An eye for an eye makes the whole world blind, its said. A tariff for a tariff makes the whole world pooror at least poorer than it would otherwise be. Earlier this month I, along with more than 1,100 other economists, signed an open letter to President Trump urging him to reconsider his trade policy.
Today, the Wall Street Journal reported that, against the logic of the basic economics of international trade, the US is proceeding with tariffs on steel and aluminum. Its not just China in the crosshairs: the US is targeting aluminum and steel from Canada, Mexico, and the EU.
Unfortunately, political leaders in Canada, Mexico, and the EU have decided to meet folly with folly by imposing tariffs on American goods. President Trump is working diligently to Make America Poor Again by reducing trade with foreign countries, and leaders in these countries are turning their guns...inward, toward their own people, and making themworse off by imposing tariffs on American goods.
If I were Canadian, Mexican, or European, I would be upset: no matter what Americans do, their best move is still unilateral free trade. And yet the Wall Street Journal reports that
Mexicos Economy Ministry said it would target several U.S. goods in response, including some steel and pipe products, lamps, berries, grapes, apples, cold cuts, pork chops, and various cheese produces up to an amount comparable to the level of damage linked to the U.S. tariffs.
But who really gets hurt by Mexican tariffs on American cold cuts? The answer: Mexicans. Who really gets hurt by Canadian tariffs on American steel? Canadians.
How? First, Mexican cold cut buyers obey the law of demand. Higher prices on cold cuts mean Mexican consumers get fewer cold cuts. The difference between what Mexicans were willing to pay and the tariff-free price of the cold cuts they are no longer able to consume is a loss to Mexican consumers.
Second, Mexican suppliers obey the law of supply. In response to higher prices, Mexicans make more cold cuts in Mexico. The loss to Mexicans comes from the fact that they tie up resources producing cold cuts in Mexico that would have been cheaper had they simply imported them from Americans.
The new tariffs also highlight an important political problem. Economists have been saying this is inefficient and this makes us worse off and the best reaction to another countrys tariffs is to...do nothing for a couple of centuries now, but we keep having the same conversations over and over and over again.
Political incentives are to blame. Tariffs do help special interests, and their incentives to seek profit-protecting tariffs that hurt domestic consumers can be overwhelming. Economics suggests that people will continue to do things for as long as the benefits exceed the costsand as long as the benefits of lobbying for tariffs exceed the costs, we can expect firms to lobby for tariffs.
The cruel irony is that all of the benefits of the tariffs to domestic producers can be wasted in lobbying and political jockeying for tariffs and other protection. The fantastic amounts of time and energy expended by expensive lobbyists in K Street offices to persuade politicians to adopt restrictions on international trade? Its pure social waste. Its beneficial for the lobbyists and beneficial for the firms that increase their profits thanks to tariffs, but every dollar of additional income to a tariff-protected firm is a dollar that comes out of American consumers pockets.
On the whole, tariffs make us worse off, and the right response for Canada, Mexico, and the European Union to American tariffs would not be to retaliate with tariffs on American goods but to look for ways to make it less beneficial for firms to seek tariffs in the first place.
|Art Carden is a Research Fellow at the Independent Institute and an Associate Professor of Economics at Samford Universitys Brock School of Business.|