Source [A]
01/28/2025•Mises Wire•Connor O'Keeffe
On Sunday, after the Colombian government turned away two US military aircraft full of detained migrants, Trump announced he would place an emergency 25 percent tariff on all goods imported from Colombia.
The tariff was quickly rolled back after the Colombian president announced he and the United States had “overcome the impasse” and that his country had agreed to receive deportees. But Trump is reportedly planning to place an equivalent 25 percent tariff on all goods coming from Canada and Mexico as soon as this weekend.
Trump’s actions are not surprising, as he made it very clear throughout his campaign that he intends to use tariffs heavily to benefit American workers and businesses and, overall, to prevent the American people from being ripped off.
Having a presidential administration that actually prioritizes the well-being of American workers, small businesses, and everyday members of the public over providing unfair advantages to well-connected mega-corporations, foreign governments, and a few deep-pocketed donors would be a significant improvement over the kinds of administrations Americans have been forced to endure for decades.
Trump is in the White House today because he convinced enough Americans that that is the kind of administration he would lead. But if Donald Trump and his team are serious about what they claim to want to bring about, they need to rethink their embrace of tariffs.
Because tariffs—or, more accurately, import taxes—are arguably the worst tool for helping domestic workers, small businesses, and everyone else in middle America who has been getting ripped off under our current political system.
Simply put, tariffs are taxes on things that Americans buy from producers in other countries. When discussing tariffs, it’s common to think of the kinds of foreign goods consumers buy directly, like Colombian coffee or Canadian maple syrup. But most tariffs actually apply to capital goods like steel, oil, and lumber that American businesses use to produce things here.
The economic effects of tariffs have been well understood for centuries. As with any other tax, tariffs impose a new cost on producers. That new cost does not directly change the market price because prices do not come from production costs. But the new cost does mean that the producers who were operating right on the margin without the tariff will now take on economic losses if they continue doing business in the country that enacted the tariff. As a result, these foreign producers stop selling their goods to domestic consumers, and the domestic supply of that good falls, which drives domestic prices up.
So, tariffs raise prices by lowering the supply of goods available to domestic buyers. And this effect cannot be reversed by domestic producers as that involves siphoning domestic resources away from whatever they had been producing before. At best, the shortages can be moved, not eliminated.
The bad consequence of tariffs is one of the most widely accepted concepts in the often hyper-divided field of economics. And centuries of real-world examples have only confirmed what economic theory says, which is why it’s rare to hear tariff advocates use pure economic arguments these days. Most rely on political arguments.
One of the more popular arguments is protectionism. It’s the idea that the federal government should tax foreign producers to help prop up American workers, American-owned businesses, and domestic industries. The very real hollowing out of many middle-American towns and the decline of American manufacturing over the last century are often pointed to as evidence of what happens when trade is too free.
So—the argument goes—the government needs to protect these small American towns from the greedy multinational corporations that will gladly dump American workers to save a few bucks on cheap labor from poorer countries. Even if prices go up a bit, we’re told, having a robust, healthy workforce and thriving domestic industries is worth it.
That sounds nice as a political talking point, but it quietly rests on a complete rejection of the economic effects I outlined above, along with a very flawed version of economic history. The hollowing out of middle America did not come about because Americans have had the freedom to buy some foreign goods and resources. It came about because of the massive federal apparatus built up over the last century to move as much of our money as possible into the pockets of government officials and their friends at some of the biggest multinational corporations through taxes, inflation, and rigged laws and regulations.
This failed diagnosis drives protectionists to embrace raising import taxes. But doing so can only hurt the people they claim to want to help. Because, while it is true that imparting costs on the use of foreign-produced capital goods and resources can keep a small group of workers in jobs that they would not have kept in the absence of the taxes, these workers—along with all the workers who aren’t “protected” by the tariff—are slammed with the high prices.
Because, remember, it’s not that greedy companies “pass the costs of the tariffs onto consumers.” The supply of the affected capital goods and resources and all the consumer goods that they would have produced goes down. Some workers can keep their jobs—albeit with paychecks that no longer go as far—but far more American workers suffer the effects of working for companies that need to make cuts to continue operating. There is no way around this.
