Tariffs Are Bad

Tariffs Are Bad

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Alex Haney, Fiscal Policy Contributor

In the realm of economics, conservatives and libertarians often find themselves on the same side. As a generality, excessive taxation is seen as a bad thing that unfairly punishes the monetarily successful for being monetarily successful. Of course, taxation at some point becomes too much of a burden on business owners, and the business is no longer able to function. The point at which that becomes true varies from business to business, but is generally true once expenses outweigh profits. The point of a business is to make profit, after all. Businesses exist to create profit, without which there is no incentive to take the risk of investing. Businesses are not created to provide a service, though the free-market dictates that this ends up being the case as a means to an end. The model of a successful business can be boiled down to one simple phrase: provide or fail.

Provide or fail. Give people something they want, and make it competitively priced. If a company is unable to do so, then it will not make money, and it will ultimately fail. Such is the nature of supply and demand, and what we may call “Darwinian Economics.” Those taxes levied on such businesses, especially small businesses, stall growth, impede progress, and remove incentives. 

If you’ve patiently gotten through my opening soapbox, I’ll get to the point. The point is that tariffs are nothing more than taxes, and they end up devastating trade and the market at large. 

When a tariff is put into place, it raises the price of goods coming into a market, and makes it more expensive to buy imported goods. The idea is that domestic goods will be more affordable, thus driving up demand. Protective tariffs were used in the early days of the United States in order to protect local farmers and producers, while the market was being set up. Though the intent and the short-term logic are both good, the long-term effects are what cause damage. In fact, protective tariffs were one of the leading causes of the American Civil War. Southern states typically specialized in creating raw materials, whereas the industrial northern states specialized in producing manufactured goods. Federal tariffs made it more expensive for southern states to buy from the north, severely stagnating economic growth in the south. It’s speculative, but it is entirely possible that the Civil War (and slavery) could have been avoided or ended sooner, respectively, had tariffs not been in place. 

In practice, tariffs do little more than drive up the price of goods for consumers. A company does not just eat the excess costs imposed by tariffs, but it passes them on to consumers. One might argue that this accomplishes the goal of driving up demand for less expensive (by synthetic design) domestic products, and would be right in a perfect scenario. However, no country produces everything it consumes. This is where the theory of specialization comes in. Adam Smith’s theory of division of labor states that each entity (in this case, individual countries) is able to specialize in a particular area, and that it is beneficial to all involved to specialize. 

Naturally, this leads to some questions, but those are typically easily answered. Consider the United States and Costa Rica for a quick, admittedly oversimplified example. Costa Rica exports both bananas and pineapples. Let’s assume the United States can only produce four things: cars, flags, timber, and bananas. The US can produce 50,000 bananas in a year, and 20,000 cars. It makes $1.00 per banana, and $100.00 per car, in profit. If it no longer produced bananas, it could make an extra 10,000 cars. Costa Rica can produce 20,000 bananas per year, and 5,000 cars, or 30,000 bananas. Both countries would benefit from specialization. If the US stopped making bananas, it would make more money in the added number of cars it could make, and still make a profit when importing bananas from Costa Rica, which could in turn make more money by exporting the added number of bananas it could produce. Even though the US could make more bananas than Costa Rica, it would miss out on potential profits by not specializing. This also brings into the conversation “marginal cost theory.” better explained here, marginal cost is the cost for a producer to make one additional unit of a product. Trade partners find a point at which both parties can achieve maximum profit margins by engaging in such mathematical calculations.  

Tariffs disrupt this natural balance of trade. 

Tariffs do not only bother economic theory, though. They tend to disrupt interpersonal relationships, as well, furthering the effects on trade. History gives us numerous examples of human nature being added to basic trade relationships. This mix regularly ends up making things remarkably worse in practice than economic theory could even predict. American history is absolutely rife with examples of tariffs harming the economy. Most detrimental may have been the Smoot-Hawley Tariff Act of 1930. Imposed  after the stock market crash which led to the Great depression, the goal of the act was to keep money in the United States market. Congress passed the act which made it nearly impossible to buy from foreign countries. While that did result in the protection of a few specific American companies, it had much wider ranging effects on the other end. The Act and following retaliatory tariffs by America's trading partners helped reduce American exports and imports by more than half during the Depression. Smoot-Hawley rendered agricultural capital useless, due to retaliatory tariffs, and “each of the ten largest world economies had their secondary financial markets crash.” By insulating the United States, one of the richest, largest markets in the world at the time, from the international market, the act effectively sent Europe into an economic tailspin, culminating in World War II. The synthetic restrictions on trade not only failed to help the US economy, but effectively laid the financial groundwork for the worst conflict in human history. 

The lesson to take away is that while barriers to trade often help very specific markets, they irreconcilably harm much wider swaths of people through the very methods deemed to help others. It is necessary to study long-term effects of any action, not just the implementation of a tariff, and not focus solely on perceived short-term gains. Our leaders and economic policy-makers need to be aware of economic theories as examples of thought, and history for examples of practicality. In the end, when markets are left to govern themselves, they necessarily balance out. Tariffs only impede that natural order.     

Follow this author on Twitter: @AlexanderT_G_

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