Protectionists’ Illogic Knows No Limits
Here’s a letter to American Greatness. I respond to this embarrassingly weak piece only because it was sent to me by about a half-dozen people, three of whom find it – befuddlingly – to be compelling.
Editor:
Spencer Morrison’s attempt to justify Trump’s tariffs is a cascade of confusion (“How Tariffs Will Lower the Cost of Living,” March 18). Consider this paragraph:
First, a tariff is a tax imposed on imports. For example, a 25% tariff on steel would increase the price of steel coming from Canada or South Korea. However, that same tariff would not apply to steel that was made in America. In this way, tariffs are a completely avoidable tax. If you do not want to pay tariffs, buy American. Simple.
Morrison, while here recognizing that tariffs raise the prices of imports, is unaware that these higher import prices allow domestic producers to raise their prices; indeed, the very logic of protective tariffs requires that these duties enable and encourage domestic producers to raise their prices. Therefore, contrary to Morrison’s naïve assertion, Americans cannot avoid paying the tariff tax by buying American.
But in the very next paragraph, although Morrison begins by acknowledging that tariffs raise the prices of imports, then argues, starting in the same sentence(!), that they don’t:
Not only do tariffs create an incentive for consumers to buy American, but they also create an incentive for foreign producers to lower their costs. If countries like China or Mexico want access to America’s market—which they certainly will—then they will have to find a way to reduce their costs to balance out the tariff. Ultimately, lower production costs will benefit everyone.
The only way a U.S. tariff will “create an incentive for consumers to buy American” is if it raises the prices charged by foreign suppliers. But if foreign suppliers “reduce their costs to balance out the tariff” and then pass along those lower costs in the form of lower prices – as Morrison’s argument requires they do if the tariff “will benefit everyone” – then the tariff provides no protection to U.S. producers. The full cost of the tariff is absorbed by foreign producers.
If – contrary to fact and to design – U.S. tariffs would be fully absorbed by foreign producers, that outcome would indeed bestow on us Americans a net benefit as it would mean that foreign producers dramatically lower the prices they charge for their exports. But it’s unclear, to put it mildly, why Pres. Trump and his fellow protectionists would approve of this outcome given that one of their chief complaints is that foreigners sell as much as they to Americans only by charging “unfairly” low prices. Surely Mr. Trump would not wish to aid and abet foreign suppliers in further lowering the “unfairly” low prices at which they sell to Americans.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
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