Economic Analysis of Protectionism Clearly Shows Trump’s Tariffs Would Make Us Poorer, Not Bigger | American Institute of Business

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Much has been said lately about the government’s new industrial policy of threatening to penalize U.S. manufacturers who move production and jobs overseas by imposing 30-40 percent tariffs on U.S. customers of these companies. if their goods return to the United States as imports. There is also a lot of talk about imposing punitive tariffs in general on Americans who buy goods from Mexico, Japan and China, because according to President-elect Trump, these countries “absolutely crush us and kill us” on trade because they “tear us up completely.” off, steal our jobs and then laugh at us.

Given the economic illiteracy reflected in these discussions, I thought maybe the time had come to combine and update several CD articles on this topic (“ECON 101: Protectionism for Dummies” and “Simple Economic Analysis of the Tire Tariff: Americans Will Be Punished By the Punitive Tariffs “) and take a basic lesson in the underlying economy behind trade protectionism and tariffs which are summarized graphically in the graph above.

The graph above helps us understand very clearly and simply what happens economically to a country when it goes from: a) free exchange with the rest of the world, consumers paying the world price (P world) for a given product like Good X, to ab) protectionist trade policies like those Trump is proposing and a new higher price (Tariff P) which includes a tariff (tax) imposed by the government which reduces the amount of trade that takes place. Here is a detailed summary of the main economic outcomes that would inevitably result from the kind of trade protectionism Trump is offering (tariffs of 30-40-50%):

A. Economic results of a tariff on good X:

1. P world is the price Americans pay for good X before a tariff, and at this world price, American consumers buy Q4 units of good X. Most of these units are imported, with domestic producers supplying only Q1 units. The quantity of imports (without tariff) is represented by the dotted line at the bottom of the above graph and is also the distance between Q1 and Q4.

2. After the imposition of a tariff, Tariff P is the new higher price in the US and consumers are responding to the higher price by reducing their purchases of Good X from Q4 to Q3. Also as a direct consequence of the tariff, the production of domestic producers increases from Q1 to Q2, which is a clear advantage for American producers, who now sell more Good X at a higher price. Foreign producers lose market share and imports decrease to an amount represented by the distance between T2 and Q3 – see “Quantity of imports (with tariff)” and the dotted line below the graph, relative to the previous larger volume represented by the distance between T1 and T4 (see dotted line at bottom of graph).

Summary so far: ours consumers have deteriorated by the tariff because they pay higher prices and buy less good X, and b) American producers are better off because they sell more units of Good X at a higher price. We can therefore conclude that there are obvious economic costs for the tariffs that are imposed on US consumers at the same time as there are benefits from the tariffs captured by US producers.

Key question: How do consumer losses due to tariff compare to producer gains? If the losses of consumers were exactly offset by the gains of producers, then the net effects of the tariff would potentially be zero, without a net loss of jobs, wealth, national income or prosperity. It would just be a transfer of economic benefits (income and wealth) from consumers to producers, but without net gains or losses. Let’s take the next step and compare the gains and losses.

B. Analysis of economic gains and losses from tariffs:

3. Due to the higher prices of good X and the decrease in the number of such goods purchased, US consumers as a group will be worse off by the area of ​​the graph represented by (a + b + vs + D), which is a measure of the loss of “consumer surplus»Of the tariff. That is to say, before the tariff, this zone (a + b + vs + D) represented economic gain to consumers at a lower price in the form of what we call “consumer surplus”. Now, at the higher price due to the tariff, this amount of economic gain has been taken away from consumers, and therefore from this area (a + b + vs + D) graphically represents economic losses to consumers, and is described as a loss of “consumer surplus”.

4. American producers will benefit from the tariff and earn additional “”producer surplus”By an amount represented graphically by the area shaded in yellow abecause producers have now increased sales (Q1 to Q2) of their product at a higher price. This producer surplus gain could translate into increased sales, market share and profits.

5. What about the US government? It will now collect tariff revenues (taxes) on imports of good X in an amount represented by the zone vs in the graph (and labeled “Tax Revenues”), which is the product of the quantity of imports of good X (Q3-Q2) multiplied by the tariff per unit. If we assume that the tariff revenue in the area vs will be efficiently redistributed to the economy, we could treat this area as an economic gain. This point could obviously be debated, and there could be other objections to transferring resources from the private sector to government through the tariff, but we will neglect these issues for now.

So when you add it all up:

Tariff costs: American consumers are made worse by zone – (a + b + vs + D). (Note: This area could be quantified as a specific dollar amount if we had information on the supply and demand for good X.)

Advantages of tariffs: American producers are better off by zone a, and the government earned revenues represented by the area vs.

Net economic loss from tariffs: Tariff costs – (a + b + vs + D) for U.S. consumers outweigh the benefits of the tariff for producers and the government (a + vs), for a net economic or well-being loss of areas – (b) + – (D), – it is the costs to the economy resulting from the tariff which are NOT offset by benefits. In other words, the two pink triangles labeled “Societal loss“(and labeled b and D) in the chart above are the amount of losses to U.S. consumers and the economy (society) due to protectionist tariffs that are NOT offset by a gain to producers or the government, and represent what economists call the “deadweight loss” Where “windfall costOf protectionism.

Conclusion: An economic analysis of protectionism teaches us that the dry losses resulting tariffs are guaranteed to worsen the economy on the Net and guaranteed to reduce our economic well-being, which would translate into a loss of jobs in the United States and a reduction in wealth, prosperity and national income. You could argue about the magnitude of deadlocks shifting from free trade to protectionism, but you can’t pretend they don’t exist.

Therefore, despite Trump’s naive proclamations about “making America great again” with protectionism and tariffs, the economic analysis above shows that protective tariffs make the country that imposes them worse, on the Net, and this proposition is supported by 200 years of economic theory and hundreds of empirical studies. This is why economists almost universally support free trade and oppose tariffs and trade protection – because economic analysis and empirical evidence clearly show that there are always net economic losses due. protectionism.

If Trump succeeds with his mercantilist and protectionist trade policies, it will be the average Americans who will be punished with punitive tariffs, not the Mexicans or the Chinese. And while Trump’s protectionism could save US jobs in the short term, his tariffs and other protectionist measures will inevitably lead to even greater job losses in the long term, as well as lower prosperity and living standards. lower for the average American. It is not a formula for greatness, it is a guaranteed formula for economic impoverishment.

Premium: In the video below, watch the skillful Milton Friedman ‘debating’ economically uninformed President-elect Trump on issues of free trade, trade deficits, tariffs and protectionism.


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