I’m a believer in the idea of free markets. The principle is simple: with less regulation and freedom of individuals to engage in trade and their own price discovery, we’ll end up with optimal price points and maximizing production, making everyone’s life better.

Tariffs fly in the face of this by introducing unnecessary and artificial barriers to trade. A classic example is sugar. The US has an import tariff on sugar, which makes it artificially more expensive to use sugar in products. Corn syrup, on the other hand, is produced from domestically grown corn and faces no such penalty. It is therefore artificially cheaper than sugar, and ends up being used in products. The results:

• More corn is produced than is actually needed, preventing agriculture from focusing on higher value production for society
• Consumers receive inferior products made out of corn syrup instead of sugar
• Consumers pay more for these goods than they would without the tariff
• Sugar producers outside the US make smaller profits

There’s an even worse aspect to tariffs though: they can kick off devastating battles between countries. Tariffs are essentially economic warfare, harming citizens of another country to help your own citizens. Once one country starts tariffs, it can snowball into a crippling domino effect that impedes all global trade.

Donald Trump has said he’s going to use tariffs, because we’re “losing on trade” by having a trade deficit. But that statement is bonkers. A trade deficit means a country receives more goods than it sends out. In other words, citizens do better with a trade deficit.

Based on all this, it seems pretty straightforward that economists would oppose Trump’s tariff plan, and would balk at his explanations. In this post, I want to steelman the position: give the best argument in favor of Trump’s plan that I can think of. (I won’t bother trying to defend the “losing on trade” comment though, it’s factually wrong, but seems like a good rallying cry for a policy from a political standpoint.)

To set the stage, we’re going to start by discussing two ideas, and then bringing them together: negative externalities and granularity of competition.

Negative externalities

In economics, a negative externality is when some activity has a negative impact on others. This essentially transfers some of the costs of an activity to others, while keeping all the benefits for the actor. A great example is pollution. A factory can either spend a million dollars a year cleaning up its waste, or it could dump its pollution into the lake. The business gets no benefit from an unpolluted lake, but normal people will lose the ability to use the lake. The business has externalized a cost onto society.

Programmers may already be familiar with another term for this concept: the tragedy of the commons.

One method to address externalities like this is through regulation: make it illegal for companies to pollute in the lake. But economics offers another approach to this as well: assign ownership rights on the lake. An owner can decide whether or not to allow pollution based on any criteria they want. Being a rational actor (one of the largest assumptions in economics, often violated), the new owner is incentivized to set up an auction for usage rights to the lake. The polluting business can compete against companies offering leisure activities on the lake. Then the free market can determine if the million dollars of cost savings is more valuable than the benefits people can take from a clean lake.

Instead of assigning the property rights to the lake to a private entity, the government can engage in this activity through open auction as well. This results in increased tax revenue, which will decrease the overall tax burden for everyone, flipping the tragedy of the commons into a benefit for all.

You may not like this solution, because you believe that the free market can’t properly price in the true value of a non-polluted lake, or because you don’t believe people will act rationally, or any other reason. That’s not terribly relevant for this discussion. The point is the definition of a negative externality, and the fact that the government can extract money from economic actors while increasing public good.

Granularity of competition

All of economics is a story of competition over scarce goods. Generally, we talk about the competition of individuals or private entities. In other words: people and businesses competing with each other. Note that the competition isn’t between buyers and sellers, as is often believed. Instead, buyers are competing with other buyers, pushing prices up, while sellers are competing with other sellers, pushing prices down.

One of the underlying assumptions of capitalism is that there’s a fair playing field. All actors should be treated equally. In practice, this fails fairly often. For example, in crony capitalism, select businesses receive special handouts from the government. Monopolies are another arguable example, where a company can leverage its overwhelming market share in one industry to subsidize the destruction of competitors in another industry.

As mentioned above, tariffs hurt people by creating an uneven playing field between individuals. But viewed at the national level, tariffs are a method of competition between different governments. In other words, leveraging tariffs may end up hurting competition at the granular level, but might end up serving the interests of a government policy which is at odds with “make all goods cheaper through more competition.”

