Since the election of Donald Trump there’s been quite a bit of talk about tariffs, taxes placed on exports or imports traded between two nations. To many, this term may be obscure and its implications ever more so. However, it is a very simple idea and a simply bad one at that.
Let’s say Japanese automaker Toyota manufactures a mid-size sedan and ships it to the United States, where it is sold for $20,000. At the same time, Ford manufactures their mid-size sedan in America and sells it for $22,000. In order to encourage consumers to buy from American producers, the United States Government places a $5,000 tax, or tariff, on the incoming Toyotas before they are sold. The sticker price of those Toyotas rises to $25,000 and more people will purchase from Ford, who, theoretically, creates more American jobs.
In the example above, when a consumer chooses a Ford instead of a Toyota after the tariff, they are $2,000 worse off than they would have been. Those who stick to the Toyotas, despite the tariff, are $5,000 worse off. Consumers lost money and Ford has lost its market incentive to reduce prices through innovation. American consumers lose out, while the Government and the tariff-protected companies benefit.
Even worse, tariffs almost always lead to more tariffs. Japan’s most likely response to American tariffs against Toyotas would be a similar tariff on Fords to protect the Japanese market. This results in a net loss of trade and a corresponding net loss of monetary power for Japanese and American citizens. Both countries hurt their own populations in order to retaliate in a never-ending cascade of awful policy making.
The last time America tried tariffs was 1930 with the passage of the Smoot-Hawley Act. The law contained 20,000 tariffs intended to help the U.S. recover from the stock market crash of 1929. However, thousands of economists of the day petitioned President Hoover to stop the act for fear that it would greatly prolong and deepen the Great Depression.
Most American exports at the time were agricultural, and individual states throughout the Midwest suffered massively from the reduction in exports, and rural banks throughout the Great Plains collapsed. Other countries like Canada and Germany levied tariffs in retaliation, lowering U.S. exports by almost $450 million in just three years. That represents an 84% decline from 1930 to 1933 in exports as a result of the tariffs and associated retaliation tariffs.
Some argue that tariffs would prevent large trade deficits, but that argument assumes trade deficits are bad. A trade deficit is simply the result of net imports from a country being higher than net exports to that country. If America buys $10 million worth of Chinese goods, we have a trade deficit of $10 million until we export something to them. In simpler terms, every American has a trade deficit with Amazon and their local grocery store.
Americans are immensely better off with such deficits. Andy George, a Minnesotan that runs a YouTube channel called “How To Make Everything,” endeavored to produce a sandwich from scratch without generating a deficit. It took six months and cost him $1,500. Trade deficits are more often than not a boon to individuals and an economy.
Tariffs, however, hurt the individual consumers and international trade. Only the government collecting the taxes and the protected companies benefit from them– crony capitalism at its finest.
With a weakening aversion to tariffs in the executive branch, Americans should loudly protest their introduction into the market.
The views expressed in this article are the opinion of the author and do not necessarily reflect those of Lone Conservative staff.