Tariffs and Exports

Early in the course, we discussed the main theories of Adam Smith, whose ideas provided the foundation for the American free-market economic system. One of these theories was free trade. Smith argued that free trade would increase the wealth of everyone involved. This ran against common economic thinking at the time. In Smith's time, many nations followed the mercantilist economic system. Nations that practiced mercantilism had two primary economic goals: maximizing exports and minimizing imports. Mercantilists believed that there was only a set amount of wealth in the world. By exporting more goods than they imported, mercantilist nations hoped to fill their coffers with more gold than any other nation. These ideas, however, led to the implementation of many trade barriers that stifled trade and limited economic growth.

In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest.

Adam Smith, The Wealth of Nations

In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest.

Adam Smith, The Wealth of Nations

The plus for mercantilists was that the gold they wanted to hoard at least had some intrinsic value. Today, a goal of maximizing exports and minimizing imports is even more suspect. Instead of stockpiling gold, countries would be stockpiling foreign money that is inherently worthless. The only use for that money is to spend it on imports.

In addition, most of the trade barriers instituted today damage the economy they're supposedly trying to protect. We've already established that tariffs and other trade barriers hurt consumers. Implementing new tariffs can also trigger trade wars that hurt domestic producers as well. When one country establishes a new tariff, its trading partners will often establish retaliatory tariffs. For example, when the United States established tariffs on Chinese goods during the Trump administration, the Chinese responded by establishing tariffs on American goods. This hurt American farmers who relied on exporting food to China. Thus, the tariffs the United States established on Chinese goods ended up hurting American consumers as well as some American producers.

Indeed, even if no retaliatory tariffs were passed by other nations, implementing tariffs does not help a nation's producers as a whole. Tariffs help domestic producers in the protected industries, but they hurt domestic producers in other industries. As you read Chapter 11 in Economics in One Lesson, pay particular attention to Hazlitt's discussions of how tariffs affect domestic producers and overall production. Then, continue to Chapter 12 for a more detailed discussion about the "pathological yearning for exports" in the United States.

Read Chapter 11: "Who's 'Protected' by Tariffs?" and Chapter 12: "The Drive for Exports" in Economics in One Lesson. When you've finished reading, click the button below to continue with the rest of the lesson.

Many arguments for tariffs in the United States rest on the idea that trade barriers will protect domestic industries and, therefore, protect domestic jobs. If foreign nations are allowed to import cheap products into America, the argument goes, then American workers will lose their jobs or have to work for lower pay. Hazlitt demonstrates that this argument is a fallacy. All that the tariffs accomplish in these situations is to change the "structure" of American production and employment. They don't increase production, employment, or wages. Instead, they simply shift production and employment from one industry to another. And in the long run, tariffs will lead to reduced production, employment, and wages.