Protectionism is a bad economic argument masquerading as a realist political position. It is remarkably harmful for everyone in the American economy—especially the overtaxed, financially-stretched people of middle America.
Some tariff advocates accept this but argue that the federal government needs to raise revenue somehow and that tariffs are much better and less invasive than our current tax system. Among the Trump movement, this often takes the form of calls to replace the income tax with a system of tariffs. Proponents usually cite America in the 1800s, when there was no income tax, and the economy grew at a historic pace while the federal government raised almost all of its revenue with tariffs.
Because of how unfathomably damaging the income tax is, it could certainly be the case that a tariff-only tax system would be less destructive than what we have today. But just as with government spending, in Washington, it is much harder to eliminate a tax than it is to add a new one. Without a heavy emphasis on gathering the public, congressional, bureaucratic, and legal support to abolish the income tax, the far likelier outcome of Trump’s interest in tariffs is a system where the income tax remains in place, and tariffs are added on top of it.
Still, some advocates will say that, even if that’s the case, there are important non-monetary benefits of tariffs that more than make up for the economic losses. They’ll say it’s risky for our economy to rely on goods produced under other governments, especially governments that we could easily find ourselves at war with in the near future.
There are a few problems with this argument when it’s used to push for more import taxes. First, the resources actually needed to defend the country are already being produced here. For example, the entire US military uses about two-tenths of one percent of domestic steel production each year. Some industry groups think the figure is a little higher, but still, it’s not as if America would be left defenseless today if some of these imports were cut off. In fact, raising import taxes to address this non-issue may have the opposite effect than what proponents claim.
But even setting all that aside, it’s important to understand that the root of all the geopolitical danger the US currently finds itself in is Washington’s obsession with remaining the primary power in every corner of the globe. The American people are forced to bankroll this costly, unnecessary, and impossible undertaking, which only makes war more likely—something many on the American right have finally started to wake up to. Also, forcing the American and Chinese economies, for example, to divest from each other lowers the immediate economic cost leaders would face if they started a new war, which only worsens the problem.
Also, absurdly, you’ll sometimes hear tariff advocates gleefully predicting that their import taxes will drive foreign companies to move their operations to the US to avoid paying the tariff. Setting aside the fact that economic theory and history cast doubt on the notion that the companies hindered by the tariff, because they were barely holding on without the tax, will suddenly start investing in entirely new foreign branches in the US, this flies in the face of all the supposed national security concerns the same people often cite. Just look at how concerned many right-wingers in Congress got over Chinese firms operating farms in America or, more recently, Beijing’s links to TikTok.
The final political argument for tariffs that is popular among some Trump supporters is that, bizarrely, all the above arguments are fake. That Trump actually knows tariffs are bad for the American people, but that he is only planning to use them to gain leverage over other governments as he tries to bring about a world with no tariffs. Even if that were true, history has demonstrated time and time again that tariffs are usually met with retaliatory tariffs, not tariff cuts. And all indications of how other countries are preparing for Trump’s trade policy suggest that this time is no different.
And, even when Trump uses America’s leverage to get foreign governments to capitulate on various other things—such as the migrant flight dispute with Colombia last weekend—there’s no reason why that has to be done with tariffs. The US government sends out a tremendous amount of foreign aid and effectively provides the national defense of many countries around the world. Threatening to hold these benefits back or eliminate them altogether would be a great way for Trump to negotiate new deals without putting the well-being of the American people at risk.
It is important to recognize that the problems cited by many of the most ardent tariff advocates are real. Many once-thriving communities across this country have been artificially hollowed out by federal policies that aim to benefit a few huge, well-connected companies at the expense of everyone else. And the American working class has been forced to subsidize and later bail out multinational corporations while bankrolling a costly global police force that nearly every other country on Earth gets to benefit from essentially for free. The American people really are getting ripped off.
But tariff advocates need to understand that these problems are caused by tyrannical government overreach, not an abundance of freedom. The path out of our national mess lies in gutting the burdensome federal bureaucracy, calling off Washington’s global imperial project, abolishing the laws and regulations that warp the economy to benefit the politically connected rich, and returning the control over the monetary system to the American people. It does not lie in raising our taxes.
