Theoretically and empirically, the costs of tariffs are disproportionately borne by consumers and domestic industries. The US-China trade war initiated by Trump led to higher prices for both imported and domestic goods, reduced the variety of products available, and redirected trade flows. In 2018, for instance, the prices of washing machines and dryers increased by $86 and $92, respectively. Although around 1,800 jobs in the market for household appliances were directly created due to the tariffs, the annual cost to consumers—$815,000 per job—is exceedingly high, making this job creation hardly economically justifiable1. The burden of these costs falls mainly on middle and lower-income households, while the wealthiest 1% remain unaffected as they often purchase custom, hand-made appliances or rely on professional services for their laundry needs. Furthermore, the gains for domestic producers in a tariff-laden system are typically smaller than the benefits consumers enjoy under free trade. Conservative estimates suggest that the reduction in real income due to deadweight welfare losses in 2018 amounted to approximately $8.2 billion.
Not all costs from protectionism are monetary. Many readers of this newsletter, especially those living near the US-Mexico border, likely know firsthand the difference in quality between American and Mexican Coca-Cola. The key reason behind this disparity lies in US trade policy. Due to quotas and tariffs on sugar imports, American soft drink producers often find it too expensive to use natural sugar (from sugar cane) and instead turn to high-fructose corn syrup as a substitute. In contrast, Coca-Cola produced in Mexico continues to use cane sugar. Anyone who has tasted «Mexican Coke» can attest to the significant difference in flavor and quality. As a result, American consumers not only pay 50% to 100% more for sugar than the global market price but also face a decline in product quality as artificial sweeteners replace natural sugar.
A further unintended consequence is that higher prices in upstream industries—those shielded by tariffs—harm downstream industries, especially those dependent on these goods, thereupon generating adverse effects that can ripple through the broader economy. For instance, Dan Digre, CEO of Minneapolis Speaker Company (MISCO), points out the fact that Trump’s tariffs levied in 2018 increased his cost of production by roughly 25%, leaving his company at a significant disadvantage compared to foreign competitors who aren’t subject to such tariffs on the raw materials used to make speakers. These raw components, like magnets and voice coils, are no longer made in the US, forcing MISCO to import them and pay tariffs, while finished loudspeakers made overseas are subject to a much lower tariff. This economic phenomenon, known as tariff inversion, incentivizes downstream manufacturers to move production abroad to benefit from lower tariff rates on final goods, albeit it undermines US manufacturing.
Why are these policies so persistent and hard to remove? Two main issues exist. First, people are often rationally ignorant; that is, the cost of educating oneself in trade policy is higher than the potential benefit this knowledge would bring. Hence, economic knowledge about the consequences of tariffs remains limited. Second, protectionist policies create vested interests among firms that benefit from these protections. These firms are incentivized to waste resources on lobbying to preserve their government-granted privileges. Even if the public became fully aware of how the government is «ripping them off» (to use Trump’s words), a collective action problem still stands in the way. Mobilizing millions of people to advocate for policy change is virtually impossible, whereas a small number of protected firms can easily organize and influence policymakers to maintain the status quo. This dynamic helps explain why Democrats have not repealed his tariffs. It’s unlikely Kamala Harris would reverse these tariffs if Democrats win the presidential election, given that Kamala has indicated complete alignment with all of President Biden’s policies.
The alleged great boons protectionism yields continue to be seen conceptually and in practice. The overwhelming consensus among economists is that free trade is beneficial and far from a zero-sum game. International free trade lowers prices, expands product variety and quality, and strengthens most domestic industries. However, when distortionary interventions like tariffs are introduced, trade is diverted to less efficient producers, ultimately resulting in a net economic loss.
Luis Báez | Research Assistant | lmbaez@miner.utep.edu
The views represented here are those of the author and do not represent the position of The University of Texas at El Paso or the Center for Free Enterprise.
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