The Long History of the Economic Costs of Higher Tariffs

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:

1. Steering trade toward inefficient producers.
2. Encouraging the covert smuggling of goods.
3. Rewarding political lobbies rather than productivity and creating vested special-interest groups that depend on government favors for profitability.
4. Creating dead-weight losses as consumer costs typically far outweigh any gains to protected producers.
5. Harming domestic producers by provoking retaliatory tariffs from other nations.
6. 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.