Do tariffs work?
If you’ve followed the current news, you’ll know that the answer is a resounding “no.”
However, like many things in economics, the truth is not that simple.
Let’s forget the Trump tariffs for a moment. It’s not that they’re unworthy of examination, but that we’re asking bigger questions.
So, do tariffs work?
Well, that depends on what you mean by “work.”
You have to remember that economics is based on outcome.
If you had complete control of the economy, you might want to create as much wealth as possible within the economy.
Now, most of this wealth may be concentrated in the hands of a few.
So, instead of creating the most wealth, do you instead try to distribute it as evenly as possible?
Or create as many jobs as possible?
Or create the highest standard of living?
Or create the most economic mobility?
None of these things are inherently bad, but they are in tension with each other. It’s impossible to get all of them at once, so you have to pick and choose which you value most and plan to work for them. Certainly, there are actions that you could take that would be bad across the board1, but some actions will allow you to pursue multiple, though not all, of these good things.
So, do tariffs work?
It depends on what end goal you’re striving for.
And I don’t say that lightly, in order to convince you that it’s all subjective and personal, but to open you up to the idea that there may be some situations in which tariffs work, even if there are others in which they certainly don’t.
So, let’s learn about tariffs.
Today, I’m giving you a reading list, not because I want to be vague, but because I want to walk you through some of the important underlying principles, and there’s no way to cover all of those in a 1000-word blog post.
Here’s what you should read if you want to understand tariffs:
- The Basis of Tariffs and Trade Barriers, Brent Radcliffe, Investopedia.
Why you should read this: Contains a lot of good, basic vocabulary that will allow further exploration.
The Big Takeaway: It’s basic vocab, people. Don’t get too excited.
- When Tariffs Worked, Brian Domitrovic, Forbes
Why you should read this: Explores the relationship between tariffs and the federal government for most of its existence.
The Big Takeaway: Points out that tariffs funded the government for many years and consequently kept it small.
- America’s Tumultuous History with Tariffs, Robert W. Merry, The American Conservative
Why you should read this: Gives an overall survey of the levels of tariffs in America for most of its existence and profiles the people who made the policy changes.
The Big Takeaway: There may be ways to handle the issues that lead to the creation of tariffs, a la Reagan. Or you can handle them bluntly, a la literally anyone else.
- How the World Works, James Fallows, The Atlantic
Why you should read this: This 1993 article takes a look at economic theories from non-English speaking economists, meaning you likely haven’t heard any of it before.
The Big Takeaway: Many countries, including the U.S., used protectionist tactics to grow, then switched to a free market philosophy when growth reached as much as it could internally.
- Tariffs Can Work – When They’re Part of a Plan, Evan Horowitz, FiveThirtyEight
Why you should read this: This is a balanced, modern article on the Trump tariffs.
The Big Takeaway: “But these risks don’t mean tariffs are doomed to fail; they just require a long-term goal that justifies the short-term cost in jobs and dollars — and a way to reach it.”
Where does this leave us?
There are certainly a lot of possible interpretations of these articles that aren’t going to line up with my own. And that’s okay.
But, what I’m going to try and do here is lay out a series of facts that is true no matter which economic outcome you think is the best.
Countries use protectionism as a way to grow their economy when it is behind and small and weak. When output has grown to a point where it exceeds domestic demand, they then switch to a free-market stance, which in turn leads to more growth. Eventually, the growth slows down and the country regresses.
Let’s switch to a metaphor.
Imagine your country is a tiny volcanic island in the middle of the ocean. Every day it spits up a bit of lava, but the rough waters of free trade scrape it away. In order to give the island a fighting chance, you erect barriers a few miles out that prevent the water from reaching the island. Over time it grows, until one day it pushes up against the barriers themselves and can no longer grow.
At that time, you remove the barriers. The island is now big enough to not be as severely worn down by the waves and stands to benefit from the extra space it can now expand into.
Time passes, and like most islands, the erosion eventually catches up with growth and the whole process stagnates. Eventually, it begins to recede.
Now, I mentioned earlier that whether tariffs are good or not is dependent on what economic outcome you’re looking for.
But there’s something else that’s relevant here: which step in the cycle do you think America is in?
I don’t think there’s a case that we’re in the protectionist growth phase, but I think you could make a case for the “growing because of free trade” or “receding because of free trade,” positions.
Again, those are really different places to be, and you need different solutions for the problems you face. But you need to know where you are and what outcome you want in order to make any kind of policy decision.
If history’s any indicator, once you start to recede it’s really, really hard to get back on top. Let’s hope we make the right choice.