What are the economic effects of tariffs?
That question has been studied in detail dating back to Adam Smith’s “The Wealth of Nations” in 1776, and a general consensus was long ago agreed to among economists.
Tariffs decrease the health, happiness, and fortunes of those engaging in trade by:
- Steering trade toward inefficient producers.
- Encouraging the covert smuggling of goods.
- Rewarding political lobbies rather than productivity and creating vested special-interest groups that depend on government favors for profitability.
- Creating dead-weight losses as consumer costs typically far outweigh any gains to protected producers.
- Harming domestic producers by provoking retaliatory tariffs from other nations.
- Increasing production costs of domestic producers that use imports in their production processes.
As these effects work their way through the economy, the result is reduced employment, slower growth, and a decline in dynamism and innovation.
Economists with the International Monetary Fund and the University of California at Berkeley have quantified the macroeconomic damage caused by tariffs in a recent National Bureau of Economic Research paper.
Their findings include:
- Statistically significant declines in domestic output and productivity occur when tariffs are increased.
- More unemployment and higher inequality occur.
- Raising tariffs in advanced economies during economic expansions is particularly harmful.
- Tariff increases are more damaging than tariff reductions are beneficial.
- The much-ballyhooed trade balance is barely affected by tariffs.
This National Bureau of Economic Research paper comes at a most opportune time because bad ideas are floating around Congress, including the proposed Reciprocal Trade Act (discussed here).
The Reciprocal Trade Act would inflict the kind of economic and real-life damage that generations of economists have been warning us about since at least Smith’s time in 1776—which was a very good year for economic theory and, of course, also a very good year for America.
