The overreaction by many to President Donald Trump’s dramatic, new tariffs, for all of one week, stunned even us. Overreaction, that is, not from those on the left, but from those on the political right—particularly libertarians and free-market economists. To them, tariffs are the ultimate, and unforgivable, economic “sin.”
This is quite odd, given that tariffs are just another tax. And for the USA, it is a tax with far less domestic impact on consumers. This is because, firstly, imports and tariff elasticities are relatively low. But secondly, and more importantly, because Trump’s tariffs were “blessed” in 1776 by the godfather of free trade economics, none other than Adam Smith.
According to Smith, “There seem, however, to be [three] cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry.”
- “The first is, when some particular sort of industry is necessary for the defence of the country.”
- “The second case…is, when some tax is imposed at home upon the produce of the latter. In this case, it seems reasonable that an equal tax should be imposed upon the like produce of the former.”
- “The [third] case…is, when some foreign nation restrains by high duties or prohibitions the importation of some of our manufactures into their country. Revenge in this case naturally dictates retaliation, and that we should impose the like duties and prohibitions upon the importation of some or all of their manufactures into ours.”
The president’s executive order on “Liberation Day,” April 2nd, cites the same three exceptions to free trade, and in the same order, as did Adam Smith.
According to Trump’s executive order, “Large and persistent annual U.S. goods trade deficits have…rendered our defense-industrial base dependent on foreign adversaries. [These] trade deficits are caused in substantial part by a lack of reciprocity in our bilateral trade relationships. This situation is evidenced by disparate tariff rates and non-tariff barriers.”
The first case is not only about decoupling from Communist China for direct defense purposes but perhaps indirectly by weakening the CCP to the point of regime change, as Reagan did to the USSR. The second and third cases of reciprocity and retaliation are part of the Art of the Deal.
Most of those who were up in arms during the seven days, between imposition and pause, of the higher tariffs acted as though this was a world of actual free trade that Trump was purposely trying to undo. On the contrary, America has been hit for decades with substantial tariff and non-tariff barriers by friend and foe alike.
President Trump is using tariffs to take down those barriers, commenting, “Man, is it good for negotiation.” Adding, “I’ve had countries that were potentially extremely hostile coming away and say ‘Please sir, stop with the tariffs. Stop.’ They would do anything.”
Trump’s critics also complain that his tariffs are inflationary. They aren’t.
Trump’s tariffs have added to economic uncertainty, but they are not inflationary per se. As Milton Friedman, the Nobel Prize-winning monetary economist, famously put it, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Finally, uninformed media pundits often claim that businesses will simply pass along the cost of the tariffs to consumers. This is a half-truth. The other half of this half-truth is that importers, to remain in business, will be incentivized to shrink their profit margins, and foreign producers seeking to remain competitive internationally will reduce their prices.
President Trump’s “America First” trade strategy, despite the outcry as being anti-free trade, seeks to reduce trade barriers. This is not without significant risk. But given Trump’s recent trade agreements with the United Kingdom and China, the president’s gamble seems to be paying off… bigly!
Darren Brady Nelson is chief economist with Fisher Liberty Gold. He is also a policy advisor to The Heartland Institute. James Carter is a principal with Navigators Global. He previously headed President Donald Trump’s tax team during the 2016-17 transition and served as a deputy assistant secretary of the Treasury for President George W. Bush.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.
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