Some Aspects of Economic Illiteracy

Earlier this week, President-elect Donald Trump announced that he intends to implement on his first day in office some of the tariffs he had threatened. The following quotes illustrate but do not exhaust the economic illiteracy involved, that is, the ignorance of the economics of trade and protectionism as it developed over the past three centuries  (“Donald Trump Says He Will Hit China, Canada and Mexico With New Tariffs,” Financial Times, November 25, 2024):

Donald Trump has said he will impose tariffs of 25 per cent on all imports from Canada and Mexico, and an extra 10 per cent on Chinese goods, accusing the countries of permitting illegal migration and drug trafficking.

In a post on his social media site Truth Social, Trump said he would impose the tariffs on Canada and Mexico on his first day in office “on ALL products coming into the United States, and its ridiculous open borders”, which would remain in place “until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country”.

Trump said the tariffs on China would apply to all imports and would come on top of existing levies, as he criticised Beijing for failing to follow through on promises to impose the death penalty for people dealing fentanyl, a deadly synthetic opioid.

This bout of protectionism is absurd. Consider: The president of the United States would force Americans to pay a tax on their imports of many products in order to incite foreign governments to control (including with the death penalty!) their producers of another product (Fentanyl) that many Americans want, or to incite foreign governments to prevent neighboring nationals from approaching American borders even if they are suspected of coming to America to work for Americans. It is not easy to find another sentence so full of economic absurdities.

A related point that many people and apparently many high-level politicos do not seem to understand is the following. A tax on imports is also a quasi-tax on domestically produced substitutes–except that the latter tax is not paid to the government imposing it, but instead to the domestic producers of these substitutes. I explained the phenomenon in the Fall issue of Regulation (“Assessing Trump’s New Tariff Ideas”):

To better understand the full extent of a tariff’s cost, we need to realize that it leads competing US producers to raise their own prices. As the quantity demanded for the domestic product increases, its price is bid up by consumers until the domestic price reaches the taxed price of the foreign good. Imports will have decreased, domestic production increased, and domestic purchasers will be paying the same price for both the imported good and its domestically produced equivalent—for example, two cars of the same brand or quality produced in Germany and in the United States. This is what “protection” means: Domestic producers are protected from the lower prices of foreign competitors; the tariff is a discriminatory tax that allows them—and even pushes them—to increase their own prices to the level of the now-tariffed imported goods.

Similarly, a tariff on an input (say, steel) is paid by the American importer who will typically pass it down the supply chain to his customers and eventually to the consumers of the final good (say, a car). After Trump imposed a special tariff of 25 percent on imported steel in 2018, for example, the chief executive of Byer Steel, a Cincinnati steelmaker, explained in a Wall Street Journal article [July 1, 2018] how the tariff had led his firm to increase production and raise its prices:

“Demand came on so fast that we had to raise our prices or we would not have had one pound of steel for anybody. We raised prices to the point where the market said it is enough.”

The article also featured an American business that was harmed by the tariff: Laclede Chain Manufacturing of Missouri, which laid off workers and cut overtime because of the higher input cost.

An oft-heard objection is that the tariffs are just a threat, but its validity is doubtful. Certainly, it is not part of the art of the deal to let a negotiating counterpart know that you are just bluffing. At any rate, the first Trump administration did enact tariffs, and most of those that remained were kept and, in some cases, increased by the Biden administration. Government interventionism is not a tap one can turn on and off at will.

Speaking of economic illiteracy, let me finally recall, from James Buchanan’s book Why I, Too, Am Not a Conservative, a disquieting argument, which applies even more to politicians than to ordinary people. In a Regulation review of Buchanan’s book,  I summarized his argument as follows (before I explained why it seems disquieting):

Other conditions [are] required to sustain a liberal democratic society. Individuals must understand “simple principles of social interaction,” and that entails “a generalized understanding of basic economics.” Or else, Buchanan claims, they must show “a widespread willingness” to defer to others who do understand.

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