Donald Trump has said more than once that the most beautiful word in the dictionary is “tariff” and that it is, in fact, his favorite word. It is a seemingly magic word for the president of the United States — a word that when implemented as government policy, makes America richer and stronger, brings jobs to the United States, and helps make America “great again.”
Trump sees tariffs as a means to raise tax revenues from those sending goods to the United States and as a way to supposedly reduce U.S. budget deficits. He thinks that by making it significantly more costly for foreign manufacturers to sell their goods in the United States, they will move their production facilities to America and make the country more prosperous, with more employment for the country’s citizens.
Trump also sees tariffs as a weapon to intimidate and threaten other countries to bend their domestic and foreign policies to his will and vision of how the world should cooperate with America. With all of Trump’s references to the United States not being a policeman of the world and focusing on the country’s own domestic “greatness,” tariffs are among his most preferred governmental means to get what he wants from other nations around the globe.
During his first term as president, Trump once got into a heated exchange with CNN correspondent James Acosta during a White House press conference. Trump said at one point, “Honestly, I think you should let me run the country, and you run CNN.” (See my article, “Presidential Hubris: ‘Let Me Run the Country,” FFF website, November 16, 2018.) This is how Donald Trump views his role as president of the United States: the highest-ranking central planner in the government, who will make America great again, under the presumption that without his direction and policies, of which tariffs are an essential part, the country will flounder and be a global “loser.”
Donald Trump as a neomercantilist
For all of Donald Trump’s talk about reducing government regulation over American businesses and reducing taxes to stimulate investment and innovation, the fact remains that, at heart, he remains a neomercantilist. Mercantilism was the 18th-century version of government planning, practiced in virtually all the major European countries of that time, particularly in Great Britain and France. Governments told private enterprises what goods they could produce, with what technologies and designs, and in what parts of the country. Prices and wages were subject to government control as well.
Most especially, governments attempted to micromanage international trade with restrictions on imports and subsidies for exports. The presumption was that imports stole revenues and employments from domestic producers and manufacturers, while exports were the financial elixir of life; when properly managed by government, tariffs would ensure that the country had a favorable or “positive” balance of trade, guaranteeing the domestic employers’ and workers’ profits and jobs.
In those earlier times, gold was money, so the idea was that if sales from exports exceeded purchases for imports, this would bring about a net inflow of gold into the country, which meant that one’s own nation had a greater store of the precious metal and therefore possessed economic strength and political superiority over other nations.
Donald Trump embodies a 21st-century version of this 18th-century mentality. Listen to what he says. Neighboring countries like Canada and Mexico are taking advantage of the United States because they sell more goods and services to the United States than the United States sells to them. The bugaboo of a “negative” balance of trade hovers over Trump’s mind day and night. By Canada selling America more, in dollar terms, than they buy from the United States, the Canadians have somehow cheated the United States, “stolen” from the United States, and made America weaker and less “great.”
While economists argue and disagree with each other about a fairly wide variety of theoretical and policy issues, there is one issue that a large majority of them generally all agree on — that freedom of trade offers the best avenue for a rising standard of living and innovative cost-efficiencies that work to better serve the interests of consumers, which means all of us.
The basis of exchange is mutual gains from trade
It all begins with the simplest and most straightforward question: why do people trade with one another? Human beings could try to, respectively, live lives of splendid economic isolation from each other. Each of us could try to follow a policy of autarky, that is, economic self-sufficiency. This would require everyone to grow their own food, make their own clothes, construct their own shelter from the elements, and, indeed, make on their own everything else that they may need, want, and desire.
It does not take much reflection to realize that our lives would be ones of poverty and misery. Our standards of living would be, at its best, like Robinson Crusoe alone on his island, dependent on his own knowledge, skills, and the narrow range of resources that he might be lucky to find on the island. Even if we think of separate households of a man and woman and their children, the number and types of things this narrow system of cooperation and division of labor would offer to each family would still be one of great economic hardship.
Trade emerged when it began to dawn on our primitive ancestors that their lives might be made a bit better by entering into exchanges with others. Another person might be able to produce some desired thing that one’s own skills or resources could not produce. And assuming that murder and theft were proscribed methods of obtaining what you want, then the only way you could obtain from that other person that thing you want would be to offer in trade something they would take to voluntarily relinquish what they and you reciprocally desire.
