Why the U.S. Should Drop All Tariffs
By Veronique de Rugy
Ms. de Rugy is a senior research fellow at the Mercatus Center at George Mason University.
June 25, 2018
President Trump has announced tariffs on $50 billion of imports from China, $34 billion of which will come into effect on July 6, saying it will force that country to be a better trading partner. China, not surprisingly, said it would slap $50 billion of its own tariffs on American goods in response, to which Mr. Trump threatened to raise the stakes by another $200 billion.
On trade, the president has been all over the place. One day he threatened to impose tariffs on our NATO allies on national-security grounds. Another day, he exempted these allies from the tariffs. A few weeks later, he changed his mind.
The United States should stop the scattershot, pointless nonsense on tariffs and go the other way, and hard: It should drop all tariffs, even if the rest of the world doesn’t follow.
Economists since Adam Smith have understood that free trade is the best policy. Studies show that countries with freer trade have both higher per-capita incomes and faster rates of productivity growth. Economists have also long understood that barriers to trade, while pitched as a way to help domestic workers, always heavily penalize domestic consumers. For instance, when Uncle Sam imposes stiff barriers on sugar imports to protect a few hundred producers in Florida and Louisiana from competition, these farmers’ gains come at the larger expense of consumers who are obliged to pay more than twice the world price of sugar, on average, each year since at least 1982.
The same is true of Mr. Trump’s steel tariffs. Claiming that they protect a vital industry and its 140,000 workers, tariff supporters never mention how much harder they make things for the 6.5 million manufacturing workers in steel-consuming industries. Add to that number all of us who consume goods made of steel, and you get an even larger figure.
Consider a domestic company that imports specialty European steel not produced in the United States. Thanks to the tariffs, this company faces an instant 25 percent price increase. It will shift some of that cost onto its customers, making the final product more costly and thus less competitive at home and globally. Or the company might shift manufacturing abroad to gain access to cheaper materials.
In both cases, the company probably takes a hit and might even lay off American workers. That’s what happened in the aftermath of President George W. Bush’s 2002 tariffs to the tune of 200,000 jobs lost in steel-consuming industries.
The fact is, free trade is a robustly good policy — which doesn’t mean that it affects all Americans in the same way or at the same time. Not only is it the best policy when other governments practice free trade; but it’s also the best policy even when other governments are wildly protectionist. By lowering its trade barriers, a government enriches its citizens regardless of the policies implemented by foreign governments. This idea runs counter to the public’s assumption that we benefit from lowering our trade barriers only if other governments lower theirs.
Yes, the world would be a better place if there were no trade barriers at all. But the United States should abolish its barriers even if China, Canada or others do not abolish theirs. As the economist and Times Op-Ed columnist Paul Krugman explained in an academic journal, “The economist’s case for free trade is essentially a unilateral case: A country serves its own interests by pursuing free trade regardless of what other countries may do.”
Mr. Krugman also lamented that economists “must deal with a world that does not understand or accept that case” for unilateral free trade. That becomes clearer by the day: Now so-called free traders seem to believe that the president’s $50 billion of tariffs on imports from China is part of a brilliant strategy to get the Chinese to open their markets to American exports. Similarly, they applaud Mr. Trump for starting a trade war with G-7 countries toward the goal of a tariff-free G-7.
Even if Canada never removes its 270 percent tariffs on our dairy products, Americans would gain if Uncle Sam, regardless of Ottawa’s trade policies, unilaterally removed not only the steel and aluminum tariffs it just slapped on Americans who buy Canadian metal but also ended all tariffs on imports from Canada.
Don’t forget that Canada’s dairy tariffs are paid by Canadian consumers. It defies logic for an American president to punish American consumers in order to prompt Justin Trudeau to be kinder to Canadians. We also know that an increase in imports from Canada will expand our exports to our northern neighbor. By contrast, protectionist policies like those supported by the Trump administration may lead to more, not fewer, protectionist policies abroad — tariff hikes that have been historically ineffective.
Finally, the case for low trade barriers is not simply theoretical. It’s currently on display in several places in the world, including Singapore, the Netherlands and New Zealand. Hong Kong is a case worth highlighting. Thanks to its history of free trade under British rule and current special status in China, it’s widely regarded as one of the least restrictive economies in the world. Among the policies that have fueled its growth is unilateral free trade.
Far from suffering from its free-trade stance, Hong Kong’s economy has experienced multiple periods of rapid growth. In 1950 its average per capita income was about one-third the average United States income, but by 2017 it was slightly higher. In 1960 life expectancy in Hong Kong was three years lower than in the United States, whereas by 2017 it was five years longer. Sure, other free-market policies contributed to this economic success story, but at the very least unilateral free trade hasn’t stopped Hong Kong’s transformation into one of the richest economies in the world.
President Trump should take a page from Hong Kong. As that territory’s experience demonstrates, and as economists have long argued, lowering trade barriers regardless of other governments’ trade policies fuels domestic economic growth. So if Mr. Trump insists on acting unilaterally, he should cut rather than raise tariffs.
Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.