Tariffs are often portrayed as a simple solution to protect domestic industries and create jobs. Politicians, like Trump, have used them as a political tool, promising immediate benefits through reduced competition and increased domestic production. However, this narrative overlooks the fundamental economic lesson articulated by Frédéric Bastiat in his principle of the seen and the unseen. When applied to tariffs, this lesson reveals the hidden and long-term damage that protectionist policies can inflict on an economy. For Canada, reacting to US tariffs with retaliation would only amplify the problem—instead, Canada must adopt a strategy that maximizes economic freedom and embraces structural reform.
What Is Bastiat’s Principle of the Seen and Unseen?
In his famous essay That Which Is Seen, and What Is Not Seen, Bastiat argued that economic decisions produce both immediate, visible effects (what is seen) and hidden, long-term effects (what is unseen). Policymakers often focus on the seen—the direct benefits of a policy—without accounting for the cascading, often negative, effects that remain hidden until it’s too late.
When it comes to tariffs, the seen effect is easy to understand. Higher prices on foreign goods are supposed to encourage consumers to buy domestic products, thereby protecting local industries and jobs. But what is unseen? The answer lies in the broader, long-term impacts on productivity, the structure of production, trade relationships, and economic growth.
The Seen: Temporary Protection for Domestic Industries
When tariffs are imposed, domestic producers initially benefit. By making imported goods more expensive, tariffs give local industries a competitive advantage in the short term. Politicians highlight this benefit as evidence that tariffs “work” to protect jobs and boost domestic production. However, this temporary protection comes at a significant cost.
The Unseen: Long-Term Damage to the Economy
- Higher Costs for Consumers and Businesses: Tariffs act as a tax on consumers, who are forced to pay higher prices for imported goods or their domestic substitutes. What remains unseen is the cumulative effect on household budgets and reduced spending in other areas of the economy. Businesses that rely on imported materials or components face higher input costs, making them less competitive domestically and internationally.
- Disrupted Supply Chains: Modern production processes, especially in industries like automotive and manufacturing, involve complex cross-border supply chains. A single car, for example, may cross the US-Canada border multiple times during its production. When tariffs are applied at each crossing, the costs escalate quickly, making final products more expensive and less competitive. The unseen effect is the cascading disruption of entire industries that depend on smooth, tariff-free supply chains.
- Retaliation and Trade Wars: Tariffs rarely exist in isolation. When one country imposes tariffs, trading partners often retaliate, leading to a downward spiral of reduced trade. Canada experienced this firsthand during the Smoot-Hawley era of the 1930s, when global retaliation to US tariffs contributed to a 60 percent decline in world trade. The unseen damage includes lost export opportunities, reduced foreign investment, and weakened trade relationships.
- Reduced Productivity and Innovation: Protectionist policies shield domestic industries from competition, reducing the incentive to innovate or improve efficiency. Over time, this leads to stagnation and declining productivity. What remains unseen is the opportunity cost: the lost growth that could have been achieved through free competition and exposure to global markets.
- Long-Term Structural Damage: As tariffs distort market incentives, resources are allocated inefficiently. Industries that may not be competitive without protection receive an artificial boost, while more efficient sectors suffer from reduced investment. The unseen consequence is long-term structural weakness, making the economy more vulnerable to external shocks.
Canada’s Strategic Response: Embracing Economic Freedom
Trump’s tariff threats, particularly against Canada, are part of a broader strategy of economic nationalism. While retaliating may seem like a natural response and provides a certain emotional satisfaction, it would exacerbate the unseen damage by deepening the economic dislocation caused by protectionist policies. Instead of retaliating, Canada should take the opportunity to address long-standing structural issues that have limited its economic potential. Here’s how:
- Lower All Tariffs and Trade Barriers Globally: By unilaterally lowering tariffs, Canada can reduce costs for consumers and businesses, making its industries more competitive. This approach also signals a commitment to free trade, attracting international investment.
- Eliminate Interprovincial Trade Barriers: Canada’s internal barriers to trade are a major drag on productivity. Removing these barriers would allow for the free flow of goods, services, and labor, unlocking significant economic growth.
- Encourage Investment by Eliminating the Capital Gains Tax: The capital gains tax discourages long-term investment and entrepreneurship. Eliminating it would unlock capital, fuel innovation, and drive economic diversification.
- Repeal Restrictions on Resource Development: Canada’s vast natural resources are a key economic advantage, but restrictive regulations have limited their development. Removing these obstacles would boost exports, create jobs, and reduce dependence on the US market.
- Diversify Trade Relationships: Expanding trade agreements with Europe, Asia, and emerging markets would reduce Canada’s reliance on the US and open new opportunities for growth.
Conclusion: Long-Term Prosperity and Resilience Through Economic Freedom
Bastiat’s lesson of the seen and unseen reminds us that the true cost of protectionism lies beyond what is immediately visible. By focusing on short-term benefits, countries risk long-term economic stagnation and structural damage. For Canada (and America and all nations), the path forward is clear: embrace maximum economic freedom, lower trade barriers, and implement structural reforms that unleash productivity and innovation. Instead of reacting to protectionist threats, Canada can lead by example—creating a resilient, globally-competitive economy that thrives on free trade and open markets.
