The cost of tariffs is higher than commonly understood

By Justin Hatherly
AIMS on Campus Fellow

The new incumbent in the White House seems intent on imposing import tariffs. While many believed that his protectionist sabre rattling was mere campaign rhetoric, President Trump has not wavered from his anti-trade instincts since taking office. For example, one of his first actions was to withdraw the United States from the Trans-Pacific Partnership negotiations.

In the wake of President Trump’s actions, it is useful to consider some forgotten impacts of tariffs. A comprehensive look at the political economy of tariffs suggests that they are even more economically destructive than standard models might suggest.

In addition to their direct costs (consumers and producers paying more for imports), tariffs also impose substantial secondary costs. The imposition of a tariff requires that the government create an administrative structure devoted to collecting tariff revenue and enforcing compliance (for instance, by prohibiting smuggling). Resources diverted to these purposes are thus unavailable to service more valuable endeavours.

In essence, once the cost of enforcing a tariff is added to the direct burden it places on consumers and producers, it should be evident that the negative economic effects of tariffs exceed the direct losses to consumer and producer welfare. The associated institutions that would have to be set up or expanded to ensure compliance and revenue collection do not add to value or economic welfare; rather, they are a mere diversion of scarce resources to unproductive ends.

Moreover, many also fail to account for the waste of resources that tariff-induced lobbying triggers. When protected by a tariff, many industries will expend substantial funds, time and other resources to ensure that protection is maintained. Once again it should be apparent that these activities are a cost to society. Resources that could have been used to invest in new productive capacity or other value-adding endeavors are instead utilized to maintain an arbitrary transfer of wealth, from economic actors generally to the industry benefitting from tariff protection.

In sum, the societal deadweight loss associated with tariffs far exceeds what traditional economic analysis might suggest. Textbooks seem only concerned with the immediate implications for consumers and producers. However, the political economy of protectionism suggests that ill effects go far beyond this.

The enforcement costs of tariffs and the rent seeking that they inevitably induce means that protectionism is far more costly than the standard analysis of economic welfare implies.

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