Who do tariffs punish? Many people think they punish unscrupulous, shifty foreign manufacturers who aren’t playing fair and “dumping” their shoddy wares on American markets at prices below American producers’ costs, but that’s not true. Tariffs are sanctions and penalties imposed on American consumers for not paying enough.
Governments regularly impose sanctions on other governments for various abuses of human rights and international treaties, or other similarly bad behavior. These sanctions can be a refusal to allow a country’s citizens to trade with another country’s citizens or an outright trade embargo. The basic idea is that punishing a country with trade sanctions will get it to change its behavior. Or, perhaps, by punishing a country’s citizens, we can inspire them to rise up and throw off the chains of their oppressors.
Sanctions have a checkered history and a less-than-inspiring track record. Protectionism is a classic example of a policy that does the opposite of what it is supposed to do. It increases American employment in the protected industries, but the workers’ additional earnings are transferred dollar for dollar from consumers. We could use the land, capital, labor, and other resources more efficiently to make something else.
According to a Daily Mail poll asking about Donald Trump’s plan for 10% tariffs on all imports, “24 percent of likely voters strongly support the policy proposal while another 30 percent tend to support it.” Protectionism is bipartisan: a few weeks ago, Reuters reported that Senate Democrats from manufacturing states were pushing for tariffs on Chinese electric vehicles because “Allowing heavily subsidized Chinese vehicles to enter the U.S. marketplace would endanger American automotive manufacturing.”
It’s not hard to show that any gains to domestic producers come out of domestic consumers’ pockets. It’s also fairly easy to show that the reduction in gains from trade for consumers is greater than the increase in gains from trade going to producers and the tax revenue the government enjoys. These videos from Marginal Revolution University walk you through the graphs.
If you scratch an economist, you will find someone more enthusiastic about free international trade than the average person and the median voter. Indeed, 1100+ economists signed a 2018 open letter from the National Taxpayers Union urging the government to abandon protectionism. Unfortunately, the median voter embraces populist demagoguery and votes enthusiastically for tariffs and other restrictions on international trade. The results do not Make America Great Again. They just make us poorer.
Tariffs on foreign goods are “sanctions” on American consumers. Their crime? Not wanting to pay as much as domestic producers want.
READER COMMENTS
Don Boudreaux
Apr 29 2024 at 3:58pm
Art: Well done!
David Seltzer
Apr 29 2024 at 5:58pm
Art: Good stuff. Trumps 10% tariff on all imports is actually 21%. A back of the envelope example. Walmart’s cost per unit of an item is $10. the markup is 10%. The item sells for $11. A 10% tariff means the new cost to Walmart is $11. Maintaining a 10% markup, the item sells for $12.1 The markup percentage on the pre-tariff cost of $10 is 12.1/10 = 21%
john hare
Apr 30 2024 at 4:32am
You’re mixing your factors here for double counting. The cost to consumer went from $11.00 to $12.10. It’s still 10%.
David Seltzer
Apr 30 2024 at 7:27am
I see your point.
Mark Barbieri
Apr 30 2024 at 9:01am
Let’s build on the success of Smoot Hawley and MAPA! Make America Poor Again!
Jon Murphy
Apr 30 2024 at 9:20am
Good stuff. Even if one wants to assume there is an optimal tariff in place, a tariff still acts as a sanction against the consumer, since the burden of the tax is still split between the consumer and the foreign producer(s).* Indeed, because a tariff on imports has an equal effect as a tax on exports, really we can say that a tariff is a sanction on both consumers and producers.
*As an aside, the optimal tariff is misnamed. It only increases welfare because the losses to producers are ignored. It’s bad theory and even worse policy; it is in no way “optimal.” But that is a rant for another time.
Jon Murphy
Apr 30 2024 at 10:43am
The second sentence in my footnote should read “losses to foreign producers.”
David Seltzer
Apr 30 2024 at 10:50am
Jon: Wouldn’t there be a loss to domestic producers? See my post on a 21% markup. If the consumer paid $11 pre tariff and $12.1 post tariff, and demand is elastic, wouldn’t the quantity demanded decrease. At the margin both producer and consumer lose.
Jon Murphy
Apr 30 2024 at 1:15pm
Quantity demanded would decrease, but quantity supplied would increase (as some domestic production replaces foreign production) due to domestic producers being able to get a higher price.
David Seltzer
Apr 30 2024 at 1:23pm
Thanks Jon.
steve
Apr 30 2024 at 11:46am
Speaking as a member of a profession that doesnt always communicate well, I dont think economists have done an especially good job of educating the public about unilateral free trade and tariffs. Granted, it’s a lot easier to just make claims about fairness and how the other side is winning, but the pushback is generally pretty weak. Then throw in a little nationalism and it gets worse.
Steve
vince
Apr 30 2024 at 4:46pm
Or maybe the public is simply rejecting the arguments and it’s a wisdom of the crowds situation.
Jon Murphy
Apr 30 2024 at 6:22pm
This isn’t a “wisdom of the crowds” situation. Wisdom of the crowds is not another name for opinion.
vince
Apr 30 2024 at 8:23pm
Indeed it is:
The wisdom of the crowd is the collective opinion of a diverse and independent group of individuals rather than that of a single expert.
Jon Murphy
Apr 30 2024 at 10:36pm
You’re correct, but note that definition does not apply here.
David Q
May 2 2024 at 12:03am
Vince, it might be a wisdom of the crowds situation, but there are some reasons to be doubtful of the wisdom of the crowds applying in this case. For example, see the arguments in Brian Caplan’s books, “The Myth of the Rational Voter” and “Voters as Mad Scientists,” and Henry Hazlitt’s “Economics in One Lesson.” Especially Chapter 1. It’s unreasonable of me to ask you to read three books.
It’s also unreasonable of me to summarize three books in a few sentences, but here goes: Special interests have a strong incentive to promote policies that help themselves. But dispersed voters have a very diluted incentive to push back. As a result, the special interests get their story in front of the public often, and the dispersed voters do not, resulting in constant misleading of the public, which would hurt the wisdom of the crowds effect from helping.
Furthermore, the general public is on average, swayed by various biases, such that the expected wisdom of crowds is sadly transformed into the foolishness of crowds. One such a bias is “anti-foreign bias.”
The theory of comparative advantage is mathematically proved*, but its implications are counterintuitive. Most people don’t run through the math to try to disprove it, so that either don’t know of it, or dismiss it too soon. The counter-intuitiveness works against the wisdom of crowds helping. The difficulty of explaining the math is not super hard, but it’s not easy, either.
* It’s necessarily mathematically true that if one zone is better at producing one thing, then another zone must be worth trading with to mutual benefit, even if the first zone is better at producing everything. This effect might be swamped by shipping costs or some other factor, but every true analysis of trade must take the theory of comparative advantage into account.
[Actual economists, did I say all that correctly?]
Jon Murphy
Apr 30 2024 at 6:21pm
Once people see all the costs and all the benefits, they reject protectionism. Furthermore, they act and vote as if they understand the benefits (free trade is quite popular. Special interests drive the policy). So, while I think there is some communication issues (as there will always be with science), I suspect it’s not as strong as politicians would prefer.
steve
Apr 30 2024 at 7:37pm
Free trade in the abstract is popular. In polls tariffs are just as, if not more, popular. However, people are actually voting into office people who support tariffs.
Steve
Jon Murphy
Apr 30 2024 at 7:49pm
Given how few people vote and the selection bias, I don’t think voting is that useful a metric.
Furthermore, we don’t vote on policy. It’s a fool’s errand to interpret policy preference from voting behavior. Actions are better indicators.