Tariffs Will Not Make America Great Again
01/28/2025•Mises Wire•Connor O'Keeffe
On Sunday, after the Colombian government turned away two US military aircraft full of detained migrants, Trump announced he would place an emergency 25 percent tariff on all goods imported from Colombia.
The tariff was quickly rolled back after the Colombian president announced he and the United States had “overcome the impasse” and that his country had agreed to receive deportees. But Trump is reportedly planning to place an equivalent 25 percent tariff on all goods coming from Canada and Mexico as soon as this weekend.
Trump’s actions are not surprising, as he made it very clear throughout his campaign that he intends to use tariffs heavily to benefit American workers and businesses and, overall, to prevent the American people from being ripped off.
Having a presidential administration that actually prioritizes the well-being of American workers, small businesses, and everyday members of the public over providing unfair advantages to well-connected mega-corporations, foreign governments, and a few deep-pocketed donors would be a significant improvement over the kinds of administrations Americans have been forced to endure for decades.
Trump is in the White House today because he convinced enough Americans that that is the kind of administration he would lead. But if Donald Trump and his team are serious about what they claim to want to bring about, they need to rethink their embrace of tariffs.
Because tariffs—or, more accurately, import taxes—are arguably the worst tool for helping domestic workers, small businesses, and everyone else in middle America who has been getting ripped off under our current political system.
Simply put, tariffs are taxes on things that Americans buy from producers in other countries. When discussing tariffs, it’s common to think of the kinds of foreign goods consumers buy directly, like Colombian coffee or Canadian maple syrup. But most tariffs actually apply to capital goods like steel, oil, and lumber that American businesses use to produce things here.
The economic effects of tariffs have been well understood for centuries. As with any other tax, tariffs impose a new cost on producers. That new cost does not directly change the market price because prices do not come from production costs. But the new cost does mean that the producers who were operating right on the margin without the tariff will now take on economic losses if they continue doing business in the country that enacted the tariff. As a result, these foreign producers stop selling their goods to domestic consumers, and the domestic supply of that good falls, which drives domestic prices up.
So, tariffs raise prices by lowering the supply of goods available to domestic buyers. And this effect cannot be reversed by domestic producers as that involves siphoning domestic resources away from whatever they had been producing before. At best, the shortages can be moved, not eliminated.
The bad consequence of tariffs is one of the most widely accepted concepts in the often hyper-divided field of economics. And centuries of real-world examples have only confirmed what economic theory says, which is why it’s rare to hear tariff advocates use pure economic arguments these days. Most rely on political arguments.
One of the more popular arguments is protectionism. It’s the idea that the federal government should tax foreign producers to help prop up American workers, American-owned businesses, and domestic industries. The very real hollowing out of many middle-American towns and the decline of American manufacturing over the last century are often pointed to as evidence of what happens when trade is too free.
So—the argument goes—the government needs to protect these small American towns from the greedy multinational corporations that will gladly dump American workers to save a few bucks on cheap labor from poorer countries. Even if prices go up a bit, we’re told, having a robust, healthy workforce and thriving domestic industries is worth it.
That sounds nice as a political talking point, but it quietly rests on a complete rejection of the economic effects I outlined above, along with a very flawed version of economic history. The hollowing out of middle America did not come about because Americans have had the freedom to buy some foreign goods and resources. It came about because of the massive federal apparatus built up over the last century to move as much of our money as possible into the pockets of government officials and their friends at some of the biggest multinational corporations through taxes, inflation, and rigged laws and regulations.
This failed diagnosis drives protectionists to embrace raising import taxes. But doing so can only hurt the people they claim to want to help. Because, while it is true that imparting costs on the use of foreign-produced capital goods and resources can keep a small group of workers in jobs that they would not have kept in the absence of the taxes, these workers—along with all the workers who aren’t “protected” by the tariff—are slammed with the high prices.
Because, remember, it’s not that greedy companies “pass the costs of the tariffs onto consumers.” The supply of the affected capital goods and resources and all the consumer goods that they would have produced goes down. Some workers can keep their jobs—albeit with paychecks that no longer go as far—but far more American workers suffer the effects of working for companies that need to make cuts to continue operating. There is no way around this.
