Free Trade Fallacy

As expected, President Trump has kicked off his second term with a bold approach. His use of tariffs has sparked political manoeuvring and caused some stock market volatility. But is there really such a thing as free trade in a world filled with externalities? And if not, don’t tariffs play a role in levelling the economic playing field?

Fentanyl serves as the backdrop for Trump’s latest tariff moves. In 2022, the Lancet reported that roughly 82,000 people in the U.S. tragically died from fentanyl overdoses, resulting in an estimated 3.1 million years of life lost. If we apply the Value of Statistical Life Year (VSLY) model, this translates into a minimum annual social cost of $500 billion for U.S. society. Now, if Mexico, Canada, and China are seen as the primary culprits (even though they aren’t solely responsible), and (if) Trump is using federal tax revenue to address the fentanyl crisis, then the tariffs might not be high enough. According to the Tax Foundation, these tariffs could generate around $100 billion annually, but economic theory suggests that the tax should equal the full social cost. So, sorry, Mexico, Canada, China—and U.S. households (who will face higher prices).

While this is a simplified analysis, it helps shed light on the illusion of free trade. The reality is that true free trade doesn’t exist. Every country’s production creates social costs—whether through labour exploitation, environmental degradation, or other factors—that get passed on through trade. In essence, a country’s social costs are subsidizing their production costs, making their goods and services appear cheaper and more competitive. Without tariffs, this isn’t free trade; it’s a distorted version of it.

The real basis for competitive advantage lies in a country’s natural and human capital, and the investment made to develop those assets.

Until national production standards are harmonized, free trade is a myth, and tariffs (although no panacea) can play an important role in levelling the economic playing field. While this might not be the primary aim of Trump’s tariffs, they help highlight just how far we are from true free trade. #value2society