Are Tariffs Good For America?

President Donald Trump has received favorable press coverage for his meeting last week with union and corporate leaders to promote keeping jobs in the U.S.

In isolation, who can oppose holding on to, and expanding, work for fellow Americans?

But, in the real world, few policies are without a downside.

The new president highlights his strong opposition - and threatens import taxes (“tariffs”) - to companies like Ford contemplating building factories in Mexico.

What’s left out in Trump’s pronouncements is an acknowledgment of the motivation of a business in considering moving south of the border.  I suggest it’s more than the attraction of a warmer climate.

A company in a capitalist system strives to make a profit.  Simply put, that means it must be able to sell its products at a price greater than their costs to produce.  Failing to do so long term will cause that company to go out of business and its employees to lose their jobs.  In the market place, of course, the company must be aware of its competition.  If costs require a sales price that is too high, customers won’t purchase its products and failure looms.

Lower labor costs are the allure of Mexico.  That means, all other things being equal, vehicles made there will cost less to purchase than those made in Michigan.  Saving money is good for American car buyers, isn’t it?  They’ll have more money to purchase other goods or services they want or need, which in turn is good for those businesses providing those goods and services. 

But President Trump, focusing only on the loss of particular manufacturing jobs, doesn’t want “things being equal”.  His threat of import duties has the purpose of protecting (protectionism) American industries from foreign competition.  The loser is the American consumer.

Free trade – no barriers to competition – has the opposite effect.

 

Yet, it is undeniable that an auto worker losing his job to a Ford employee in Tijuana is a concrete negative.  The fact that an American car buyer is a winner is less obvious.

Thus, while the president’s pronouncements on protecting American jobs sound appealing, that does not mean they constitute sound policy.  Actually, economic studies are unequivocal.  For a country’s long-term economic prosperity, free trade [forgive me] trump’s protectionism.

In a very real sense, which is rarely expressed, tariffs are a form of welfare payments paid by the broad public to those protected.