of trade. Instead, if the goods and services available to the American people are greater as a result of international trade, then Americans are wealthier, not poorer.
The third issue is that Trump’s punishment tactics, like the 200 percent tariff to John Deere, fail to solve the root of the US jobs and manufacturing problem. The reality is that US companies like John Deere are suffering from the costs brought on by bad economic policy. Such policies have increased labor and manufacturing costs here in the US. Labor costs account for well over half of the overhead for manufacturing for companies like John Deere, so of course they have the incentive to minimize costs by moving jobs and manufacturing abroad. The question should not be “How can I punish them into staying?” but instead “How do we lower the costs of them doing business here in the US?” Punishment and bullying do nothing to solve the root of the problem.
Trump promises that his “smart use of tariffs” will restore American manufacturing, but the truth is that these policies will only deliver higher costs to American manufacturers and consumers and exacerbate inflation. History has shown us that American consumers, not foreign countries, have paid for—and will continue to pay for—tariffs. Estimates show that tariffs would cost the typical American household more than $2,600 per year.
While Trump’s plan to lower the corporate income tax rate from 21 to 15 percent will start to heal US supply chain issues we’ve been facing and have a positive impact on economic growth, the benefits will be offset, at least in part, by his costly tariff policies, especially on the middle-to-lower-income class. The sad reality is that his policy proposals have a “7 steps forward, 10 steps back” approach to economic growth.
The reality is that countries that are open to trade and investment tend to see long-term, sustained economic growth and higher living standards while countries that have higher restrictions and tariffs on international trade have weaker economic growth.
In short, tariffs never make goods cheaper. Only free trade can.