Economics 101: consumers always pay for tariffs
If there’s one thing every economist agrees on, it’s that the only people who benefir from tariffs are cynical politicians, says Daniel Freeman
Economists almost never agree on anything. Even if you ask a single economist their view on a subject they will generally give you at least three contradictory positions.
This makes the overwhelming consensus among economists across the political spectrum in favour of free trade and against tariffs – taxes on imported goods – all the more remarkable.
The reasons for this consensus are numerous and well evidenced: tariffs result in higher costs for your own consumers and producers that buy foreign inputs, they shift investment and labour away from more productive industries into less productive ones, and they reduce the specialisation which drives much economic growth.
And yet the world’s largest economy under the leadership of President Trump is now heading in the opposite direction. The US has now imposed tariffs on various countries and goods. The UK is expecting to be hit by a 25 per cent on all cars imported into the US from today.
Trump’s protectionist argument goes like this: for decades the US has been reducing tariffs and buying more goods from abroad. This weakened the US manufacturing sector as Americans chose to buy more foreign goods that are cheaper, higher quality or both.
It also means the US runs a trade deficit (meaning it imports more than it exports) with many countries. This is a bad thing because the US is sending them more money than they’re using to buy goods from America.
The solution to both these problems, they say, is to raise tariffs making foreign goods more expensive for American consumers and therefore boosting demand for US produced goods.
There are numerous issues with this. While it’s true that the US, like most other rich countries, buys more manufactured goods from abroad than they once did. But this has not been accompanied by a long-run rise in unemployment or reduced growth, in fact the result has been the opposite as people and investment have shifted into higher value sectors in which developed countries have more of a competitive edge.
The idea that running a trade deficit with another country is a sign you’re being taken advantage of is absurd. You could just as easily say that I must be being conned by my nearest Chinese takeaway, because I’ve spent hundreds of pounds there and yet they have never bought anything from me.
The economic equivalent of snake oil
So why do politicians support the economic equivalent of snake oil?
Partly there is a nostalgic element to protectionism, particularly in the US. Trump has made repeated references to the high tariffs of America’s late 19th century Gilded Age as a model to follow – even if the work of economic historians like Douglas Irwin and Alex Klein has shown the US industrialised in spite of a high tariff regime not because of it.
But there is an appeal to tariffs in that they allow politicians to pose as defenders of certain industries while the cost of doing so is diffused across society and therefore less likely to be noticed.
An example of this is the first Trump administration’s imposition of tariffs on washing machines. This did lead to the establishment of a few new washing machine plants in the US which was of course trumpeted as a great success for the tariff regime. What was less obvious was (as a later study found) that every additional job in the US manufacturing cost American consumers over $800,000 (£627,000) in higher costs per year.
Tariffs make people dependent on the state maintaining the tariff regime and therefore more likely to support the politicians who impose them in future. Trump may cynically claim that the bill is being paid by foreigners. But the reality is that trade enriches everyone and when it is choked off, especially in an arbitrary and random way, we all pick up the tab.
Daniel Freeman is managing editor at the Institute of Economic Affairs