Proponents of protectionism have claimed for centuries that they inspire domestic production and beef up industry. These claims are decidedly false. You can look at the vast literature that proves Adam Smith’s claim: prosperity follows the extent of the division of labor. The more inclusive and expansive the trading is, the more everyone benefits.
Protectionism cuts off opportunities for gains from trade. It also reduces the right incentives for improvement while disabling the signaling that stems from competition. You can know this from intuition. Does less competition in industry – that’s really all that protectionism achieves via making borderless trade more expensive – make business stronger and more innovative or weaker and relatively stagnant? A country that punishes imports rewards companies for not improving.
But one claim made by protectionists that is not obviously false is the following. It is a good way to raise money for the treasury. It’s a form of taxation, yes, but one that is lucrative for government. Many protectionists will cite the experience of the U.S. in the 19th century and conclude that tariffs are a less invasive way to raise money for government than the income tax – which might be true if that were really what we are comparing.
However, whether and to what extent tariffs raise money for government overall really is an empirical proposition worth investigating. This is precisely what Benn Steil and Benjamin Della Rocca of the Council on Foreign Relations have done. Writing in the Washington Post, they test two propositions: 1) China is lowering prices in response to tariffs and hence they and not us are paying, and 2) tariffs have resulted in a huge revenue windfall for the US Treasury.
Here is their on-the-ground analysis:
Given that tariffs last year raised the import costs of Chinese goods roughly 6 percent on average, if Chinese firms had cut prices to offset Trump’s tariffs the index would have fallen 6 percent since last June — when the trade war started. Yet the index has fallen barely 1 percent, and at least some of that tiny decline can be explained by Chinese currency depreciation — which makes Chinese goods cheaper for U.S. importers. There is, therefore, no evidence supporting Navarro’s claim. Americans are, in fact, bearing the burden of Trump’s China tariffs.
Trump’s second claim is that tariffs are “filling U.S. coffers.” China tariffs, recall, were allegedly bringing in “hundreds of billions of dollars.” Yet this, too, is false. Government data show that they netted just over $8 billion in 2018. Extrapolating forward through the end of May, total revenue from Trump’s China tariffs has therefore been about $20 billion — a small fraction of what the president asserts.
More important, as of May, Trump has authorized nearly $26 billion in compensation to U.S. farmers for the losses they have suffered to date from Chinese retaliatory actions. This compensation is $6 billion more than the total estimated China tariff revenue. Far from “filling U.S. coffers,” then, Trump’s tariffs have been draining them at an accelerating pace.
To sum up, Chinese companies have not responded to tariffs by cutting prices equal to the new tax; moreover, the tariffs have cost the U.S. Treasury to a greater extent than it has taxed Americans, simply measured by the subsidies paid to damaged industries. So even on the empirically contingent claims of the good tariffs can do, 18 months of real-time experience with tariffs have led to demonstrable failure.
This doesn’t include the piling up of other costs. As AIER demonstrated in a comprehensive study of 2018 tariffs, the tariffs have nearly reversed the 2017 tax cuts, importers have managed to pass most costs to consumers in the form of higher prices, and there is no evidence that a single sector of American business has actually benefited. U.S. producers have lost markets, lost supply chains, and lost confidence in US reliability as a trade partner.
It’s hard to come up with a single good result from this experience except that perhaps that we are again reminded of what we learned in 1930 but then forgot and had to relearn against in the 21st century. Tariffs have no redeeming value: they are bad economics and bad policy.
Let me conclude with a long overdue mea culpa, one of which I’m reminded to make because of the death of Ross Perot. He was a huge opponent of NAFTA. At the time I thought he was right but for the wrong reasons; his “giant sucking sound” was a myth, but the NAFTA deal was still not the right kind of free trade. What I didn’t understand at the time is that the political choice was not actually between managed and free trade; it was between managed trade that is marginally freer and all-out mercantilism. The champions of NAFTA knew what I did not: old-fashioned protectionism could come back absent an agreement such as this. They were right and I was wrong. And of course, in the end, NAFTA didn’t protect anyone against the rise of a regime that cares nothing for agreements or commercial ideals.
As we look at the state of trade today, and US policy in particular, we can see that the trade agreements of the 1990s were trying ultimately to realize an expanded global market. Yes, it is absolutely true that unilateral free trade is the right policy while these deals are an expedient. But the need for trade is such an imperative that it is probably wiser policy to negotiate agreements, at the very least, rather than risk a drive toward autarky under the mistaken view that this is some kind of good national policy.
Let us at least learn from the real-time history and experiment in process right now. Let us look at the facts and compare them with the promised results.