In The Spectator, Oren Cass once again tries to point out that when it comes to Trump’s tariffs, economists just don’t get it. This is not the first time that he’s done so nor is he the only lawyer to suggest that when it comes to economics, economists just don’t understand something. His American Compass colleague, Michael Lind, has done so and Zephyr Teachout did so with respect to price controls. While these three have learned some economics in the course of their legal training and political careers, it is painfully obvious that they’ve learned just enough to be a nuisance but not enough to be insightful.
But if we stop and look at the defenses of tariffs that have been offered by the so-called “New Right,” the only consistency we can find is the shifting goal post of their argument. To his credit, Cass offers a clever way to argue that there is no goal-post-shifting going on by pointing out that tariffs have “four different uses.”
- Funding
- Decoupling
- Rebalancing
- Negotiating
One would be hard pressed to argue that different defenses of tariffs cannot be made. But do those arguments hold water, or are their proponents, in the words of James Buchanan, “[making] only noise under an illusion of speech?”
Funding
President Trump has made many bombastic claims about tariffs. Most famously, he has argued that they could be used to replace the income tax. Indeed, even news outlets such as The National News Desk, have argued the same. But if we look at their Fact Check Team’s report, we find stunning and sloppy mistakes. For instance, they report that “the federal government is projected to collect $518 billion in individual income taxes for fiscal year 2025, accounting for 48% of its total revenue.” They then link to the Treasury Department’s website as evidence of this claim.
There are two problems with this. First, as the Treasury’s website clearly states in very big, very bold letters right at the top of the page, the $518 billion is revenue collected so far this fiscal year (which began, as the Treasury points out, in October of 2024), not what they project to collect over the course of the entire year. The reality is that the federal government is projected to collect around $2.5 trillion in revenue from income taxes this fiscal year, which about five times as much as The National News Desk’s Fact Check Team claims.
The second problem is that even if the Fact Check Team was right about the $518 billion, the question remains as to whether we could replace just this sum with tariff revenue. For 2024, the federal government collected $80 billion from tariffs. The non-partisan Congressional Budget Office analyzed various tariff proposals, including President Trump’s famous proposal to levy a 60% tariff on China and a 10% tariff on the rest of the world. They find that these tariffs would raise about $270 billion per year over the next ten years. To be fair, the CBO has been wrong before. But they have never been wrong to the degree necessary to justify the claim that we can replace the income tax with tariff revenue.
Bottom line: can tariffs be used to raise revenue? Yes, of course they can. That the US collected $80 billion last year is evidence that they can, indeed, be used in this fashion. But the fact that even the most bombastic of tariffs proposed by then-President-Elect Trump only increased projected tariff revenue by only $190 billion underscores just how limited this defense of tariffs is in the real world and certainly could not be used to replace income tax revenue.
Against a total federal budget of $7 trillion for FY2025, an extra $190 billion would be comparable to a typical American winning a $1500 lottery ticket. While this would certainly be nice, it could hardly be considered life-changing.
Decoupling and Rebalancing
The second and third justifications for tariffs that Cass gives is that tariffs “can shift supply chains” and “promote domestic production” respectively. These justifications have been used several times. For example, in 2009, then-President Obama levied tariffs on “new pneumatic tires, of rubber, from China, of a kind used on motor cars (except racing cars) and on-the-highway light trucks, vans, and sport utility vehicles” to protect the American tire making industry. These tariffs were enacted for a total of three years. The result of this is clear: the price of tires in the US rose during the years of the tariff, only falling when the tariff was rescinded.
But did it create jobs in the U.S.?
According to a 2012 report from The Peterson Institute for International Economics, it created, at most, 1,200 jobs in the U.S. tire-manufacturing sector. In the same study, the authors find that the largest winners from the Obama tire tariffs were not Americans; they were Thailand, Indonesia, and Mexico, whose tire manufacturers were able to increase their output (and prices) and sell more of their now-more-expensive tires to Americans.
However, because the price of tires in the U.S. rose so significantly, Americans had less disposable income to spend in other areas of the economy. The result was a loss of an estimated 3,731 jobs in the U.S. retail sector, meaning that the net effect of the Chinese tire tariffs was to reduce the total number of jobs in the US by 2,531.
As a more recent example, in 2017, President Trump famously levied tariffs on Chinese steel and aluminum, citing the importance of these materials for national defense, hoping to create more jobs in the U.S. and to shift global supply chains such that America played a larger role in the world market for these important products. The best evidence that we have suggests that around 1,000 jobs were saved in the U.S.’s steel and aluminum producing sectors. However, because the tariffs caused the price of steel and aluminum to rise in the U.S, American manufacturers had to pay higher prices for their steel and aluminum. When manufacturers face higher costs for production, workers bear the brunt. The result was a loss of about 75,000 jobs in manufacturing due to the higher prices of steel and aluminum. Indeed, a 2019 report by the Federal Reserve finds that “U.S. manufacturing industries more exposed to tariff increases experience relative reductions in employment.”
