I think most people get that Trump’s plan to impose very high tariffs if elected is a bad idea, a very bad idea. He seems to think tariffs on imports are paid by foreign countries rather than by US residents (Heather Cox Richardson, in a post on how Trump’s citing the McKinley era as a great one is bonkers, thinks this is a deliberate lie by Trump - honestly I can’t tell when he is lying and when he is just dumb). JD Vance thinks when it comes to tariffs, economists don’t know what they are talking about, but, actually we do - they will raise prices for American consumers, they will not boost the economy.1
But whilst HCR got into the history of late nineteenth-century trade policy, I want to look at the worldview that leads to it. High tariffs don’t work in practice, I want to show how they don’t work in theory either.
In a nutshell: Trump sees the US economy as analogous to a really big commercial firm. I know from teaching introductory economics that this is a common, popularly-held error, especially from people in the world of commercial business, many of whom are quite smart about business management and strategy, and many of whom, I predict, would vote Democrat in the coming election, Trump’s overwhelming number of bad qualities outweighing his trade ideas which they think are not entirely horrible. It is a view that I sometimes see on television news shows devoted to business and economics, and was most strongly advocated by Lou Dobbs, who I think was one of the few people Trump actually respected as a knowledgeable, sympatico fellow.
Look at how Trump talks about trade, and especially “deals”. He sees a trade agreement, say the one formerly known as NAFTA, as a business agreement between three “firms” - the US, Canada and Mexico - and they are a bad deal if they don’t favor the sales made by the US. Trade, in this view, is not mutually beneficial. In this news clip, caught by the invaluable Aaron Rupar, Trump says that sure, South Korea is an ally in a sense, but on trade “it is an enemy”.2 When it comes to the economy, The US and Korea have a relationship just like Ford and Hyundai, and Trump is here to boost sales for “his” company.3
So what’s wrong with this? Why shouldn’t we think of the US economy as a firm?
It is because the US economy has many thousands of firms. They can expand and contract, come into being or shut down. The US economy has a labor force, infrastructure and capital, and businesses will expand or contract according to the market conditions in their sector, to their own innovations, and the like. Workers move to where they find the best real wage offers, capital goes to what appear to be the most promising investments in terms of profits. For ordinary traded goods and services, markets actually do a pretty good job of employing labor and capital in their most valuable uses.
When jobs in a particular sector decline, either through shifts in demand away from that product, or labor-saving technological change in the manufacturing process, or that other countries can produce that particular good at very low opportunity cost, people go to work elsewhere, where their labor is more valuable. That’s how real GDP grows. But the key here is that there are many, many firms.
If a political leader starts to think of the US as one big firm, trying to maximize domestic production and sales, they miss the fact that the economy will already be pretty decent at doing that. It is already the case that investments and expansion are going to where the opportunities are greatest. Tariffs interfere with that - they steer investments not to where they are actually most valuable, but to where tariff policy has made domestic production in a sector artificially valuable because the price of imports has been boosted by government.
As I write this, I am wearing a tee shirt made in Bangladesh. There is not a lot of tee shirt manufacturing going on in the US, because in this economy it is not a very valuable sort of investment - labor is too expensive to make any profit manufacturing tee shirts in the US. Now suppose we put a 300% tariff on all imported tee shirts. First off, that would make tee shirts a lot more expensive.4 Second, some entrepreneurs in the US might say “the price of tee shirts is so high right now, I think I’m going to start making them here.” That is the appeal trade protectionists are trying to promote. But here’s the problem: where are the new tee-shirt making workers going to come from? They are going to come from other jobs they were doing that actually were valuable. They are going to move from a higher value occupation to a lower-value one, albeit one artificially boosted by the government. That’s why economists don’t like tariffs - they lead to a misallocation of jobs, and our labor being devoted to producing whatever is favored by tariff policy rather than what actually had a high production value. National income falls.
That’s what the the-country-is-one-big-firm gets wrong: it assumes we can just expand the scale of our national firm. But we can’t. A national economy is about ensuring resources are employed in valuable ways. A firm can double, triple in size by getting more “deals.” But a country cannot do that.
Trump/Vance have made tariffs their centerpiece. Opposition to this idea rightly reminds people that the tariffs are paid by US consumers, not foreigners. And that tariffs raise prices - indeed tariffs depend on rising prices to shift jobs into the protected sectors; if tariffs didn’t affect prices, we wouldn’t see shifts in US production. These are right and proper criticisms.
But they miss the main point: tariffs make a country poorer, not richer, by shifting production into sectors where it would be less valuable.
A last point. What if there are some market distortions, where due to imperfect competition, externalities and the like, our allocation of labor and capital sans tariffs is in fact not close to perfect? Are there not a set of carefully targeted tariffs that could do some good? I’m willing to grant that - through grad school we learned nothing if not the limitless avenues for looking for second-best policies. But here’s the thing: in the real, political world, if you open the door to a policy of tariffs, you are not going to get those very carefully targeted tariffs, especially in an executive confident in their belief that economists don’t know what they are talking about. You will get tariffs based on impulse, lobbyists with access, off-the-cuff thoughts during a television interview. The best reason for adopting a leaning towards trade free of tariff and quota barriers is not that it is perfect, but that the true alternative is so very much worse.
I often see posts on Substack from the right-wing saying “look how left wing academics are: they all vote Democrat!”. They don’t explore why people who make a living studying issues in depth would want to vote for a party whose opinion of the academy is that they don’t know what they are talking about, or, again from Vance, that they are in fact the enemy. What is the appeal supposed to be?
I searched for reference to this quite outlandish comment in the New York Times and the Washington Post - no luck. Which is something.
Note in that Trump clip he says in passing not that the Japanese government paid the United States, but they paid him. It’s a telling comment.
Yes, JD Vance, I do know what I am talking about.