In a recent column, Paul Craig Roberts wrote that tariffs not only made international trade possible, but that they were merely a tax on consumption and were neutral elsewhere—and should be much-preferred to income taxes. He wrote:
Trump sees tariffs in a different way than indoctrinated free-market economists. Tariffs don’t prevent trade. They ensure that countries have something with which to trade. Moreover, tariffs are a tax on consumption, not a tax on factors of production such as labor and capital. And as I emphasize, tariffs in place of income tax eliminates the resurrection of a form of slavery established in 1913 when government was given partial ownership of the labor of every working citizen.
In another column, Roberts stated:
A tariff is a tax on consumption, the preferable means of taxation according to the classical economists. It establishes no government ownership rights in your income. An income tax not only gives government a part ownership of your working time, it is also a tax on factors of production — labor and capital. Taxing factors of production reduces economic growth and Gross Domestic Product. It is a counter-productive tax that suppresses output.
The substitution of a tariff for an income tax is a pro-growth policy that will produce higher incomes and raise living standards. Free labor is always more productive because you are working for yourself and your family.
The Investopedia site describes tariffs as follows:
In simplest terms, a tariff is a tax. It adds to the cost borne by consumers of imported goods and is one of several trade policies that a country can enact. Tariffs are paid to the customs authority of the country imposing the tariff.
In other words, tariffs simply raise the price of imported goods, so consumers in the country where the tariff is levied can choose to pay the higher price or look for substitutes. The idea, as Investopedia notes, is that “cheap” imports damage higher-cost producers in the country levying the tariff, which then allows the domestic producers to operate on a “level playing field”:
The levying of tariffs is often highly politicized. The possibility of increased competition from imported goods can threaten domestic industries. These domestic companies may fire workers or shift production abroad to cut costs, which means higher unemployment and a less happy electorate.
The unemployment argument often shifts to domestic industries complaining about cheap foreign labor, and how poor working conditions and lack of regulation allow foreign companies to produce goods more cheaply. In economics, however, countries will continue to produce goods until they no longer have a comparative advantage (not to be confused with an absolute advantage).
Supporters of tariffs, such as Roberts, claim that the lower-cost producers abroad were “cheating” by underpaying workers or taking taxpayer subsidies, so tariffs allow the domestic producers to be competitive once more. That means that while domestic consumers will pay higher prices, at least they are helping keep their fellow citizens employed at higher wages than would have been the case without the tariffs.
However, when President Donald Trump levied tariffs in 2018 during his first term, the hoped-for results of more manufacturing output and employment didn’t happen, according to a Federal Reserve study:
The tariffs Trump imposed on Chinese goods in 2018 had a net negative effect on manufacturing jobs as well overall US employment.
The Federal Reserve Board found that the tariffs caused a reduction in manufacturing employment of 1.4 percent. Modest gains (0.3 percent) achieved by shielding domestic producers from foreign competition were “more than offset” by rising production costs for manufacturers who used steel as an input (-1.1 percent) and retaliatory tariffs (-0.7 percent).
Not surprisingly, Ford Motor Company, which was financially damaged by the Trump tariffs in his first term, has declared that tariffs against Canada and Mexico would negatively affect the US auto industry:
Ford CEO Jim Farley, on the eve of traveling to Washington, D.C., to meet with members of Congress on President Donald Trump’s proposed tariffs, did not mince words Tuesday during an investor conference.
While Trump has talked about strengthening the US auto industry, which would be a signature accomplishment, “So far what we’re seeing is a lot of cost and a lot of chaos,” Farley said.
“Let’s be real honest: Long term, a 25 percent tariff across the Mexico and Canada borders would blow a hole in the US industry that we’ve never seen,” Farley said.
The reason for Ford’s opposition to the Mexico-Canada tariffs is that Ford uses component parts made in those countries in production of vehicles in the US, and there are no facilities to make those parts in this country. Furthermore, even if Ford or another US automaker were to decide to build a new parts manufacturing facility, it would take several years for it to come online. In the meantime, the company would have to suffer possible losses or even close down entire assembly lines, depending upon the availability of needed parts.
While critics of tariffs concentrate on increases in consumer prices, few commentators look beyond that point to see how tariffs affect structures of production in the economy. Other than the Austrians, no one seems to notice how tariffs affect capital formation.
The simplistic view held by those favoring protective tariffs is that they encourage domestic capital investment because they make it possible for a homegrown industry to produce goods that can be sold in the domestic markets at competitive prices since the tariffs have increased import prices. One problem with this view is that tariff rates are set by politicians who are pursuing their own agendas.
Take the Trump tariffs against Canada and Mexico, for example. One day he says he will levy them and the next he postpones them, creating uncertainty in the markets. This hardly is an atmosphere that would encourage new capital formation, especially given that new capital investments are years in the making.
At the same time, tariffs also damage the prospects for industries that depend upon exports, with agriculture being hit hard, with the problem exacerbated because other countries respond with their own retaliatory tariffs. As farmers find their markets dwindling, at least some of their capital either loses value or becomes nearly worthless.
The reason for this situation is that, according to Austrian theory, the value of the factors of production is determined by the value consumers place upon the final products. When tariffs change the value of the final good, then that change in valuation will affect the value of the capital used in production of that good.
In the case of Ford Motor Company, the tariffs on imported parts influenced production of cars, which then would affect domestic production facilities. And even if the necessary slowdown in production of domestic cars would raise their relative prices, it is highly unlikely that the increased car prices would stimulate new capital development, given that the car prices were driven up artificially.
In a normal market setting, entrepreneurs see an opportunity for profit which leads them to direct resources toward those production opportunities. Interest rates and market conditions help entrepreneurs to make decisions about how much they are generating and the methods of production. While it might seem that the levying of a tariff would open new production possibilities, one should remember that the other reasons why not to produce still exist, that is, the factors that existed pre-tariff which made production too costly to match prices of imports have not gone away.
One irony is that the US—once known as a land of entrepreneurs—now has federal and state regulatory systems that are hostile to free markets and profitability. Tom Mullen writes:
Lower labor costs aren’t the only factor of production cheaper in foreign markets. The US is also far more regulated than many foreign countries outcompeting it for manufacturing. Once near the top, the US is no longer even in the top twenty on economic freedom indices and would be even lower if welfare spending weren’t counted as a factor. While it is perfectly appropriate to do so, it lowers the score for some countries otherwise much freer economically than the US.
While manufacturing output is at all-time highs, meaning most manufacturing jobs have been lost to automation, not foreign competition, those jobs that have moved overseas have done so because the US government has made it so expensive to employ people in manufacturing domestically. Government-backed unions and massive regulation impose burdens that foreign competitors higher on those economic freedom indices don’t suffer.
Unfortunately, the Trump economic programs do not seem to address any of these situations. Instead, we are likely to get the worst of both worlds: high production costs and high consumer prices. These are part of a recipe for economic stagnation.