Protectionism is a bad economic argument masquerading as a realist political position. It is remarkably harmful for everyone in the American economy—especially the overtaxed, financially-stretched people of middle America.
Some tariff advocates accept this but argue that the federal government needs to raise revenue somehow and that tariffs are much better and less invasive than our current tax system. Among the Trump movement, this often takes the form of calls to replace the income tax with a system of tariffs. Proponents usually cite America in the 1800s, when there was no income tax, and the economy grew at a historic pace while the federal government raised almost all of its revenue with tariffs.
Because of how unfathomably damaging the income tax is, it could certainly be the case that a tariff-only tax system would be less destructive than what we have today. But just as with government spending, in Washington, it is much harder to eliminate a tax than it is to add a new one. Without a heavy emphasis on gathering the public, congressional, bureaucratic, and legal support to abolish the income tax, the far likelier outcome of Trump’s interest in tariffs is a system where the income tax remains in place, and tariffs are added on top of it.
Still, some advocates will say that, even if that’s the case, there are important non-monetary benefits of tariffs that more than make up for the economic losses. They’ll say it’s risky for our economy to rely on goods produced under other governments, especially governments that we could easily find ourselves at war with in the near future.
There are a few problems with this argument when it’s used to push for more import taxes. First, the resources actually needed to defend the country are already being produced here. For example, the entire US military uses about two-tenths of one percent of domestic steel production each year. Some industry groups think the figure is a little higher, but still, it’s not as if America would be left defenseless today if some of these imports were cut off. In fact, raising import taxes to address this non-issue may have the opposite effect than what proponents claim.
But even setting all that aside, it’s important to understand that the root of all the geopolitical danger the US currently finds itself in is Washington’s obsession with remaining the primary power in every corner of the globe. The American people are forced to bankroll this costly, unnecessary, and impossible undertaking, which only makes war more likely—something many on the American right have finally started to wake up to. Also, forcing the American and Chinese economies, for example, to divest from each other lowers the immediate economic cost leaders would face if they started a new war, which only worsens the problem.
Also, absurdly, you’ll sometimes hear tariff advocates gleefully predicting that their import taxes will drive foreign companies to move their operations to the US to avoid paying the tariff. Setting aside the fact that economic theory and history cast doubt on the notion that the companies hindered by the tariff, because they were barely holding on without the tax, will suddenly start investing in entirely new foreign branches in the US, this flies in the face of all the supposed national security concerns the same people often cite. Just look at how concerned many right-wingers in Congress got over Chinese firms operating farms in America or, more recently, Beijing’s links to TikTok.
The final political argument for tariffs that is popular among some Trump supporters is that, bizarrely, all the above arguments are fake. That Trump actually knows tariffs are bad for the American people, but that he is only planning to use them to gain leverage over other governments as he tries to bring about a world with no tariffs. Even if that were true, history has demonstrated time and time again that tariffs are usually met with retaliatory tariffs, not tariff cuts. And all indications of how other countries are preparing for Trump’s trade policy suggest that this time is no different.
And, even when Trump uses America’s leverage to get foreign governments to capitulate on various other things—such as the migrant flight dispute with Colombia last weekend—there’s no reason why that has to be done with tariffs. The US government sends out a tremendous amount of foreign aid and effectively provides the national defense of many countries around the world. Threatening to hold these benefits back or eliminate them altogether would be a great way for Trump to negotiate new deals without putting the well-being of the American people at risk.
It is important to recognize that the problems cited by many of the most ardent tariff advocates are real. Many once-thriving communities across this country have been artificially hollowed out by federal policies that aim to benefit a few huge, well-connected companies at the expense of everyone else. And the American working class has been forced to subsidize and later bail out multinational corporations while bankrolling a costly global police force that nearly every other country on Earth gets to benefit from essentially for free. The American people really are getting ripped off.
But tariff advocates need to understand that these problems are caused by tyrannical government overreach, not an abundance of freedom. The path out of our national mess lies in gutting the burdensome federal bureaucracy, calling off Washington’s global imperial project, abolishing the laws and regulations that warp the economy to benefit the politically connected rich, and returning the control over the monetary system to the American people. It does not lie in raising our taxes.
