I Hope Russia WinsRandall Holcombe • Thursday July 5, 2018 9:00 AM PST •
I’m not talking about the World Cup here, but Russia’s challenge, along with six other countries, to Trump’s steel and aluminum tariffs. The Russians will be discussing those tariffs with the Trump administration, the first step in challenging them before the World Trade Organization. Those tariffs are bad for Americans because they raise the prices of steel and aluminum, which makes products made of steel and aluminum more expensive for American consumers.
Tariffs impose harm on both the importing and exporting country, but most of the harm falls on the country that imposes the tariffs. An elementary principle of economics is that there are gains from trade, and it follows from this that anything that impedes trade–such as tariffs–reduces those gains, both to buyers and to sellers.
The harm falls most on the country imposing the tariffs because consumers in that country pay the higher prices for imported goods, or in this case, domestically manufactured goods made from steel and aluminum.
Supporters of Trump’s tariffs make several arguments in favor of them. One is that we continue importing more than we are exporting, creating an on-going trade deficit. This means we are consuming more than we are producing. Why is this bad?
One argument about why this is bad is that it cannot go on forever, but the argument is wrong. What happens with the money we send overseas to buy foreign goods? Much of it comes back as investment in the United States. When foreign companies open facilities in the United States, as many do, where do they get the dollars to invest? Right! From our trade deficits.
This foreign investment is good for the American economy. It adds investment that would not have been here before and takes nothing away from Americans. By increasing investment in the United States, it makes the US economy more productive and raises the wages of American workers.
It is also worth mentioning that many of those dollars never come back to the United States. The dollar is used worldwide, and many of those dollars Americans spend on imports remain in circulation outside the United States because foreigners use them as currency.
Another argument supporting the tariffs is that the policies of foreign governments have imposed tariffs and other barriers to US exports, hurting American companies. While there may be some truth in this, those costs foreign countries impose on their own citizens (by making American goods more expensive) create the incentive for American producers to be more efficient. Americans can still buy American goods, and if foreign goods appear more attractive to American consumers for any reason, the best thing we can do for our fellow Americans is let them buy those foreign goods.
A related argument is that policies of foreign governments, by harming American businesses, are costing Americans jobs. But the unemployment rate in the US is 3.8%, so who would work those American jobs? With such a low unemployment rate, the argument that the trade policies of foreign governments are taking American jobs overseas is obviously faulty.
President Trump plays heavily on the fairness argument, but if foreign governments are restricting their imports of American goods, the people they are being most unfair to are their own citizens. The president’s fairness argument amounts to saying that because foreign governments are harming their own citizens, in fairness we should enact policies that harm Americans.
Trade is beneficial to both buyers and sellers, and trade barriers like Trump’s tariffs impose costs on both buyers and sellers. But the biggest costs are borne by Americans who will pay higher prices because of the tariffs. For everyone’s benefit, I hope Russia wins in their attempt to eliminate Trump’s tariffs.
Randall Holcombe is a Research Fellow at the Independent Institute. His Independent books include Housing America: Building Out of a Crisis and Writing Off Ideas: Taxation, Foundations, and Philanthropy in America.