What Economists Understand About Tariffs

I have tremendous respect for Gene Callahan. His writing, especially on economics, has received well-deserved praise, and rightly so. In a recent essay at Modern Age, however, he joins the rancor of people accusing economists of just not understanding something when it comes to tariffs and the discussion surrounding them. He begins with an analogy of someone who, after being offended, is considering giving the offender “a good punch in the nose.” The man asks his friend, who happens to be a physicist, for moral advice. The friend instead describes the kinetics involved in a fist colliding with a face based on “the masses and velocities involved.” The physicist has obviously answered a question, but not the question that was asked. 

The implication here is that economists speaking about tariffs are much like the physicist: we give precise, rationalistic answers to the outcomes of tariffs and then move from those answers to proffering advice to the practical question of “what should we do?” Callahan doesn’t advocate specific policies or endorse President Trump’s trade actions, but instead he urges economists to adopt a more open, civil approach to discussing tariffs. Fair enough—civil discourse is valuable and some economists, myself included, have occasionally been less than diplomatic on the topic. 

By chiding economists for being too rationalistic in our approach, however, he overlooks the simple fact that the same can be said about tariff proponents: they believe that they can 1) identify substantive social outcomes that “we” want, such as certain types of jobs in certain locations (e.g. manufacturing jobs in the Rust Belt), national economic “independence,” or increased tax revenues, 2) that they alone possess the knowledge of which policy buttons to push to bring about these assertedly desired outcomes, and 3) that the sequence of policy changes they advocate will bring about those outcomes. In doing so, they present their own rationalistic answers and similarly move from those to answering “what should we do?”

So in truth, we do not have the hyper-rationalist economists telling people what they should do versus cosmopolitan thinkers pondering bigger, moral questions. Instead, what we see are economists questioning each of the three points above, with an admittedly particular emphasis on the question of whether the policies will bring about the results their advocates claim.

Still, I will cede Callahan’s broad point that economists qua economists should cease proffering answers to normative questions, just as Nobel Laureate James Buchanan argued. We should absolutely not allow, however, for the folk economics to grow and fester that Paul Rubin warned us about and that Frederic Bastiat and Henry Hazlitt provided panaceas against. In that respect, economists have a unique and necessary role to provide a “prophylactic to popular fallacies.”

Tariffs: Means, Not Ends

Economists excel at analyzing means to achieve given ends, though the economist qua economist is incapable of judging the ends themselves. With respect to tariffs, the Trump Administration has put forth five ends they contend tariffs will achieve: bolstering national security, raising revenue, repatriating jobs, reshaping supply chains, and negotiating better trade deals. With these ends in mind, economists can analyze their efficacy.

First, tariffs are often justified as protecting national security. This is especially true when they are unilaterally enacted by a president, even though recent court cases have rendered this less certain than they were a few weeks ago. No serious economist denies the possibility that tariffs and other forms of trade restrictions can enhance national security. Even staunch free-trade advocates such as Don Boudreaux acknowledge this possibility. Economists do raise two concerns that are often overlooked by non-economists, however: first, reducing trade barriers may actually strengthen national security more than raising them. Second, the national security argument may be abused. Are foreign films or Apple’s overseas investments really threats warranting tariffs? 

The right question isn’t whether tariffs in general can promote security but whether they do in particular circumstances—a question economists are well-equipped to analyze. For example, decades of protectionist policies—special tax abatements, protective tariffs, and mandatory purchasing agreements—have done little to save the domestic steel industry, with US Steel and Cleveland-Cliffs, among other steel companies, reporting loss after loss each year. At some point, the problem with the domestic steel market is not the supposed scourge of foreign competition. 

Second, tariffs are proffered as a means of generating revenue. Recently, Trump and advisors such as Pete Navarro have claimed that tariffs could replace income taxes or generate $600-700 billion annually. Revenue collected through tariffs falls squarely within the realm of economists, namely, that of public finance economists. While calculating tax revenue is a seemingly straightforward task (simply multiply the effective tax per unit by the number of units sold), the reality is more nuanced. Because tariffs are taxes, both the buyers and the sellers will bear some of the burden of the tax. This means that the price that buyers pay for this good will increase by at least some amount because of the tariff. How much it increases and the subsequent decrease in the amount purchased will depend on decidedly economic factors.

Additionally, there is the further complication of determining how much of the economic incidence will be paid by the sellers and how much will be paid by the buyers. President Trump has famously (and repeatedly) claimed that it is the foreign country that will pay all the tariffs. He said this with respect to building the wall on America’s southern border during his first term and again with the tariffs he’s imposed during his second term. But more recently, Trump admonished Walmart on social media and told them to “eat the tariff.” And yet if tariffs were entirely paid by foreign entities, then there should be nothing for Walmart to “eat” here.

