By Mark A. Humphrey
Donald Trump wants to impose tariffs on imported goods. He believes foreign competitors take revenues from American business, and jobs from American workers. But trade barriers hurt the great majority of Americans. 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 demonstrates that free enterprise lifts living standards for everyone. When restrictions and taxes are imposed, enterprise becomes less productive and people suffer.
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 United States, 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.
Now let’s trace through the destruction inflicted by tariffs. Foreign firms are subjected to a sales tax on their products, so domestic firms exempted from the tax can raise prices. This leads to higher profits for domestic producers, which expand output and employment.
But faced with higher prices, consumers must buy fewer units or spend less elsewhere. Wherever consumers reduce their spending, profits and jobs disappear. Low-productivity jobs among protected firms replace high-productivity jobs in firms forced to contract due to falling revenues. As productive output slumps, average prices increase and real wage rates fall.
Tariffs also hurt the many businesses that buy imports to make products. Tariffs force them to pay more or accept inferior quality. This reduces their productivity, because business 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. In the end, foreign holders of dollars can use them for only one purpose: To buy American goods or investments.
When Americans buy imports, they gain benefits. Cutting off benefits won’t improve their situation, regardless of the injustice of foreign trade barriers.
Mark A. Humphrey is a Montana-based writer on economics and investing.