Tariffs continued

  • Post author:
  • Post category:Economics

Tariffs are not taxes on foreign producers, but on domestic citizens. We can see that in our example where the Japanese producers still get their $10,000, but American consumers have to spend a $1,000 more.

They also do not increase total employment. They might increase employment in the car industry, but that would take away jobs in other sectors. For one thing, anyone who buys a new car is out an additional $1,000 compared to the pre-tariff situation and he can no more spend as much as he could on restaurants, movie theaters, etc., so the merchants in these areas suffer.

By penalizing U.S. imports, the tariff simultaneously penalizes U.S. exports. Specifically, for every car that U.S. consumers buy from Detroit rather than from Japan, it means Japanese citizens now have $10,000 less to spend on goods made in America. Thus the extra business of U.S. car producers is offset by the drop in sales among American producers of wheat, software, and other exports.

The significance of a tariff isn’t the effect it has on dollar bills—the number of dollar bills isn’t changed by a tariff law, and it’s ultimately not green pieces of paper that make Americans rich or poor. No, what makes Americans richer or poorer is how much they can produce with their own labor and other resources, and how much they can consume by either purchasing output from domestic producers or by trading surplus production with foreigners.