Third, the promise that tariffs can “bring jobs back” ignores key facts. Specifically, that US manufacturing output is near record highs, that most of the jobs that were “lost” in manufacturing were lost due to productivity gains not offshoring, that few people want to do the manufacturing jobs themselves, or that there are at present plenty of manufacturing jobs open does nothing to sway those who fetishize the idea that we need to “bring back” manufacturing jobs. The “New Right” champions tariffs to revive these jobs, but their arguments recycle failed protectionist ideas. Economists focus on trade-offs: tariffs may protect some jobs but raise costs for other industries, costing them jobs. The net effect on jobs of this is, for reasons economists particularly understand, negative.

Fourth, tariffs are also pitched as a means of diversifying supply chains and reducing our reliance on countries like China, a concern that was starkly brought to light during the late pandemic’s supply shortages. But to assert that tariffs simply will work, with no relevant unintended consequences, is to deny history. From the tire tariffs the US placed on China in 2009, for example, we can plainly see that the tire industries in Taiwan and Mexico were able to grow and mature into the sectors of their economies they occupy today. This sounds like a win. However, because of the higher prices for tires, trucking companies in particular shifted to using retreaded tires. Just how many additional accidents this will cause on the highway, as trucks experience more complete tire blowouts with the retreaded tires than with brand-new tires, is an empirical question. Its link to the tire tariffs is not.

Finally, we come to the consideration of tariffs as a negotiating tactic. Here, we can turn to Adam Smith, who provided perhaps the most cogent defense of this strategy in his Wealth of Nations. To summarize, Smith points out that tariffs and other trade restrictions (or the threat thereof) can be used to convince other nations to lower their barriers against us. However, they should not be a permanent state of affairs, and they should only be used in situations where they are likely to work. Trump goes far beyond this and, in doing so, is actively pushing other nations away, which will lower their overall effectiveness as a negotiating tool.

Economists and the Good Life

In his Modern Age piece, Callahan argues economists miss the value of contentment over endless consumption. Yet, economists understand trade-offs in personal choices, too. Many, including myself, choose lower-paying academic jobs over lucrative private-sector roles because we value the sense of meaning we achieve through our work. Furthermore, many of us will retire at some point; surely, the quest for “more and more” is not served by ceasing to earn income. Though some, like the excellent Walter Williams, joke that “if I should ever die, I want to have taught that day.” But in doing so, people like Williams demonstrate not their consumerist desires, but their great love for their craft of teaching.

Likewise, when Callahan criticizes Mike Munger for describing wealth as “the ability to obtain high quality, low cost products,” he again misses the mark. The implication is not that all people should always and everywhere zealously pursue maximizing their ability to buy more stuff. Munger is making the simple claim that, all else being equal, a person is wealthier when they can purchase more things. If we want people to have more access to the things that allow them to live healthier and wealthier (however they choose to define those terms), then we should eschew policies that make that more difficult. This is especially true of tariffs, which are widely recognized as being regressive in their application, even by members of the New Right such as Michael Lind.

The unfortunate reality is that tariffs, which are intended to help the poor by bringing back low-skill jobs and boosting the wages of low-skill workers, often have the exact opposite effect and enrich the already-rich at the direct expense of the poor. Tariffs open the door for cronyism, one of the most pernicious forms of the transference of wealth from the poor to the rich. Autarkist utopianism may be well-intentioned, but it is just as misguided as socialist utopianism. The facts do not support the dreams of tariff proponents, and economists have both the ability and duty to speak up.

Callahan’s call for economists to engage other disciplines is certainly reasonable, but even fostering an interdisciplinary spirit can never justify bad trade policy. Economists understand tariffs’ mechanics and historical failures better than most. Trump’s “Tariff Man” rhetoric paints them as a cure-all, but economic analysis reveals their true limits. Great economists such as Mises and Hayek warned our field against narrowness, and we should heed their advice. But on tariffs, our skepticism is grounded in evidence and expertise. Far from misunderstanding tariffs, economists are uniquely positioned to clarify their costs and benefits for a public often swayed by political promises.

Trade policy does need to be guided by more than knowledge of the past or theoretical understandings. It requires prudence, good judgment, and discernment. Economists can (and should) contribute to these discussions owing to our specialized knowledge of how markets work and how they respond to policy changes. With the specific ends in mind that the Trump administration has espoused, the reality is that protectionism failed in the past, is failing us now, and, because of the very forces that economists readily understand, will fail us in the future.