Point: Let Free Trade Work Its Magic

Tariff advocates have three main arguments. One, they raise revenue. Two, they revive domestic industries. And three, they are a diplomatic negotiating tool. Not only do these arguments not stand on their own, they contradict one another.

It’s true the government consumes lots of money. Currently, its primary source of revenue other than debt is the income tax, which is projected to bring in about $2.5 trillion this year. An additional $1.7 trillion will come from payroll taxes, again garnered from your paycheck. Could tariffs replace this?

The simple answer is no. President Trump has already announced tariffs on our primary trading partners, Canada and Mexico. (For all the hyperbole surrounding it, our trade with China accounts for a much smaller amount of imports.) The estimated revenue from those tariffs amounts to a comparatively measly $110 billion this year, including the tiny revenue effects of ending the “de minimis” exemptions that allow consumers to order small items affordably from abroad.

There isn’t enough trade to make up the gap between tariff revenue and income taxes to allow for tariffs to become the primary source of revenue in modern times. When tariffs were last the primary source of government funding, in the Gilded Age (called that to give the impression of riches without real substance), the federal government was tiny, with even military spending being minimal by today’s standards.

Moreover, the hope of tariff revenue being large and sustainable is stymied by one of the other rationales advanced by tariff enthusiasts. When they claim tariffs will revive industries lost to other nations, that presupposes Americans will buy fewer imports because of higher prices caused by tariffs, which will then enable domestic industries to thrive thanks to the higher price levels. If that happens, tariff revenue must, therefore, shrink as people purchase less from abroad and the economy adjusts to new price levels.

This argument that tariffs will shield domestic industry from competition may seem intuitive. Indeed, it is probably the reason enthusiasm for tariffs, like a vampire, survives after it seems dead and buried. However, the theory requires all other things to be equal when they most decidedly are not.

For instance, steel tariffs have been tried before — and not just by President Trump. Every time, they do indeed increase employment in steel firms. However, steel is a valuable input for many domestic manufacturing firms. By increasing the cost of this input, the tariffs undercut the profitability of those other manufacturing firms, reducing employment there. It’s robbing Peter to save Paul.

According to a Federal Reserve study, the effect of the similar 2018 steel and aluminum tariffs was to reduce manufacturing employment by 75,000 jobs. Meanwhile, the increase in steel and aluminum production employment was only 1,000 jobs. This looks like a pretty lousy deal for the American worker.

So, if tariffs can’t replace taxes and don’t actually help workers, what about the third claim? Can the threat of tariffs lead to better outcomes for America in international negotiations? There’s also a sub-argument here that tariffs can lead to “strategic decoupling,” as firms rejigger their supply chains away from strategic adversaries like China and toward places like Vietnam.

This, too, is a hard one to prove. To begin with, nations rarely just roll over and die after tariffs are threatened. They will often invoke retaliatory tariffs, which hurt American exporters. They might also engage in new trade alliances, cutting America out of the picture. In some cases, such as the emerging markets of South East Asia, American trade policy appears to be driving countries toward China rather than away from it. Even the seeming concessions of Canada and Mexico after the president’s recent tariff proposals may just have been speeding up actions they were going to take anyway.

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