Tariffs Make Us Poorer in the Long Run

I was drinking last night in Snyder's tavern in West Shokan, and two friends were defending Trump's tariff program. After four Canadian Clubs, I wasn't about to go into the apples-and-oranges example that illustrates comparative advantage; then, one of the friends emailed this Breitbart column defending the tariffs because products made with the protected metals have been in strong demand. 

Comparative advantage is a simple insight: If someone can do something that you can do, even if not as well as you (i.e., so that they are poorer and less productive than you in all respects), it makes sense to have them do the thing or things at which they are most productive or at which you are least productive if it enables you to spend more time on the things on which you are most productive. The total output goes up (their production plus your greater production), and the surplus can be divided.

Studies of comparative advantage have confirmed that it works in the real world. When you shop at Wal-Mart or Target, you benefit from free trade.

When tariffs are first imposed, it is normal for output in the protected industries to go up in the short-term because the effects of making yourself poorer aren’t yet felt. In addition, today’s economy is accelerating due to the monetary expansion of the Obama years. There is high demand as the monetary cycle peaks, which probably enhances the short-term effect on the protected industries. 

The greater demand for home-based products (what Breitbart calls “firms hit by tariffs”) creates short-term employment gain in those few industries. A year or two after employment goes up in the specific industries, the prices of the protected products that they make go up, so there is less money to spend, and demand in other areas falls, so people lose jobs in computers, plastics, barber shops, and so on.

The tariffs make the protected industries seem to do better (as Wall Street has done since the 1970s because of monetary subsidies), but in a few years everything else turns sour. You will have made yourself poorer.

Here is an article by Deirdre McCloskey on comparative advantage that may be helpful.

Tariffs are one example of short-term or focusing-on-the-obvious-but-ignoring-secondary-effects thinking that the famous book by Henry Hazlitt, Economics in One Lesson, explains. It is an easy-to-read book, and I recommend it. It is available for free here.