The economic impact of import tariffs

Import tariffs act as a tax and will discourage people from purchasing goods from foreign suppliers. People work and invest primarily to earn income to purchase goods and services produced by others. In the same manner, people in one country export products and services to earn the wherewithal to buy imports from other countries.

If you tariff imports, you reduce the demand for imports which, in turn, reduces the need for the proceeds from the sale of exports and thus reduces exports. Tariffs, therefore, reduce both imports and exports, and in static terms, create jobs in inefficient domestic industries to replace the loss of efficiently made foreign imports, consequently losing jobs in efficient domestic industries that formerly were exported.

The relation between exports and imports among countries is no different than the relationship between income and spending amongst individuals. Income is earned by producing goods, which is sold in order to buy goods others produce. A country's imports equal its exports without capital flows. Tariffs do not per se change a country's net exports or what is called a trade balance.

To grasp the trade balance, its essential to recognise the close relationship between a country's capital surplus (i.e. capital inflows) and its trade deficit. A capital surplus is the difference between what a country invests and what it saves, while the trade deficit is the difference between what a country spends and what it produces. In essence, a country's capital surplus mirrors its trade deficit. If imports and exports move in lockstep, their difference (i.e. trade balance) won't change.

Tariffs also do not raise overall prices simply because the increase in domestic prices of imports (products and efficiently produced abroad) are offset by the fall in domestic prices of formerly exported products (more efficiently produced domestically). A country's import and its export are as tight a correlation as could be imagined. The lesson to be taken from this is that trade protection measures destroy the gains from trade by lowering total trade (exports plus imports) hurting importers, exporters, consumers and producers. It also hurts economic growth.

Tariffs do cost jobs and do reduce productivity as a result of a loss of comparative advantage gained from trade. Also, the collapse in total commerce as a result of tariffs leads to domestic tax revenue shortfalls and prompts domestic governments to raise tax rates everywhere. This perverse government response is anti-growth, leading to a vicious cycle of a race to the bottom.

Tariffs also lead to further job losses because of the atavistic urges of foreign governments to enter a trade war. Matching tariff increase for tariff increase is precisely the wrong thing to do, yet governments everywhere do just that. The end result of the trade war, in addition to a market collapse, is a magnified decline in trade for both imports and exports, and very little change in the trade balance.

In addition to everything else, tariffs will not raise much, if any, net revenues for the government. Increased tariff will reduce the overall trade from taxes. This point was a central tenet of Adam Smith in his book: The Wealth of Nations.

People work and invest to buy goods and the higher the quality of these goods and lower the price, the better off workers and investors are. Protecting industry from foreign competition by imposing tariffs comes at the expense of everyone. Consumers, producers and economic growth all benefit on average from free trade.

The winners from free trade outweigh the losers. The benefit of trade accounts to everyone – importers, exporters, consumers and producers of all trading nations. The benefit of trade is best measured as total trade – exports minus imports.

When viewing tariffs in the grand scheme of things, they represent government intervention in the market place. Tariffs are the antithesis of free market economics. The one over-riding theme is that whatever the perceived problem may be, government intervention is definitely not the solution!

THE WRITER IS A PHILANTHROPIST AND AN ECONOMIST BASED IN BELGIUM