Protecting workers

In this sense, tariffs are not at all unique. Differences in regulations between countries, laws about fair labor practices, environment impact, local tax structures, and manipulation of currency exchange rates are all part of the competition between different nations. As a simple example, suppose country A has strict labor laws, demanding safe working conditions and demanding health coverage for all workers, while country B does not. Country B will be able to outcompete country A for new businesses, because it’s relatively cheaper to produce in country B.

Tariffs in such a scenario can be a method for country A to make production in country B less attractive. If country A imposes a 20% tariff on country B imports due to human rights violations, it is in essence making production in country A more competitive again. Without this kind of change, countries seeking to attract investment and new businesses may be incentivized to pass laws that hurt their citizens just to bring down production costs.

National security

Another topic is national security. Let’s take countries C and D, who are not on the best of terms. Both countries are stocking up on weapons in case war breaks out. Both countries locally source weapons production, ordering lots of tanks from domestic producers.

Firstly, why domestic? Because it would be crazy to put your national defense in the hands of a potential enemy!

But suppose there’s completely free international trade, with no embargos and no tariffs. Country C is a major steel exporter, obviously an import input to tank production. Country C can engage in some economic warfare of its own against country D:

• Subsidize local production of steel
• Cheaper steel exports prevent domestic production of steel from ramping up in country D
  • Under normal circumstances, this is great! It’s what we would term specialization, allowing citizens in country D to focus on what they’re relatively better at.
  • In the long run, the strategy would be unprofitable for country C’s government, and it will eventually either go bankrupt or have to halt the policy.
  • However, since we’re discussing national security…
• When war breaks out, country C can simply block all steel exports
• Country D will face a supply chain crisis. Its domestic steel production is low, it hasn’t invested in better tools and technology for steel production, and it will have to quickly and inefficiently produce enough steel to keep up with the war effort.

Tying it together

The best argument I can pull together from these points is that tariffs can be used to place the United States in a stronger position for future competition with geopolitical competitors. Instead of allowing poor labor practices in other countries to drag down the standard of living for Americans, tariffs will artificially inflate the price of incoming goods. Instead of rewarding other countries that pollute, tariffs will extract a penalty from those countries, properly allocating the costs of the negative externalities to those polluting nations. And finally, by incentivizing an increase in domestic production across the board, the US is set up for more autonomy in the case of escalation (through either embargos or full-on warfare), protecting its interests.

It’s the best argument I can make. Others can probably critique my points as well as provide better justifications than I have. I’d love to see those in the comments. The real question is: do the arguments in favor of these tariffs justify the costs many of us anticipate seeing: higher product costs, trade wars, decreased international trade, and isolationism of the US.

Personally, I don’t think the arguments add up. I’m mostly on the side of the mainstream for once. I wouldn’t have proposed tariffs in the current world environment, I wouldn’t vote in favor of them, and I wouldn’t speak out in support of them. And especially given that the proposal seems to be a flat tariff on most countries (with a higher tariff on China), it doesn’t seem to address the “negative externalities” bit at all, which would do better from targeted tariffs attempting to incentivize specific changes (like carbon emission reduction or improvement to labor laws).

Which leaves me with only one final argument in favor of the tariffs: they could be a great bluff. I think many people in the world believe that Trump would be willing to pull the trigger and enact such a policy. That gives him a really great negotiating position for whatever trade deals and other foreign policy objectives he has.

My prediction

I’m a software developer who watches politics and studies economics. My prediction on topics like this isn’t particularly informed, and is likely to be completely wrong. But I may as well put my thoughts in writing so everyone can remind me how wrong I was in the future!

I think Trump will continue to talk about tariffs in his new administration. He’ll spend more time discussing them with the press and foreign leaders than with the Republicans in Congress. There will always be a convenient reason why the tariffs aren’t proposed. And eventually, Trump will get some concessions from other nations, and will eventually “fail” to pass tariffs. The media will have a field day with it, and Trump will accuse someone somewhere of being the reason why “the greatest tax plan of all time” failed.

And maybe it’s my prediction just because I’m hoping it’s what becomes reality. Other outcomes I can foresee are much less rosy.