If you meandered through Donald Trump’s presidential campaign long enough to listen to his views beyond illegal immigration and radical Islam, you would have picked up on one aspect of his campaign which he emphasized to gain the attraction of working-class voters: trade deals.
Trump spent a large portion of his campaign focused on the trade deals implemented since the Clinton administration, and he has not been afraid expressing how much he opposes them. He spoke endlessly about how Asian countries like China and Japan are imposing high tariffs on our exports while our imported goods have low tariffs, even though economists have pointed out this is not true in many cases. These high tariffs have forced many companies founded in the United States to offshore their labor and resources, and this is, in Trump’s own words, “taking American jobs away.”
He has promised to implement reciprocal tariffs on imported goods, both as an incentive to keep businesses running in the United States as well as move businesses from foreign countries into to the United States. In his first year as President, it does not appear his views have shifted much.
In addition to trade deals with Asian countries, Trump has also been looking to scrap NAFTA, a deal made by the Clinton Administration between the US, Canada, and Mexico that laid the grounds for low barriers to free trade in North America.
All this talk of reciprocal tariffs and import taxes has me worried about the future of the economy in America. On the surface, nothing could be nobler than for a president to incentivize companies to headquarter in the United States and provide Americans job opportunities that would have otherwise been outsourced to other countries. However, it takes a keen effort to understand that tariffs and import taxes are a burden to every country involved. They do not raise wages, increase employment, or even raise the standard of living. If history is a sufficient metric to measure the effects of government intervention into free trade, they create a net economic loss by forcing a country to create goods inefficiently at the expense of all other industries which may be more efficient. Trump’s vows to be tough on trade deals with Asia and our bordering neighbors will not help the American economy grow.
To begin, let’s look at some fundamental principles. It is always in our interest to buy goods and services from those who can sell it to us at the cheapest price. It is also, broadly speaking, our right to purchase any quantity of goods and services that we want, so long as someone can provide it to us. Certainly, these statements are not irrational, yet with regards to international trade, Trump and other pro-tariff politicians completely disregard these principles.
Tariffs clearly do not allow us to buy goods at the cheapest price possible. The solution to imbalanced trade with other countries is not pushing for reciprocal tax rates on imports. Rather, Trump and his administration should be negotiating deals in which we slash our import taxes in exchange for our trading partners to do the same.
Some may be asking, “Why do we even have tariffs and import taxes to begin with if they have been proven to hurt all countries involved?” The answer, simply, is crony capitalism. Some industries, primarily due to geographical location dictating whatever resources are available, are simply profitable in one country but not in others. In order for an unprofitable or incompetent industry to thrive in their domestic country, companies lobby the government to set tariffs, which artificially increase the cost of the same goods abroad, thereby securing the industry in place.
Let’s throw in a completely hypothetical situation and say the clothing industry in Australia is more efficient than in the United States. The American CEOs of clothing companies have been made aware that Australian clothing is virtually identical to the United States, but Australians can sell their clothes in the US for $5 cheaper. The American clothing industry is losing sales from this competition, and a typical path the CEOs take in order to avoid a tarnished reputation is to send lawyers and lobbyists to Congress to impose something along the lines of a $5 tariff on the Australian clothing so that Americans working in the clothing industry don’t lose their livelihood. Congress will almost always implement the tariff to say they are “saving American jobs” and get high-fives from the media and the public. So the tariff is charged to Australia, and now both American and Australian clothing are sold in the United States at the same price. All is good, right?
Now let’s imagine this tariff was not imposed. Eventually, holding all things constant, the Australian industry would outcompete the American industry to the brink of bankruptcy. The most common result people point out is that all the American workers (at least those who still had jobs after several budget cuts) are laid off, but this is far from the only consequence of a lack of a tariff. Consumers can now purchase the same clothing for $5 cheaper, and with the extra $5 they can invest in other businesses, which indirectly creates jobs in those respective businesses. In addition, now that the Australian industry can sell more clothing in America, consumers give the Australian company American dollars to purchase American goods. Basically, as a result of importing more Australian goods, the United States can now export more of their own goods, which once again increases job opportunities domestically. Not only does free trade allow consumers to create more jobs domestically, but Australia can now do the same by purchasing more American goods.
This is all an example of one of the most common fallacies in economics: only looking at the immediate result of an event without taking note of the peripherals, the outsiders whose lives are slightly easier now. Many people see just the immediate consequence without the tariff and fail to see everyone that has been affected and the long-term effects of a free trade policy.
Ultimately, our global economy prospers at its highest level when each country specializes in producing goods they are most efficient at producing. Copying another country’s tariff policy is simply not a sensible position to take. President Trump appears to want the United States to be the jack of all trades (no pun intended), but that mindset is an unrealistic and unhealthy sense of arrogance. If we want to see economic progress on a global scale, it must come in the form of lower tariffs and expanded trade.