Or it might be that you could make something for yourself with your own skills and resources, but it would be inferior in quality or more costly in terms of resources used and labor time consumed than the version of the desired product that could be made by a neighbor. Adam Smith explained all this in the early chapters of The Wealth of Nations (1776). He imagines a primitive tribe in which one of the members realizes that another of the tribesmen can make a better set of bow and arrows than he can make for himself, while he notices that he can tan and prepare an animal hide suitable to cover a tent better than the one who can make superior archery implements. He offers a better tanned animal hide in exchange for the better set of arrows and a bow. Each will now be better off through this simple act of exchange in which they trade away what they value less highly for what they, respectively, value more highly.
Smith continues the example, suggesting that another tribesman sees this successful act of trade and realizes, in turn, that he can offer to make a set of superior tools — a primitive axe or hatchet or stone knife — in trade for one of the archer’s bows and arrows as well as for the tanner’s animal skins. Slowly but surely, with no prior overall intention or design, more and more members of this community of tribesmen would see the benefits from their specializing in one or a few things and trading these specializations for the superior products of the others in the group.
There would emerge and develop a system of division of labor through networks of exchange. All would be better off through this evolved arrangement of mutual interdependency that would improve the number and variety of goods and services available to each, and at lower costs, than if they each tried to do everything for themselves. What was true for the members of the same community would be no less true when applied to people of different communities or nations. As Adam Smith famously said:
It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…. What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage….
It is certainly not employed to the greatest advantage, when it is thus directed towards an object which it can buy cheaper than it can make…. The industry of the country, therefore, is thus turned away from a more, to a less advantageous employment, and the exchangeable value of its annual produce, instead of it being increased, according to the intention of the lawgiver, must necessarily diminish by every such regulation.
Comparative advantage and the law of association
Later economists, like James Mill (father of John Stuart Mill) and David Ricardo, extended Adam Smith’s reasoning through development of the concept of comparative advantage. Even if an individual or a country was far more productive and cost-efficient in a wide variety of activities, it still would be more advantageous for such a person or country to specialize in what they were relatively, or comparatively, most productive at doing and acquire some of the things they desire from less efficient trading partners.
Imagine a medical doctor who can perform one brain surgery an hour and who could tend his own garden around his home in three hours. Imagine a professional gardener who has no training to perform any type of surgery and, even though it is his specialization, would take five hours to tend the doctor’s garden. Further suppose that the doctor could earn $200 per operation and the gardener would charge $50 an hour to care for the doctor’s garden. The doctor’s comparative advantage, in terms of how others value his time and skills, strongly suggests that he should hire the inferior gardener to do his gardening work for a total cost of $250. It frees up three hours of his own time to perform surgeries; the total value for this period of time would be $600, resulting in a net gain in income of $350 after paying the gardener to do what he could have done himself in less time.
Again, this simple example brings out the logic by which all gains from trade direct people into those activities in which they have both absolute and comparative advantages that enhance the economic well-being of all participants. It also explains how “society” as an extended, complex, and continuous network of human relationships emerged and has continued to grow to now incorporate most of the people everywhere around the world — the modern global society.
The Austrian economist Ludwig von Mises, in his great treatise Human Action (1949), called this the “Ricardian Law of Association”:
The law of association makes us comprehend the tendencies which resulted in the progressive intensification of human cooperation. We conceive what incentive induced people not to consider themselves simply as rivals in a struggle for the appropriation of the limited supply of means of subsistence made available by nature. We realize what has impelled them and permanently impels them to consort with one another for the sake of cooperation. Every step forward on the way to a more developed mode of the division of labor serves the interests of all participants….
If labor under the division of labor is more productive than isolated labor, and if man is able to realize this fact, human action itself tends toward cooperation and association; man becomes a social being not in sacrificing his own concerns for the sake of a mystical society but in aiming at an improvement in his own welfare.
Balance of trade fallacies
All of this may sound all well and good, Donald Trump and his followers may say, but nonetheless other countries must be taking advantage of America when the dollar value of what they sell to the United States is greater than what they buy from Americans. The dollar value of our imports is greater than the dollar value of our exports, and this is a measure of the degree to which other nations are gaining while we are losing in the international system of trade.
While Trump talks about the United States as a whole and its trade balance with other countries, the same logic applies to each of us as individuals. I teach economics at an institution of higher learning, for which the college pays me a salary. I have a balance-of-trade surplus with my students and their parents, in as much as their tuitions pay for my salary, while I purchase little or nothing of the particular goods and services the parents of those students produce to earn the incomes to send their sons or daughters to college. Thus, they buy what I have for sale, but I buy little or nothing from them that they have for sale.
At the same time, I use the income I have earned by teaching economics to my students to go to the supermarket and purchase the wide variety of foods I desire from those who own and manage the supermarket. I am fairly sure that no one at the local supermarket where I do my shopping has ever spent any of the money they earned from selling me groceries to buy one of the books I have written or paid to hear me deliver a public lecture on economics. I, therefore, have a large balance of trade deficit with the supermarket, as I spend a good portion of my income buying food items from them, but they buy nothing of mine that I sell to earn that income.
