On the love for tariffs: What are the benefits of Tariffs for a Nation's Economy?

Question

The following extract is from Newsweek.com:

Former President Donald Trump waxed poetic about his love of tariffs again on Friday — including his love for the word itself.

Speaking at a roundtable with voters in Auburn Hills, Michigan, the Republican presidential nominee said he thinks "tariff" is "the most beautiful word in the dictionary."

"You have other words that are damn nice, like 'love,'" Trump said, while others in the room laughed. "But I tell you, I think it's more beautiful than 'love.'"

Apart for the political and propagandistic use of the term “tariffs”, are there any solid economic reasons to the indiscriminate use of tariffs. In other words, will the introductions of tariffs and their consequences help economic growth in the USA? Is there pragmatic and historical evidence about this issues?

Answer 1

The answer below is a bit informal but still since there are a few parts to your question I think we need to go back to basics.

Background

A introductory international trade course would show that while free unrestricted trade is generally beneficial for nations as a whole, there are "winners" and "losers" from unrestricted trade policy.

As an example if consumers have a choice between more expensive domestically produced products and cheaper foreign products (assuming these products are homogeneous), consumers will choose the foreign products.

The thing to remember though is that one person's spending is another person's income, so by consumers purchasing these cheaper foreign products, they are reducing the revenues of domestic firms.

In this case the winners are domestic consumers and foreign producers and losers are domestic firms.

If for some reason we want to protect the revenue's of our domestic firms from foreign competition we will use tariffs to do so. If the regulator is accurate they will do so in order raise the price of foreign products so they are on par or more expensive than domestic products. In this case domestic consumers will either be indifferent between foreign and domestic products or strictly prefer domestic products.

In this case the "winners" from the introduction of a tariff are the domestic firms and "losers" are the domestic consumers (who see higher prices) and foreign firms which lose out on revenue.

Will The introduction of tariffs help growth in the USA?

Based on "Back of the Napkin" reasoning:

A tariff is just a tax levied on foreign goods. we know that tax revenue will be collected and then used to finance other projects adding to our nations income. We also know that it will reduce the demand for foreign goods.

So far this sounds good.

The one concern however would be with reference to retaliatory tariffs from foreign countries which would reduce the demand for the domestic countries exports.

So if we are thinking about Economic growth, from the back of the napkin we should expect some but not much.

Is there pragmatic historical evidence about this issue?

A quick google scholar search of "Tariffs and Economic Growth" gave me this paper as one of the first results: Tariffs and economic growth in the first era of globalization. There's some cute pictures which naively shows a slightly positive relationship between economic growth and average tariff level.

Clearly this is older work, but still in the absence of the politics and retaliatory tariffs we could see some growth but I would not bet on it.

Summary

1. Tariffs are a tool for protecting domestic firms from foreign competition and collecting tax revenue.
2. There's no sure thing we can say about the relationship between economic growth and tariffs empirically, but from "back of the napkin reasoning" we might see some growth.

Answer 2

are there any solid economic reasons to the indiscriminate use of tariffs. In other words, will the introductions of tariffs and their consequences help economic growth in the USA?

There aren't economic reasons for indiscriminate use of tariffs. Tariffs are generally inefficient, from economic perspective (e.g. see Krugman et al International Economics: Theory and Policy 9th ed). There are some specific reasons when tariffs can be efficient. For example, one can make case on tariffs for national defense, or to protect infant industries and so on, but there isn't an general result that would show tariffs are economically beneficial.

There could be beneficial in some situations (as discussed above), however, even in those cases the benefits exist when we assume they are implemented by benevolent social planner. In real life there are public choice issues, for example, the value of tariffs might be influenced by lobbying from industries that benefit (Krugman, 1987). Consequently, there is a widespread policy consensus in economics that are generally not good economic policy as most top policy economists believe gains of free trade outweigh the costs.

There is little reason to believe that tariffs would allow US grow faster. A case for tariffs could be made on national defense grounds, but this would still hurt US economically, the point is that the economic disadvantage could be offset by potential military advantages (e.g. a chip tariff would encourage domestic production of chips, which even if less efficient than purchasing chips from abroad, would give US edge in conflict as enemies would not be able to disrupt chip shipments, for example by blockading Taiwan).

Is there pragmatic and historical evidence about this issues?

Yes there is a lot of historical evidence. International trade is one of the subjects in economics that has the longest history of both theoretically and empirically. For example, even Smith's Wealth of Nations was heavily concerned with trade theory.

There are a lots of papers on this topic. If you are a layman you would probably benefit most from just reading undergraduate textbook. Abovementioned, Krugman et al International Economics: Theory and Policy 9th ed, is widely used international trade textbook at good universities, but ultimately all undergraduate textbooks are pretty much same so any standard bachelor level international trade textbook will give you some historical context.

Answer 3

The general economic theory says that tariffs are bad for economic growth. If there is a tariff on some good that means customers need to pay more for this good than they would otherwise (regardless of whether they buy the import and pay the tariff or whether they buy the more expensive domestic alternative). This is well established, has been known for a long time, is covered in most econ textbooks that talk about trade and represents the general consensus of most modern economists.

However, there are some special circumstances where a tariff might be in best interest of a country. The benefits may be non-economical, so one could argue that a little bit of economic growth is sacrificed in order to achieve independence of foreign powers or to preserve some industry (and the associated skills and knowledge) in the country. There is also the idea that one protects a local industry from foreign competitors through tariffs now in the hope that in the future it will mature and be able to compete without tariffs.

Whenever a tariff is imposed (and there is an attempt to make it sound economically sensible) it is usually argued that this is one of the special cases where a tariff would be beneficial overall. However, judging the value of these arguments is very difficult and the historical experience is mixed at best.

Answer 4

Is there justification for tariffs?

The above arguments are all valid. But we must consider that the stable global world order of the last 70 years is shifting. We are no longer in a time of continued world population growth, with commensurate continuing growth in demand. We have moved into a world of of falling demographics. Demand is starting to fall across the globe. In some places the fall in population is precipitating a fall in the capacity of manufacturing plant. The world may soon not produce and distribute enough food to feed itself. We don't have a good economic model for the world that is coming to be.

Remember the days of Empire, when the great nations rose because they controlled all off the food, energy and resources that they needed inside a single economy? I hope that the days of small countries that have specialized economies and reliance on a global order that allows them to thrive through trade are not vanishing. They have not vanished yet. The choices of our leaders can lead us forward into a great future of wealth for all, or cause most of the world economies to shudder and falter. Time will tell.

For America's part, it is already undergoing the largest period of industrialization in our history. America has food, energy and resource security in the face of growing world uncertainty in these areas. Foreign concerns are already shifting their manufacturing plant to America in order to insure ongoing operations. Tariffs are not needed for this.