Tariffs, Prices, and Populism

Note. This is an old post from the old layout, but (a) I don’t want a totally empty blog, and (b) I like the post…so there you have it.

Two weeks into American Foreign Policy this summer, I realized that our undergraduates need more exposure to trade theory. It’s as simple as that. (Even if they choose to reject the logic and the evidence down the line, they still need to know what they’re rejecting, no?) We talked one day last week about how Presidents are typically more pro-free trade than Congress, because the former is beholden to the national median voter (more or less), who’s a consumer, while the latter are more likely to care about producers at home. Add them together and, voila, presidents of all partisan stripes support NAFTA, while Congresspeople of all stripes are less fond of it. I asked this question on the exam, and I got a lot of responses about how free trade is bad for the country as a whole, and while Congress realizes this, the President only cares about pleasing foreign governments. I was shocked. It’s not these students’ fault, but ours, the academy, for not teaching them the basics…

At its heart, a tariff does one thing well: it allows domestic producers to charge higher prices for their goods, because the prices of competing imports are artificially raised by the tariff. Most students will follow to that point, but the real kicker is what comes next: tariffs take from the many to give to the few. While domestic firms that can’t compete are protected, ensuring that their executives and their relatively few employees (compared to the number of people buying those products) still have salaries, consumers—and there are millions of us—pay higher prices than we should have to. So millions are overcharged to ensure that hundreds don’t have to switch jobs. I’m not sure I’m too high on that. Put starkly, tariffs make some people wealthy and more people relatively poorer, because they have less income left over after buying products that use tariff-protected imports. (Think of the Bush steel tariffs from last decade. It pleased a few people in Pennsylvania, but everyone that buys anything that involves steel—even if it’s the steel in the trains that ship purchased products across the country—would have seen prices jacked up unnecessarily had they stayed in place for an appreciable amount of time.)

In that sense, again, tariffs take from the many and give to the few. To all those self-styled populists out there, chew on that for a while. Want to help “greedy” businesspeople? Protect their industry with trade barriers. Want to help the average consumer? Get rid of those barriers. So there you have it: free trade is as populist as it gets.

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