Way back when then Presidential Candidate Donald Trump started talking about imposing tariffs I went into full facepalm mode. Economically, tariffs are bad news. They are a net drain on the economy. “Protectionist” tariffs at best help a few at the expense of the many.
Let me expand on that a bit. Take for instance iron. A nation, call it Industria, can produce iron internally at, oh, 100 ID (Industria Dollars) per ton. Another nation, call it Ferria, can produce iron, and ship it to Industria, at 80 ID per ton. This makes the ironworkers (and the owners of iron producing businesses) very unhappy since either nobody buys their iron and they go out of business, or they have to find some way to match Ferria’s price. This usually means making more with less which among other things means letting a lot of the former ironworkers go–much to their displeasure.
Enter the President of Industria. He imposes a 20 ID per ton tariff on imported iron. Now Ferria iron costs just as much as Industria iron. And there was much rejoicing among iron workers and iron producing business owners.
All is good, right?
Not really. This is what is seen. There’s a flip side the “unseen” that Frederic Bastiat spent much time talking about. By imposing that Tariff, the President of Industria has saved the iron making industry and lots of jobs. But he’s done so by depriving every user of iron of the lower cost iron that Ferria would have made available. That means everything that is made of iron and steel, everything that’s built with iron and steel machinery, everything that’s transported over iron rails, in iron and steel vehicles will cost more. The iron workers were “saved” at the price of higher costs and lower standards of living for everyone else. That part is “unseen” but it is nevertheless real.
Economically, there really isn’t any good justification for tariffs.
However, I have found reason to moderate my initial reaction to Trump’s talk of tariffs because while there’s no good economic justification, there can be other justifications. (Indeed, Bastiat makes that very argument–that there can be valid reasons for tariffs and other taxes, just not reasons based on economics.)
One of the reasons falls under national security. If a nation allows itself to become entirely dependent on foreign supply of materials and industries critical to its defense, that nation is vulnerable to having that supply cut off. In an ideal world every nation would recognize that it is in its own interest to trade freely on the open market in all these goods. If they have a scarce resource that trade allows them to obtain the goods and services that make up the wealth of nations. If one nation can produce goods more cheaply than another, it is in the other nations interest to trade for the cheaper goods in exchange for things the other nation cannot produce so cheaply. In a free trade environment, everyone benefits.
The problem is, we don’t live in an ideal world. Nations can make decisions based on things other than sound economic principles. They may decide they are more interested in hurting you by depriving you of a resource they have than they are in reaping the benefit of that resource. So, one needs to either have sufficient stockpiles of the critical goods to carry through a conflict, or to have the ability to produce those goods domestically, even if not as cheaply as a competitor. An that may require a tariff on the competitor’s goods to support certain critical industries.
Another case where tariff’s might be of value is retaliatory. If a nation has imposed tariffs on your nations goods, it might be valid to impose tariffs in rebuttal. Ideally, the goal is to convince the other nation that tariffs to restrain trade are a bad idea and get them to the negotiating table so that you can eliminate tariffs entirely. That may or may not work and you can end in a trade war that hurts everybody so extreme caution must be taken in when and where to use retaliatory tariffs. But in the right circumstances, they can be valid.
And that is why I have had to moderate my position on President Trump’s proposed tariffs. Other nations are starting to respond with suggestions of reducing or eliminating existing tariffs on American goods, which, if implemented, will have the benefit of encouraging trade generating more wealth and increasing the goods and services that make up the wealth of a nation available to people not just in the US, but in her trading partners. A true win-win scenario.
As for the worries about a trade war? We were already in one. We just weren’t fighting back.