Regime Uncertainty: Another Substantial Cost of Tariffs

Over the last two months the pace of U.S. foreign policy pronouncements can only be described as dizzying. From pausing and then unpausing aid to Ukraine, to discussions of “reclaiming” the Panama canal and launching a “soft invasion” of Mexico, it’s a challenge to stay up to date.

Nowhere is this more apparent than with trade policy, particularly tariffs. Tariffs are implemented, suspended, increased, decreased, not open for discussion, and then up for negotiation. Other nations retaliate. The U.S. doubles down. It feels like watching an unruly game of dodgeball where the players switch teams at random, the “ball” is an economic grenade, and no one knows when they’ll take that grenade to the face.

All this back-and-forth and uncertainty is a problem—a big problem.

I’ve discussed elsewhere how tariffs—taxes on foreign goods—are harmful to domestic and foreign consumers as well as domestic and foreign businesses. They provide opportunities for special interest to gain immensely at the expense of everyday consumers, foreigners, and domestic businesses that use foreign goods.

These costs are massive. Study after study finds that tariffs are bad news economically. U.S. consumers alone spend billions more as the result of tariffs. It is estimated Trump’s tariffs on Canada and Mexico could cost the average U.S. household over $1,200 a year.

These costs we can measure, or at least estimate, but what about the costs we can’t measure? How do we measure the effects of the uncertainty surrounding trade policy? We could look at stocks. Since mid-February, the U.S. stock market is down significantly. Global markets are down too. But even these measurements underestimate the costs of the uncertainty introduced by our game of “tariff dodgeball.”

Some have suggested that the back-and-forth on policies and the inability to predict what will happen next is akin to Mr. Trump playing “3D or 4D chess.” He’s making political moves so advanced that normal people simply cannot comprehend them. The reality, however, is much different.

In addition to failing to understand the basic laws of economics, the contemporary obscurity surrounding U.S. foreign policy has introduced profound regime uncertainty. Developed by economist Robert Higgs in the 1990s, this idea highlights how people respond when they cannot predict the environment in which they operate. When the government is constantly changing the “rules of the game,” in terms of taxes, regulation, etc., economic activity is stifled. Investors—the people who channel resources into businesses and create jobs—will adopt a “wait and see” attitude, lest they lose when the government changes the rules again.

If I open a business that relies on Canadian imports, will it be profitable? If I open a Colombian restaurant, will I be able to import the ingredients I need at a reasonable price? What about six months from now? Will I be able to import goods from China a year from now? What happens if the European Union implements reciprocal tariffs and my costs rise? These are very real questions faced by today’s U.S. entrepreneurs. Foreign entrepreneurs and foreign governments are also wondering, “is the United States a reliable trade partner? What will happen next” Right now, they can’t discern an answer.

So, they wait.

This indecision caused by unpredictable policy is not good for an economy. Regime uncertainty played a major role in the economic malaise of the 1930s. Similarly, research finds regime uncertainty stifled recovery from the Great Recession. It is wholly possible—indeed likely—that the uncertainty caused by the unclear and everchanging rules regarding trade and other foreign policy will generate real economic harm for the United States. This economic harm is in addition to the costs discussed above. Far from ushering in an era of prosperity, we may find ourselves staring down an economic downturn.

So, what is to be done? Instead of playing multidimensional chess, or dodgeball with economic grenades, our policymakers should abandon their silly and intensely detrimental games regarding trade. They should return to the fundamental lessons of economics. These lessons teach us that trade makes all of us better off. Trade allows us to buy more goods more cheaply. Trade lifts the poorest out of poverty< /a>. And for those concerned about peace and conflict, trade makes us less likely to fight too. Should policymakers fail to do this, expect things to get worse, not better.