Have those students and their parents suffered a loss from paying the tuition that pays my salary because I do not spend any of my earned income on the specific goods and services they sell in the marketplace? Or do I feel like a loser due to the fact that the supermarket management and employees do not turn around and spend back any of the money I spent buying food on my writing or lecturing services?
I certainly do not feel like I’ve suffered a loss or have been taken advantage of or have been “exploited” by the sellers of the food I buy from them. In fact, the only reason I “export” my writing and lecturing services to some in the marketplace is to have the financial wherewithal to “import” all of the goods I do not and cannot make myself from all the others who serve my needs, wants, and desires at a far lower price and cost than if I attempted to do it all by myself. That is, I export so I can import. My exports are merely a means to the end of importing all the things I’d like to have and cannot do for myself.
The trade balance has to balance
Trump looks at America’s trade with individual countries and becomes angered when “we” have bought more from “them” than “they” have bought from “us.” What matters is not the individual balances with particular trading partners, but our overall balance of payments, which include everything that is bought and sold and not only, and narrowly, finished goods and services. At the end of the day, all my importing capacity is constrained by my exporting ability. If I earn, say, $1,000, that constrains what I can buy from everyone else. My capacity to import is limited to what I have been able to export. And the same is true for everyone else in the marketplace. So the total value of all my imports cannot exceed the total value of all my exports, regardless of how I spend that $1,000 on different things. The same applies to everyone else in the arena of trade. At the end of the day, everyone’s balance of payments must balance.
Another way to see this is to ask how foreign earners of dollars can spend what they have earned. Suppose that American consumers purchase $1,000 worth of Japanese goods that are imported into the United States. But suppose that the Japanese earners of those dollars only spend $800 on American finished goods and services. In Trump’s eyes, the $200 not spent on American goods is an indicator of by how much Japan has taken advantage of America.
But we need to ask what else can those Japanese exporters do with the remaining dollars they have earned. First, some of those Japanese might decide to undertake direct investment in the United States. That could mean, for example, that, say, $100 is used to start up or partner into a business here in America. Or some of those Japanese might decide to indirectly invest in the United States, which means they might take $75 of the $1,000 they have earned and deposit in an American bank or other financial institution due to the attractiveness of U.S. rates of interest compared to those in Japan or anywhere else; this adds to the American savings pool for American investors to draw upon.
Finally, some of those Japanese earners of dollars might decide to sell $25 on the foreign exchange market for Euros, since they are interested in buying, perhaps, something sold in Germany or France. Why would someone have sold Euros for those dollars on the foreign exchange market? Because they wanted dollars to either purchase finished American goods and services, or to directly invest in the American economy, or indirectly invest to earn an interest income. And at the end of the day, the $800, plus the $100, plus the $75, plus the $25 equals the $1,000 Americans spent on Japanese goods. The dollar value of imports equals the dollar value of exports. There is no imbalance in America’s trade with the world.
Foreign imports do not cost jobs in America
But don’t imports cost Americans their jobs, since the domestic producer may be marginalized or even driven out of the American market due to the fact that the foreign exporter sells their version of some product at a lower price than their American rival? In a nutshell, “No.” Suppose that the American version of the product has been selling for $100, and now a foreign rival enters the American market and sells it for $75, which the American competitor cannot find a way to match.
American consumers are now able to obtain a desired good for $75 instead of $100. They have that good for a lower price that now leaves $25 in their pockets to purchase other goods they previously could not afford to buy. This increases the domestic demand for those other goods, creating employment opportunities in these alternative domestic corners of the marketplace. In addition, the foreign seller has not provided his product to American consumers out of the goodness of his heart. He sold his product for $75 precisely so he could increase his own demand for what he wants to buy in America. This opens up increased business and employment opportunities in the American export sectors of the U.S. economy as the means to pay for those imports.
As a result, while the composition of what goods are produced and sold in America, either to domestic consumers or foreign buyers, changes, any jobs lost by the America producers who have not matched their foreign import rival are merely shifted to other sectors of the U.S. economy. This does not discount that some jobs are lost and those let go must move to other employment and may have to learn some new skills along the way. But the longer run net effect for everyone is a higher standard of living as less-expensive goods are sold, and real incomes rise for Americans as a whole.
