Are tariffs a good idea? Here are some basics:
Below are some rough notes taken from the short video for this post:
Free trade policies are designed to increase the trade of goods and services between countries. Tariff’s which are really taxes on imports make the prices of the goods that are the subject of the tariff to go up. This reduces the attractiveness of those products and thus inhibit free trade between countries. .
As stated, tariffs usually cause prices for the goods in question to go up (inflation). This is because the foreign exporter has to cover the increased cost he incurs in getting his product into the importing country. The exporter does this by raising the price he charges to the foreign (importing) customer.
(It is possible in rare instances for prices not to go up if the foreign exporter already has a sufficiently big markup on the price of the items upon which the tariff has been imposed and he can swallow the cost of the tariff and is willing to make less profit) (Or it can occur if the exporter is willing to take a loss for other business reasons.)
Arguably tariffs could help the importing nation’s GDP because imports are traditionally deemed to be a negative in the GDP calculation. However, is this really true? David Ricardo and Adam Smith would argue that this may not be so. One big reason why is that if country A imposes a tariff on country B’s goods then typically B will turn around and impose tariffs on country A’s exported goods thus causing an offsetting or, worse, a more than offsetting decrease in A’s exports which causes a diminution in the calculation of A’s GDP. This is exactly the situation that free trade proponents wish to avoid. Retaliatory trade wars.
A strong belief in free trade (as espoused by Adam Smith) has always been a central belief of conservativesand Republicans. Adam Smith has always been one of their heroes.
Interestingly, however in the 1990s, starting with Bill Clinton and through the Obama many Democrats also adopted many free trade beliefs. Free trade, or some variation thereof, was an idea supported by many modern day Republicans and Democrats alike for reasons that should become more obvious if you watch our video on the subject albeit with some modifications to reflect concerns about job security, labor working conditions, agricultural, environmental and national security issues.
That was the situation until Trump entered the political arena in 2016. Trump signficantly change (revolutionized) the Republican perspective on free trade. Trump has advocated using tariffs to protect American jobs and as a bargaining chip to gain other concessions from other nations on a whole variety of issues.
At reasonandbalance we did a video on free trade in 2017 that is still valid today in terms of explaining how free trade often benefits all nations that participate in it (often in the form of lower prices), albeit in many instances with some industries suffering job loss. There is often a balancing of the widely held benefits of free trade versus the disproportionate burden shared by some who often suffer the loss of their jobs.
An interesting point that never gets debated or explored is this. If free trade is in fact beneficial to all countries, why not use all or at least a fair portion of the increase in wealth created thereby and use it to ease the burden on those who are displaced and/or whose jobs are lost. That would only be fair and it would allow everyone to enjoy the benefits of free trade. The problem is that rarely in this day and age is political debate conducted on a calm rational level. So the back and forth shouting matches just go on and on.
One additional point should be made. Tariffs may have some advantages, but they are not likely to reduce inflation. In fact, tariffs are likely to cause more inflation.
Here is the link to that Youtube video titled:
Free Trade Comparative Advantage
By David Lentz