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Tariffs make us poorer — the rest is semantic

Raising trade barriers ultimately harms domestic consumers

By Gordon Gray – Originally appeared in The Washington Times

The appeal of trade barriers is understandable. We know that other countries use unfair trade practices designed to prop up their domestic industries, and policies that subsidize and protect domestic industries are proliferating globally. Bad ideas can often appeal broadly, and raising trade barriers is a prime example.

The evidence is overwhelming that raising trade barriers, including tariffs, ultimately harms domestic consumers. Tariffs make imports more costly relative to other goods. The United States runs a deficit in its goods trade, which means we import more than we export. This is neither a good nor a bad thing in and of itself. It’s simply accounting.

For example, many Americans run a goods deficit in their grocery store. For most, this makes sense as their time is more productively spent doing other things than farming, ranching, or producing foodstuffs. Indeed, even people in those industries still probably find buying finished consumer goods more useful than making them all from scratch.

Now, consider what would happen if the government decided to tax the heck out of groceries. The price level of groceries would jump, as would those goods for which the taxed groceries serve as inputs. At the new price level, groceries would become unaffordable for consumers, and they would have to adjust. Despite such endeavors not broadly making sense before the tax increase, people would resort to more home-based or communal food production. You’d see more subsistence farming.

This would be a win for the newly empowered Subsistence Farmers Association! Its ranks would swell. Assuming this constituency was concentrated in a battleground state in, say, a presidential election. They could look forward to glowing paeans from fawning candidates on bringing back the golden age of subsistence farming like that which prevailed before modernity.

Of course, observers would be asked to overlook that humanity was poor and miserable, though not for very long, since life expectancy was a fraction of that of the modern era.

To the extent no one could generally afford highly taxed goods, demand for those goods would crater. Recent research on the tariffs imposed by former President Donald Trump and maintained by President Biden has shown substantial pass-through of tariffs to finished and intermediate goods.

Not all the costs were passed on but have been absorbed by domestic firms, according to other recent research. For grocers and other less-favored industries, employment would shrink and eventually right-size to serve a much smaller market. As other research has shown, tariffs ultimately leave Americans worse off, even when factoring in the incremental benefits to protected firms.

Tariffs are also not a wise source of revenue. Under the hypothetical grocery tax, as the grocery and foodstuff business collapsed, so too would the grocery tax’s revenue.

A similar dynamic infects the current debate about trade policy. Whether couched in terms of bolstering national security or outright pandering to certain constituencies, taxing imports makes them relatively more costly than otherwise. This can show up in consumer sticker prices, reduced firm income, reduced production, or outright business failure.