The Tattered History of Tariffs

Much like bell-bottom jeans, tariffs are making a comeback. President Trump imposed tariffs on about $380 billion in products in his first term. The Biden administration kept most of those tariffs, then expanded them for China-made goods, including computer chips, steel, and aluminum—and quadrupled tariffs, from 25% to 100%, on electric vehicles(EVs). And Trump II seems committed to doubling down. Two weeks into his second term, he announced an additional 25% tariff on our friends and neighbors, Canada and Mexico, and 10% on China, neither a friend nor a neighbor. Trump then threatened 25% tariffs on Colombia if it refused to accept deported immigrants on military planes.

En route to the Super Bowl aboard Air Force One, Trump also announced plans for a 25% tariff on aluminum and steel. Guess what Air Force One is made from? It’s unclear whether those tariffs will replace or be added to existing tariffs. One thing everyone can agree on is that no one knows what’s going on. Chaos, policy uncertainty, and economic ignorance abound. Domestic steel, aluminum, and EV producers may celebrate these moves, but economists agree that we shouldn’t break out the champagne.

Tariffs have long been politically appealing despite their controversial history. They are part of what Adam Smith called the “mercantile system,” which he criticized. It was the dominant economic policy in western Europe from the 16th to the late-18th century. The underlying belief was that bringing gold and silver into the country through exports would secure domestic jobs and strengthen the nation. Both historical and modern mercantilists focus heavily on “trade deficits,” operating under the assumption that imports harm the economy.

Adam Smith and David Ricardo offered an economic theory to challenge these assumptions. Smith wisely pointed out that producing what you can more cheaply purchase from someone else is imprudent.

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The [tailor] does not attempt to make his own shoes but buys them from the shoemaker. The shoemaker does not attempt to make his clothes, but employs a [tailor]. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbors, and to purchase with part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for. It is an acquired advantage only, which one artificer has over his neighbor, who exercises another trade. Yet, they both find it more advantageous to buy from one another than to make what does not belong to their particular trades.

Economics is about stewardship; we must economize on our scarce resources and put them to their most productive uses at any given time. Autarky, or self-sufficiency, is the road to poverty. Trade allows us to economize on our time, treasure, and talents and get the most out of life by getting more from less. David Ricardo introduced the concept of comparative advantage, which requires us to compare relative opportunity costs across people and exchange accordingly. Ricardo opposed his day’s protectionist British Corn Laws, which restricted wheat imports through heavy tariffs. He argued that a nation accumulates wealth through free and open trade. We become richer individually and as a nation when we trade for products that we can acquire at a lower relative cost from people in other countries rather than making them ourselves. This inspired a British free-trade movement led by Richard Coben and others, who argued that wealth and peace, doux commerce, could best be obtained through free trade based on mutual advantage.

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America was founded on the idea of free and open trade. As Samuel Gregg argues, “Key American Founders sought to create a republic in which the habits and institutions of commercial freedom, industry, enterprise, competition, and trade would be integral to its identity.” Even so, early voices advancing protectionism, such as Alexander Hamilton and Henry Clay, insisted that tariffs be used to protect infant industries.

Trade economist Doug Irwin points out that political support for U.S. tariff policy has always waivered. Prior to World War II, Democrats were the party of freer trade. At the same time, Republicans supported high tariffs, such as the disastrous Smoot-Hawley Tariff Act of 1930. By the mid-20th century, Republicans began to support free trade. Since the 1993 North American Free Trade Agreement (NAFTA), Democrats have become more opposed to free trade based on opposition from organized labor unions. Today, the “New Right” is deeply skeptical toward free trade and free markets, supporting tariffs and other industrial policy measures. Economics, however, demonstrates the false hopes and devastating consequences of tariff policies.

Simply put, they cannot achieve their desired outcomes. Defenders promise that tariffs: don’t involve reciprocity, will reduce fentanyl trafficking, will reduce the deficit, and will raise sufficient revenue to eliminate the income tax. Oh, and foreigners will bear the real costs. But the math ain’t mathing here. If tariffs could do those things with little to no cost to the United States, we would see exorbitant tariffs everywhere. To summon Oprah Winfrey: You get a tariff and you get a tariff. Tariffs for everyone!

Maybe the truth is stranger than fiction. Economic analysis often involves myth-busting because the economic way of thinking is not intuitive; it must be studied, understood, and applied. Moreover, public opinion favors free trade in the abstract but is skeptical about the various specifics of trade policy. Yet economists universally agree that free trade is beneficial; you can read more here, here, here, and here. The Smoot-Hawley Tariff was viewed as so calamitous that over a thousand economists signed a joint letter printed in The New York Times asking the Hoover administration to veto the bill, to no avail. Thus, it sounds appealing when politicians argue that tariffs are somehow costless or so low-cost that we should use them to solve all of what ails us.

