A Quick Primer on Trump's Tariffs

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There has been a dizzying array of White House scandals and controversies lately. You can be excused, then, if you've ignored more boring news about Trump's tariffs -- economic policies with the potential to be among the president's most fateful decisions. 

To catch you up to speed: Since the beginning of 2018, Trump has imposed sizable tariffs on imported aluminum, steel, solar panels, washing machines, and Chinese electronics. Tariffs, for the uninitiated, are taxes imposed only on imported goods. If you squint very hard while talking about them, tariffs appear to help American businesses sell to American customers, bringing jobs to American workers and building the American economy.

Virtually all (like, all) economists agree that these tariffs will instead hurt the American economy. 95% of top American business executives considered them a "moderate to serious risk." While Trump has cited historical evidence that tariffs benefitted America in the past, there is a reason none of the presidents he cites are from the last century -- American presidents have mostly avoided tariffs since, ya know, that time the big bad Smoot-Hawley tariff of 1930 helped cause the Great Depression.

Why do economists so unanimously despise tariffs? To summarize:

• Tariffs raise prices for American consumers. In one of my favorite examples for my classes, 550% Indian tariffs on "Scotch" whiskey meant that Indian consumers couldn't afford good whiskey and were stuck with inferior products. Trump's tariffs don't just mean higher prices on washing machines and solar panels and smart home appliances. Products that use aluminum or steel (beer, cars, etc.) may also see price increases. (For a very basic summary of why economists think free trade is good, see this video).
• American companies that rely on imports to make their products will face much higher costs. They are already! The world economy is far more interdependent than it was in 1930, making this a huge problem. Similar steel tariffs in 2002 led to exactly this result: 200,000 jobs lost in industries that relied on steel. Already, American tech companies are feeling the pinch. This can even lead to a decreased demand for American steel and aluminum as consumers prefer finished imports over pricier domestic products -- which American companies are already reporting! (!!)
• Tariffs almost always invite retaliatory tariffs. Like China's, which has the potential to gut the US soybean industry. Like the EU's.  And Canada's.

So, why would anyone support tariffs? There are a couple of commonly used arguments. Some are better than others.

• Tariffs help infant domestic industries grow by giving them a break from international competition. This argument works best if international competition has a head start on American companies -- not applicable today. It is likely a myth anyway that tariffs were behind American manufacturing growth in the 19th century -- this growth had far more to do with frenetic population growth and territorial expansion. (See this if you're interested in the "infant industries" argument).
• Tariffs are vital to national security. This argument imagines that if America ever becomes too dependent on international trade, its economy would be crippled during a war. Most economists aren't convinced by this argument, and it certainly doesn't apply to this round of tariffs (as convincingly argued here and here).
• Tariffs protect domestic industries from unfair competition. Imagine competing against international companies that can undercut you because they use unethical business practices: sweatshops, child labor, or pollution. Trump sympathizers particularly point to government subsidies that Chinese steel, for instance, receives. Is that really "free" trade? Shouldn't Trump help out American industries?
  
  Tariffs aren't the answer. Note that Chinese subsidies of steel help American companies and consumers who can buy steel and steel products at a lower price -- helping other American industries! Whether foreign subsidies ultimately help or hurt American business is up for debate. But given the costs of tariffs to American businesses and consumers, virtually no economist would recommend fighting foreign subsidies with tariffs. 

Steven Rhoads explains that tariffs benefit "not just those who would have otherwise have lost their jobs but also wealthy stockholders and those who remain employed at above-average wages. By keeping resources needed in growing industries tied up in declining ones, the policies are a source of great inefficiency" (100, The Economist's View of the World). Trump consistently describes an America that is long past, fighting policy battles from last century and protecting industries that don't project as viable long term.

Economists like Rhoads can sound like heartless mathematicians who value abstract efficiency over the well-being of domestic workers. They are confident, though, that even if tariffs do help out some steelworkers, there are many other Americans employed in other industries who will be harmed. International trade has a few very visible losers and many more dispersed, less visible winners.

The more disturbing truth: tariffs like these pass, despite all counsel from economists, because of pressure from highly motivated special interest groups. If a small group of Americans can gain $50 from a policy at a cost of $100 to the rest of the country, the policy may still be politically beneficial if that $100 is dispersed enough. Say that 200 people stand to lose 50 cents each and 5 people stand to gain $10 each. The 5 people may win the support of politicians because they will be louder than the 200 people, who aren't incentivized to organize a systematic resistance. Come election time, the 200 will likely forget this policy. They may not have even noticed!

José Niño explains: 

Because each individual consumer has to shoulder slightly higher prices due to tariff increases, there is very little incentive for them to rally against the increased tariff rates. On the other hand, powerful interest groups like steelmakers enjoy a competitive advantage in coordinating political action. Until consumers are able to effectively band together, the rent-seeking gravy train will continue to roll unabated for protectionist interests.

Lots of industries, though, are noticing that Trump's tariffs are also war on business (especially farmers!). For all the talk as Trump as an "outsider" who'd "end politics as usual," there's a whole lot of graft still on display in Washington. Same swamp, new gators.