This would be no less true if it was a producer in Oregon who was able to sell a desired product in South Carolina for a lower price than his South Carolinian competitors. Some jobs would be lost in South Carolina, but consumers in South Carolina would have a higher real income due to being able to buy a wanted product for less than they had been paying before, which enabled them to also purchase other things they previously were not able to. And South Carolinians would find other work making goods the sellers in Oregon would like to buy as payment for their exports to South Carolina. The imaginary lines on a map that are said to divide America from, say, Canada does not change the basic economic logic that applies no less to trade between the states within the United States. Whether it be foreign or domestic trade, imports are paid for through exports, and making goods cheaper improves the economic wellbeing for everyone in general.
Retaliatory import taxes only add to the economic harm
But, wait! It is all very well and good to talk about the benefits from freedom of trade, but we live in a world in which other countries do not always play by free-trade rules. They impose tariffs against American goods and subsidize some of their own goods to artificially sell them for less in the United States than the producers’ actual costs of production would have permitted. Surely, the U.S. government must retaliate against countries and governments that do such things that undermine a “level playing field” in the arena of international trade.
Again, in a nutshell, the answer is, “No.” Imposing a retaliatory tariff on some or all the goods from another country only succeeds in imposing additional harm on the consumers and producers of the retaliating nation. First, contrary to what Donald Trump constantly asserts, the foreign supplier is not the one who bears most of the brunt of the import tax — make no mistake about it: it is a tax borne by the consumers and producers of the importing nation. The impact of an import duty is really not much different from our experience with a sales tax. The consumer goes to the checkout counter in a store, and in addition to the product’s sale price, the sales tax is added on to that basic price and is the total amount that consumer must pay to walk out of the store with the desired commodity.
So, too, before the importer can leave with the foreign good at its point of entry, they must pay the import duty. So the importer has paid the foreign producer for the product and then pays the government the import tax to bring it to market in the American economy. The basic price of the imported good plus the import tax paid represents the full cost of bringing the good into the country and selling it to American consumers. Based on the elasticity of demand for this imported good — that is, the amount by which the quantity demanded for this good may decrease when it is offered at the higher price — the import seller may or may not make more revenues when it has been sold. But either way, American consumers pay a higher price and purchase less of the good than would have been the case if it could have been imported duty-free. The American consumers have borne most of the import tax. As a consequence, it is not the foreign producer who pays the import tax, though he may earn less revenues due to a decrease in the demand for his good in America because of the tax added to the good’s basic price.
But what about the case of a foreign government subsidizing one of its producers so they can sell the good to American importers at a lower price than their actual costs of production would have profitably permitted? All this means is that American consumers are able to buy more of this good at a lower price. As explained earlier, this means they may experience a higher standard of living since they have money left over to buy other things they previously did not have the money to buy, and some American producers and workers shift into making other domestic goods for which the demand now increases, as well as into the export industries to pay for these imported goods.
Imposing an import tax on this good to compensate for the foreign production subsidy merely denies American consumers an opportunity to be better off, benefitting the America producers protected from this foreign competitor. Suppose the foreign producer had devised a way to make this product for less and sell it for less. From the perspective of the American consumers being made better off, there is no difference between the two cases. It should be the citizens and taxpayers in the foreign country giving that export subsidy who should be protesting, since it is they who are being taxed to pay for the privileged enterprises to be able to sell their goods to American consumers at a lower price.
Free trade is the best policy, regardless of what other nations do
In 1896, British economist Henry Dunning MacLeod argued in his The History of Economics that trade retaliations or reciprocally imposed import tariffs only end up harming the citizens of one’s own country far more than it imposes any supposed damage on the offending trading partner. Said MacLeod:
If the present hostile tariffs destroy an incalculable amount of commercial intercourse, a resort to reciprocity and retaliation would destroy it infinitely more…. If foreign nations smite us on one check with their hostile tariffs, if we followed the advice of the reciprocitarians, and retaliated, we should simply smite ourselves very hard on the other cheek…. The true way to fight hostile tariffs is by free imports.
His fellow British economist Sir Louis Mallet said a few years before Macleod in Free Exchange (1891):
If as is alleged, protection is only sought for the sake of reciprocity, it is impossible to understand why a one-sided Free Trade should not be better than no Free Trade at all. The mutual relaxation of restrictions is a mutual advantage; the mutual creation of restrictions is a mutual injury. If one tariff is bad, two must be worse. It matters nothing whether the barrier be raised in one country or the other, the effect is precisely the same.
The best policy, therefore, is the full and uncompromising policy of free trade, regardless of what and how other governments interfere with and try to manipulate the exports of their own country. Unrestricted free trade will benefit the American people, even if other nations choose to follow unwise and foolish trade policies instead.
This article was originally published in the May 2025 issue of Future of Freedom.