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What is a tariff, anyway? Donald Trump says it’s “the most beautiful word in the dictionary.” Insert exaggerated eye roll here. A tariff is a tax on goods imported from another country and, thus, a trade barrier that raises prices and creates an economic burden. Tariffs penalize voluntary exchange by making it more costly for consumers to acquire desired goods.

Trump’s first-term tariffs amounted to an $80 billion tax on American consumers and producers. The Tax Foundation estimates that the new Trump tariffs will shrink economic output by .4% and increase taxes by over $1 trillion between 2025 and 2034, amounting to an average tax increase of $800 per household. Protectionism is costly, and it creates winners and losers. Tax economist Erica York points out that the economic burden of tariffs varies and can be borne by some combination of American consumers, businesses, and foreigners who export the goods. She adds that most 2018 and 2019 tariffs were passed on to consumers, resulting in higher prices and reduced export growth. Thus, American consumers bear the tariff (tax) incidence, reducing consumer surplus and overall welfare. Moreover, exports and imports move together, known as the Lerner symmetry theorem. A tax on imports is equivalent to a tax on exports. The biggest losers of tariff policy are exporters (American firms). As Doug Irwin explains:

Some participants in the debate on trade tend to believe that a country’s exports and imports are independent of one another, and therefore, one can reduce imports without hurting exports. Exports and imports are the flip side of the same coin. Exports are necessary to generate the earnings to pay for imports.

We now have arrived at the heart of the matter. Tariff defenders believe that trade is a winner-take-all, zero-sum game. However, trade is not a football game with one winner. Trade based on voluntary agreements between the producer and consumer is win-win. The zero-sum game mentality would argue that we lose when we purchase energy from Canada, avocados from Mexico, or steel from China. Adam Smith reminds us that the opposite is true. We gain when we don’t have to make at home what is cheaper to outsource; this frees our time for more productive endeavors. Americans are the workers with the highest levels of productivity. Since 2000, American workers have produced 60% more stuff and have increased their working hours by only 10%. Productivity for the win!

Yet the zero-sum mentality prevails and results in a convoluted misunderstanding of the term “trade deficits,” which occurs when a country imports more than it exports and is part of how we calculate gross domestic product (GDP). Tariffs can reduce imports, but they also reduce exports. The bottom line is that tariffs will not lower our trade deficit, and the data confirm this: From 2016 to 2023, the trade deficit remained relatively unchanged in the face of the Trump and Biden tariffs.

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As if this were not all bad enough, tariffs result in such unintended consequences as retaliation and distorted trade and production patterns. In the wise words of Thomas Sowell, “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” There is no free lunch here. Tariffs result in trade diversion, whereby imports shift from relatively lower-cost countries to relatively higher-cost countries. This means we divert resources to less productive uses, increasing production prices and costs. Guess who pays the bill? American producers and consumers. Steel prices started rising even before Trump announced the tariffs.

But wait, there’s more. Tariffs create winners and losers. The most prominent proponents of tariffs are special-interest producers who seek to limit competition to gain an above-market profit at the expense of consumers. American workers who stand to benefit from a 25% tariff on aluminum imports are outnumbered 177-to-1 by American workers in downstream industries who are harmed. Concentrated benefits and dispersed costs ensure that these tariff deals will be sweet and enduring for a lucky few only.

Since the 1970s, U.S. steel companies and workers have received more government assistance than has any other industry. Moreover, these tariffs will increase U.S. manufacturers’ costs, reducing their competitiveness. They also result in job losses. Steel is produced by a few firms but used as an input for many more, so the economic damage is widespread. The 2018 steel tariffs created 1,000 steel-producing jobs at the cost of 75,000 jobs in industries that usesteel.

Finally, all these tariff threats immediately result in retaliatory tariffs, as we saw with Colombia, Canada, Mexico, and China. For now, Mexico and Canada have paused their retaliation for 30 days, whereas China is proceeding. Even trade wars we end up not fighting create costs and uncertainty. Lest we forget, Canada, Mexico, and China are our top trading partners, and the first two are friends and neighbors. It makes no sense to get into a prolonged tit-for-tat war. It’s like the bully in the schoolyard who walks over and shoves you, and you stand your ground by pushing back. This escalates and leads to mutual misery. China may not be an ally, but what if free trade with Chinese citizens (not their government) is one way (not the only way) to build peace and generate shared prosperity?

Milton Friedman believed this and argued that unilateral free trade not only paves the way to peace by reducing government involvement in the economy but also allows us to be an example to the world. It is said that “war is the health of the state,” yet we know wars destroy. Tariff defenders seem to believe that “trade wars are the health of the state,” yet they, too, destroy wealth and well-being. It’s time to put tariffs where they belong: into the dustbin of history.

By Anne Bradley , Acton Institute affiliate scholar; vice president of Academic Affairs at The Fund for American Studies ; and professor of economics at Institute of World Politics