Tariffs are a dead weight on economic growth. Free trade and the concept of comparative advantage maximize a nation’s wealth. Each nation should produce the goods and services where that nation enjoys a cost advantage.
The United States enjoys competitive advantages in the production of high value-added goods such as commercial aircraft, Boeing, and in the design of the most advanced semiconductors, Nvidia. In addition, over the past decade, the U.S. has emerged as a low-cost producer of carbon-based energy products such as oil, natural gas, and highly processed chemicals. Under the principles of free trade and comparative advantage, the national welfare is enhanced when the U.S. allocates land, labor, and capital to commercial aircraft, chips, and oil and gas.
But there is no comparative advantage for the U.S. in the production of labor intensive low-value goods such as clothes and shoes. Nor do we have a comparative advantage in the production of domestic appliances. U.S. welfare is reduced when tariffs are imposed on low value-added products. Does the U.S. want to focus on advanced aircraft and semiconductors or do the people of the country want to make shoes and washing machines? Under an iron law of economics, even if the U.S. is more productive on all goods and services, the U.S. should focus on what it does best.
Resources are scarce. That means we should allow capital to flow to the most productive and profitable sectors. Unfortunately, both former President Donald Trump and President Joe Biden have used tariffs to win votes. That reduces national wealth.
Yes, sometimes national security outweighs narrow economic considerations. That is the case with tariffs against China. It is good policy to impose tariffs on China. Engaging in free trade with China promotes economic growth in that country. When China is economically stronger, it poses a more serious national security risk for the U.S. Under Section 232 of the Trade Expansion Act of 1962, the president has the authority to impose tariffs on imports that threaten national security. In an ideal world, the U.S. would completely decouple from China.
But Section 232 tariffs should not be used against steel imports from Canada, Mexico, or the free countries of Europe. Those nations are our allies or close partners. For example, when tariffs are raised against imports of steel from Mexico or Europe, U.S. businesses that use steel to manufacture goods face higher costs. Caterpillar and Deere would be disadvantaged. No one wants that. Except their foreign competitors.
What about unfair trade practices? What if a nation allied with the U.S. subsidizes the production of steel, aluminum, or even commercial aircraft?
There are remedies for unfair trade practices: illegal subsidies or dumping, exporting goods to the U.S. at prices below cost. Section 301 of the Trade Act of 1974 provides the president with the authority to impose tariffs on imports that are produced through unfair means, such as tax subsidies or business loans with below-market interest rates.
Free trade is not free when one country in a trade transaction engages in activities at odds with basic principles involving price, supply, and demand.
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Aside from trade with China, the U.S. should only use tariffs in exceptional circumstances. When tariffs are used to protect a small number of workers, the few benefit and the majority are poorer. Unfortunately, tariffs are popular with the public.
Both Vice President Kamala Harris and Trump have pro-tariff agendas. Voters may be pleased, but they will be less well off.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be reached at [email protected].