But even this is charitable and only reflects history through about 2019. Looking forward to today, despite everything that has been done to save the U.S. steel industry – from special tax abatements, protective tariffs, and mandatory purchasing agreements – U.S. Steel, the largest steel producing company in the U.S., still teeters on the verge of bankruptcy. It seems odd to blame the decline of the U.S. steel industry writ large on the scourge of foreign competition.
Negotiating
Finally, can tariffs be used as a negotiating tactic? It seems clear from recent history that it is possible to do so, as Columbia, Mexico, and Canada all changed their tune in response to the threat of tariffs and other trade sanctions. Further, there’s an argument to be made that El Salvador is willing to accept U.S. prisoners in the hopes that they, too, will be spared from tariffs in the future. Indeed, Adam Smith, the father of economics himself, offered a cogent defense of the use of tariffs as a negotiating tool, writing, “There may be good policy in retaliations of this kind when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconvenience of paying dearer during a short time for some sorts of goods.”
In other words, Smith’s recommendation is that we use tariffs and other trade restrictions (or the threat thereof) to impel other countries to reduce their trade barriers against us. After which, we can then rescind these trade restrictions. However, he goes on to say, “When there is no probability that any such repeal can be procured, it seems a bad method of compensating the injury done to certain classes of our people, to do another injury ourselves, not only to those classes, but to almost all the other classes of them.”
In simpler terms, Smith is saying that if tariffs and other trade restrictions do not cause the other country to lower their trade barriers, then restricting trade ourselves only serves to further harm ourselves.
When it comes to countries like Columbia, Mexico, and Canada (and El Salvador), U.S. trade restrictions are likely to work. Their economies are heavily dependent on their economic relationships with the U.S. and anything that jeopardizes this would be a real and serious threat to their own economic livelihood. As such, it is little surprise that these threats were met with capitulation, at least to an extent.
But when it comes to much larger, more internationally diversified regions like China or the European Union, tariff’s ability to affect trade relationships is much more limited. But we don’t have to simply take my word for it. When it comes to the effectiveness of the 2018 tariffs imposed on China, a 2024 U.S. Trade Representative report makes it clear, writing:
China has not eliminated many of its technology transfer-related acts, policies, and practices, which continue to impose a burden or restriction on U.S. commerce. Instead of pursuing fundamental reform, the Government of China has persisted and even become more aggressive, particularly through cyber intrusions and cybertheft, in its attempts to acquire and absorb foreign technology, which further burden or restrict U.S. commerce.
Indeed, the 2019 Economic Report of the President, which Trump signed, notes that “In response to U.S. actions…, Canada, China, the EU, Mexico, Russia, and Turkey imposed retaliatory tariffs.” In other words, the tariffs did not lead to other countries lowering their barriers to trade: they led to other countries raising their barriers to trade.
Can tariffs be used as a negotiating tool? In some cases, yes, but as countries around the world continue to become increasingly more interconnected, this ability will wane. The use of tariffs in this fashion will only incentivize other nations to accelerate this interconnectedness and lessen their dependence on US markets.
Conclusion
Paul Rubin once referred to Folk Economics, which he defined as “the intuitive economics of untrained people.” Frederic Bastiat writes powerfully about “the seen and the unseen.” Henry Hazlitt, in much blunter terms, describes the difference between the bad economist and the good economist.
When it comes to the arguments of Cass, Lind, and Teachout, it is clear that they are espousing the type of Folk Economics that Rubin warned us about and that Bastiat and Hazlitt provided the panacea against. At best, they overstate the case for tariffs and understate the harms.
Tariffs are a rotten deal for the American people, workers and consumers alike. Their ability to raise revenue is lacking, their use in decoupling and rebalancing international trade is counter-productive, and they have but limited (and diminishing) practicality when it comes to impelling other nations to change their tunes vis-à-vis trade policy.
The problem with tariffs is not that they have been inadequately defended; the issue with them is with the thing itself. It is time to rethink our international strategy. President Trump and his supporters often tout his success as a businessman. He did not earn his billions of dollars by threatening his customers and business partners. He did so by finding creative win-win propositions where nobody else could. He should play to these strengths. Rather than threaten to erect new barriers to trade, he should instead find more bilateral trade agreements that lower barriers to trade for everyone, American or otherwise. In doing so, he would leave behind a legacy that would be the envy of the world and every past U.S. President.
