Tariffs: Bargaining Chip or Blunt Instrument?

why tariffs hurt more than they help

Few policies in economics sound more patriotic but less understood than tariffs.

Politicians wrap them in the flag, pundits praise them as tools of national revival, and many Americans, watching factories close and jobs disappear, see tariffs as a long-overdue defense against foreign exploitation. But when rhetoric meets reality, the story quickly begins to lose appeal. Tariffs may have a role as a temporary negotiating tactic to curb the practice on both sides, but as a permanent economic policy, they are both misguided and costly.

At first glance, tariffs seem like simple logic: if foreign countries are dumping cheap goods on our market, just tax those goods until they become less competitive. That way, American producers can compete on a level playing field. The trouble is that the world economy is not a one-way street. Tariffs don’t merely punish foreign producers — they raise prices for American consumers, provoke retaliation against U.S. exports, and disrupt the very supply chains that many American businesses depend on.

Historically, tariffs have failed more often than they’ve succeeded. The Smoot-Hawley Tariff Act of 1930 is a prime example. Passed with the goal of protecting American agriculture and industry during the Great Depression, it triggered a wave of retaliatory tariffs from other nations. Global trade contracted, prices rose, and unemployment soared. While Smoot-Hawley didn’t cause the Depression, it clearly prolonged it. The lesson, then as now, is that economic nationalism may win applause on the campaign trail, but it’s often a loser in practice.

Tariffs are not inherently foolish. Like sanctions or military presence, they can be used as a form of leverage. If a trading partner is violating intellectual property rights, manipulating its currency, or closing its markets to American goods, then the threat of tariffs can serve as a stick to bring them to the negotiating table. In this context, tariffs are not policy but pressure — a way to gain concessions, not to punish indefinitely. The danger comes when politicians confuse the two.

What too many politicians ignore is that a tariff is ultimately a tax. It is not paid by the foreign exporter — it is paid by the domestic importer, and then passed on to the consumer. A 25% tariff on Chinese electronics doesn’t make Americans richer; it just makes electronics more expensive. The idea that taxing your own citizens is a blow against foreign nations only makes sense in Washington.

Supporters of tariffs often argue that certain industries are “vital to national security” and must be protected at all costs. That may be true in rare cases — such as defense manufacturing or critical technologies — but that is a separate issue from using tariffs as a blanket policy. If something is essential to national defense, then it must be addressed through direct subsidies or strategic investment, not by making every American pay more at the checkout counter.

Another illusion is the belief that tariffs “create jobs.” While they may save some jobs in protected industries, they destroy jobs elsewhere. For example, higher costs for inputs like steel might save jobs in the steel industry but they also mean higher costs for manufacturers that use steel, leading to layoffs or reduced investment. It is a textbook case of what Frédéric Bastiat once called “the seen and the unseen.” We see the jobs “saved,” but not the jobs lost.

Free trade, while not perfect, has historically raised living standards, lowered prices, and created access to a wider variety of goods. It has fueled innovation and competition, especially in industries where American firms excel. But free trade must also be fair. When other countries manipulate rules, ignore intellectual property rights, or subsidize state-run enterprises to undercut foreign competitors, then something must be done. But that something should be targeted, strategic, and short-term.

It makes no sense for any country to make all its products domestically. Each country prospers most by producing what it can make most efficiently and trading for what others produce more efficiently. America lacks the proper environment for growing coffee beans. Some other countries lack the technical skill to build aircraft. When the United States exports airplanes and imports coffee, both sides benefit. Trying to produce everything domestically may sound patriotic, but it invariably squanders resources on inefficiency. Trade is not exploitation, it is specialization, and advocates of tariffs should keep that in mind.

Tariffs provide an illusion of positive action and the appearance of toughness. But economics is about consequences, not intentions. And the predictable consequences of long-term tariffs are higher prices, economic distortion, and global instability.

The real path to American prosperity does not involve shielding ourselves from competition, but in strengthening our capacity to compete. Tariffs may be a card worth playing at the negotiating table, but once you make them the game itself, everybody loses.