No, Mr. President, Tariffs Do Not Cause Prosperity

Published May 10, 2019

Maybe that dance I performed in my living room caused it to rain. Maybe the tie I wore today caused the tulips finally to bloom. Maybe holding my left ear this way causes this website to work better. And maybe tariffs have caused American prosperity.

Or maybe I just have very goofed up ideas about cause and effect. The Latin phrase is post hoc ergo propter hoc. It means, after this and therefore because of this. It is not an explanation. It is a fallacy.

The prospect that the US president would conclude that tariffs cause growth has always been the downside of good economic numbers. Good performance of the macroeconomy only encourages his worst instincts to impose very harmful policies.

After the historically amazing jobs numbers came out on May 3, 2019, I wanted to celebrate. But I also knew that there resides in the White House a person who calls himself “tariff man.”

For some 40 years, Donald Trump has believed that tariffs are the path to making a nation great. He stated this over and over during the campaign. This view might be classified as one of his few consistent positions throughout his public career (along with his appreciation of eminent domain and immigration restriction). He said it a thousand times. He is massively invested in the idea.

As good numbers have poured in, he has only been reinforced in his view. And so, on the eve of restarting negotiations with China – the representatives of which have decided that the US president does not negotiate in good faith – he tweeted the following.

For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!

Two huge problems here: 1) China does not pay tariffs; the consumers of imported products do, i.e. American businesses and consumers; 2) there is no world in which taxing your own people and hobbling their trading relationships creates more wealth. 

Notice that even Trump understands how much markets hate this news, which is why he dropped this bomb on Sunday when the markets were closed. Dow futures crashed. 

The trouble here for the China negotiations, scheduled to restart this week, is this. The Wall Street Journal embraces hope over experience in saying: “The move may be a gambit by the president to use his unpredictable negotiating style to apply last-minute pressure to negotiators.”

Sadly, there is no evidence that this is a tactic. There is plenty of evidence that Trump believes more tariffs are better. Hence, no matter what China does or agrees to, the president believes with all his heart that taxing American producers and consumers for buying goods that list China as the country of origin is somehow magically causing American productivity to rise.

There might be some economic model in which restricting trade with another will cause a statistical shift in what it is we want to measure. For example, let’s say you want me to cook more. Restricting my ability to go to restaurants will likely cause my cooking to rise in frequency. Further restricting my ability to buy groceries will cause my tendency to raise my own vegetables to rise.

None of this means that I’m richer. This same point applies to national units – ever less meaningful in a massively gobalized economy – as well.

Regardless there is absolutely not a shred of evidence that the tariffs have caused American prosperity to rise. AIER did a comprehensive study of 2018 tariffs to conclude the following:

  • The 2018 tariffs directly claw back a quarter or more of the savings American households and firms realized from the 2017 cuts in individual and corporate tax rates.
  • U.S. importers passed a large portion of the new tax burden they directly faced onto consumers.
  • While protectionists claim that tariffs are necessary to shield important domestic industries from competition, data from the steel and aluminum industries provide no evidence that these sectors have realized any gains.

Historical counterfactuals are impossible in something as complex as economics. But one might imagine even more growth and more jobs gain had the tariffs never been in place. Looking back over the last year, the softening of markets has often coincided with fear over the trade war. Traders have been trying to be optimistic that the Trump administration really wants some deal. But, as I’ve written repeatedly, there is little basis for this hope.

Sorry to quote me:

The key to understanding the shifts, the changed terms, the amped-up demands, the constant new threats, the overturning of rules and agreements, the unending chaos of trade policy over the last year is the following truth that few want to accept: the U.S. president believes in his heart of hearts that tariffs are a good and productive thing and that autarky is a healthy economic policy. All the rest is just making noise.

I wish it weren’t true but you truly can make “sense” out of US trade policy by looking at the trade deficit figures. Look up the country and the latest year and you will see precisely what Trump believes this country owes the US. He is going to get it by taxing Americans, who are the only people who actually pay these tariffs. The number for China for last year is $419B. Until he hits that magic number in total market valuation of taxes on goods from China, he will believe that “we” are being ripped off by “them.”

This kind of thinking makes one wish, with Donald Boudreaux, that this pointless number were never collected by government at all. It matters not at all how much my clock repair shop buys from me compared with how much I buy from it. The point is to seek voluntary cooperation from everyone and expand the division of labor as much as possible.

But back to this point that tariffs cause prosperity. The most exhaustive study of the 19th-century experience conducted by Douglas Irwin shows in exhaustive detail that tariffs only harmed prosperity (Clashing over Commerce: A History of US Trade Policy).

So, no, tariffs do not make anyone prosperous. Without them, we would likely be experiencing even better economic times. Yes, these new tariffs are a terrible idea. They are going to do terrible damage.

This whole topic is exhausting so don’t take my word for it.

The primary reason for a tariff is that it enables the exploitation of the domestic consumer by a process indistinguishable from sheer robbery. ~ Albert Jay Nock

Blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people from trading. What protectionism teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war. ~ Henry George

Now, legal plunder can be committed in an infinite number of ways. Thus we have an infinite number of plans for organizing it: tariffs, protection, benefits, subsidies, encouragements, progressive taxation, public schools, guaranteed jobs, guaranteed profits, minimum wages, a right to relief, a right to the tools of labor, free credit, and so on, and so on. ~ Frederic Bastiat

All that a tariff can achieve is to divert production from those locations in which the output per unit of input is higher to locations in which it is lower. It does not increase production; it curtails it. ~ Ludwig von Mises

We can not increase employment by restricting trade. American industry, in the present crisis, might well be spared the burden of adjusting itself to new schedules of protective duties. Finally, we would urge our Government to consider the bitterness which a policy of higher tariffs would inevitably inject into our international relations…. The higher duties proposed in our pending legislation violate the spirit of this agreement and plainly invite other nations to compete with us in raising further barriers to trade. A tariff war does not furnish good soil for the growth of world peace. ~ Statement by economists signed by Edward C. Harwood in opposition to the Smoot-Hawley tariff act of 1930.

[Originally Published at AIER]