Why Both Major Candidates Are Wrong on Trade

Tariffs of any sort hurt Americans and harm economic growth

Donald Trump wants to impose tariffs on imported goods. He believes foreign competitors take revenues from American business and jobs from American workers. So he plans to impose a 35% tariff on goods from Mexico and a 45% tariff on imports from China.

Tariffs hurt the many domestic businesses that buy imports to make products. Hillary Clinton believes that free trade is an unreliable means to raising wages and living standards. She wants the government to manage international commerce to secure “a level playing field” and “fair trade”, as she has stated many times, including in a speech in Australia in 2012. These are protectionist euphemisms used to advance trade restrictions and regulations.

Not the Way Forward

However, trade barriers inevitably hurt, and never help the great majority of Americans. It makes no difference how trade is restricted and regulated: brazenly and broadly, or subtly and narrowly. To whatever extent trade is restricted, prosperity is reduced. A few inefficient firms and their workers benefit, but only by imposing costs on everyone else.  

The business of America is trade, domestic and foreign. Trade is free enterprise, wherein people seek their own advantage through voluntary exchange. History and economics demonstrate that free enterprise lifts living standards for everyone. When restrictions and taxes are imposed, enterprise becomes less productive and people suffer. That’s why folks in Cuba drive cars from the fifties and North Korea is no Shining City on the Hill.

Everyone Wins

Contrary to protectionist myth, free trade helps American consumers and job seekers. When “cheap” imports displace more expensive or lower quality goods made in the USA, consumers save money. They spend their savings on other products, so that output and employment increase in those sectors. Americans then have more wealth, more and better products to buy, with no net loss of jobs.

Some jobs are killed by international competition, but they are unproductive insofar as they serve businesses that lose money. Those unproductive businesses are replaced by profitable enterprises that create productive jobs.  Eventually everyone, even workers displaced by competition from foreign firms, is better off.

Tariffs are Taxes

Tariffs are sales taxes on imported goods. Foreign firms are taxed, so that their domestic competitors exempted from the tax can raise prices.  Protected firms tend to enjoy higher profits, so they expand output and jobs.  

The less Americans buy from abroad, the less they can sell abroad.But faced with higher prices, consumers must buy fewer units from protected firms or spend less elsewhere. Wherever consumers reduce spending, profits and jobs disappear. Thus low productivity jobs among protected firms replace high productivity jobs in firms whose customers had to reduce their spending. So production slips, average prices increase and real wages fall.

Tariffs also hurt the many domestic businesses that buy imports to make products. Tariffs force them to pay more or accept inferior quality. This reduces their productivity, because their costs increase. When businesses become less productive, they become less competitive internationally. So American exports tend to decline, which is the problem tariffs were supposed to fix. 

When a foreign business sells goods here, it takes dollars in payment. It can save the dollars or exchange them for its own currency, in which case another foreign entity holds those dollars.

In the end, foreign holders of dollars can use them for only one purpose: To buy American goods or investments. The less Americans buy from abroad, the less they can sell abroad: Less grain and machinery, fewer computer chips and consumer products. So once again, trade barriers reduce productivity and real incomes.

If China or some other country imposes tariffs on American goods, we should allow Americans to continue to buy and sell, without tariffs or other intrusions. When Americans buy imports, they gain benefits. Cutting off benefits won’t improve their situation, regardless of the injustice of foreign trade barriers.

Further Reading

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