Will Trump’s Tariffs Kill Free Markets?
President Trump’s tariffs on steel and aluminum against allies like Canada, Mexico and the European Union are only the latest skirmish in a long-term attack on America’s free-market economy. So now that Trump is also mulling tariffs on foreign automobiles, renegotiating NAFTA and raising trade barriers against China, will that finally be the death knell for free enterprise? Hardly.
The president’s threats must be fought, but the good news is America’s fundamental institutions will withstand Trumpian bluster. For one thing, our economy remains a powerhouse. America’s $19 trillion economy already withstands an annual $1.9 trillion in annual regulatory costs from Washington. On top of that, Trump’s tariffs will cost “only” a few billion dollars. In short, the economy is dragging along a big, deadweight burden, but it can still get the job done.
Another American strength is our system of property rights. Compared to most countries around the world, Americans enjoy relatively secure property rights, which makes long-term investment possible. Entrepreneurs can make 10- or 20-year investments without fear that the government will nationalize (confiscate) them.
Inflation, another indicator of strength or weakness, is low. That means prices for consumer goods and services reflect real-world ups and downs in the marketplace. Prices send relatively honest signals, in other words. That means when people compare prices and entrepreneurs eye different opportunities, they’re basing their decisions on accurate information.
Corruption, yet another harbinger of economic woe, does exist, but it is much lower than in many other countries. Outright bribes are rare, and while judges are often wrong, they are rarely bought. Countries such as Venezuela and Zimbabwe do not enjoy such basics of reasonable governance, and it shows in their economic performance.
Even in trade, where the Trump administration poses the greatest threat to free enterprise, America has been liberalizing for more than 75 years. The Smoot-Hawley tariff bill of 1930 raised America’s average tariff to more than 60 percent and worsened the Great Depression. But today tariffs are closer to 5 percent (source: Douglas Irwin, “Clashing Over Commerce: A History of U.S. Trade Policy,” p. 8), and Trump’s targeted tariffs likely won’t raise that figure more than a decimal point. Trump is reversing a long history of openness, but so far it’s small potatoes. If economists, Congress and the World Trade Organization all do their jobs, it will stay that way.
Also consider that Trump administration trade threats will be met with opposition. That process has already started. The Global Trade Accountability Act, a new bill from Sen. Mike Lee of Utah, a member of Trump’s own political party, would prevent the White House from unilaterally raising tariffs in the future.
And despite Trump economic adviser Peter Navarro’s prediction that “I don’t believe any country in the world is going to retaliate,” Canada, Mexico and the European Union immediately announced they would retaliate. Canada is planning tariffs on $12.8 billion of U.S. goods, and Mexico is planning tariffs proportional to the damage it is expecting. The European Union, in addition to still more retaliatory tariffs, will bring a challenge to the World Trade Organization, and will likely win.
As the years go by, booms and busts have come and gone, but the long-run economic trend has always been upward. Meddle as he might, Trump cannot stop that trajectory.
Each generation continues to be richer than the one before. In 1980, U.S. income was about $28,000 per person. By 2000, it was $44,000 per person, and today it is more than $53,000 per person. And those rising dollar amounts don’t factor in non-monetary life improvements such as better medical care, longer life expectancies, safer and cleaner cars, high-speed internet, and more. Twenty years from now, our children and grandchildren will likely have even higher living standards — and enjoy new technologies that haven’t even been invented yet.
The root institutions behind America’s market economy have taken quite a beating over the last several administrations. Trump’s tariffs and many of his other actions build on earlier bipartisan abuses of executive power, such as George W. Bush’s PATRIOT Act and Barack Obama’s infamous boast about regulating by pen-and-phone. But America’s institutions will survive, and living standards will continue to rise, though more slowly than they would with fewer shackles.
President Trump’s tariff nonsense will cost a minimum of 146,000 jobs, on net, with hundreds of thousands more livelihoods in peril if he raises more trade barriers. But as dire as it will be for the people on the losing end of the tariffs, it is worth remembering that the American economy is strong enough to withstand Donald Trump.