Donald Trump believes that tariffs have magical properties. He even claimed in his speech at the Economic Club of New York last month that “I stopped wars with the threat of tariffs”. He added: “I stopped wars with two countries that mattered a lot.” So great is his faith in tariffs that he has proposed raising them to 60 per cent on imports from China and up to 20 per cent on imports from the rest of the world. He has even suggested a 100 per cent tariff on imports from countries threatening to move away from the dollar as their global currency of choice.
Can one defend such disruptive policies? In an article in The Atlantic on September 25, Oren Cass, executive director at American Compass and an FT contributing editor, argues that economists who criticise Trump’s proposals ignore the benefits. In particular, they ignore an important “externality”, namely, that consumers buying foreign goods “will probably not consider the broader importance of making things in America”. Tariffs can offset this externality, by persuading people to buy American and employ Americans.
However, as Kimberly Clausing and Maurice Obstfeld write in a blistering paper for the Peterson Institute for International Economics, it is not enough to argue that some benefits might follow. To justify Trump’s proposals one has to assess the costs of the proposed measures, the scale of the purported benefits and, above all, whether these measures would be the best way to achieve the desired objectives. Alas, the costs are huge, the benefits doubtful and the measures inferior to alternative options.