With most of President Donald Trump’s policies—even the seemingly more outlandish ones—there’s often an important underlying truth. On tariffs, a long-standing priority of his, he raises valid concerns. American exporters frequently face disadvantages: other countries impose tariff and non-tariff barriers, while the U.S. has traditionally kept its markets more open.
Where Trump goes wrong is in overlooking a counterintuitive reality about international trade: retaliation usually harms the retaliator most. Tariff costs are typically borne by domestic consumers and businesses. This is partly why the U.S. economy, despite foreign trade barriers, often grows faster and proves more productive than other advanced economies.
Finally, a reason to check your email.
Sign up for our free newsletter today.
Until recently, the average American tariff rate was about 2.5 percent. Other countries levy much higher tariffs. India charges about 6 percent, and some nations—usually smaller, poorer ones—charge tariffs above 10 percent. They impose these rates because protectionism is thought to be a development strategy. It appears to give domestic industries an edge, so that they can grow, adapt to technology, and compete in foreign markets.
But protectionism’s track record as a development tool is not great. It may have given South Korea and Taiwan a boost in the past. But it typically encourages cronyism and corruption, while making industries less competitive.
While wealthier countries tend to impose lower official tariffs, Trump is right that they often use other policies that function as barriers to trade. These include costly regulations that raise compliance costs and restrictions on agricultural imports—measures that effectively operate as tariffs by another name.
Such barriers are common in Europe, even among countries trading within the EU. The IMF estimates that these barriers amount to the equivalent of a 44 percent tariff on manufacturing and 110 percent on services, despite the bloc’s status as a nominal free trade zone. For U.S. companies, the costs can be even steeper. Yet, as the IMF notes, Europe bears the brunt of these costs itself—helping to explain the region’s sluggish economic growth.
Another barrier is currency manipulation, which seeks to devalue a country’s currency relative to the dollar. China has a history of doing this. But like tariffs, it carries costs for the country using it. Devaluation can discourage investment, invite speculative attacks on the currency, and slow economic growth.
Some restrictions, however, are unavoidable. For example, the European value-added tax isn’t considered a tariff because it applies equally to domestic and foreign goods. And some trade barriers reflect local preferences rather than protectionism: the Japanese tend to prefer smaller cars, which works against U.S. automakers; some Europeans simply favor their own regional cuisine.
When Trump says Americans are being ripped off, he’s right in one sense—we don’t live in a free-trade utopia. If more of our trading partners lowered their barriers, both they and the United States would benefit.
But free trade did not hollow out American manufacturing, as Trump and some of his supporters often claim. The real drivers were technological advances and rising national wealth, which increased the cost of domestic labor and led production to shift to cheaper markets.
More importantly, countries that restrict trade tend to stagnate. Even China’s state-driven growth model is running out of steam. Meanwhile, America’s economy has continued to expand.
Raising tariffs would risk choking off that growth. Tariffs increase costs for consumers, make inputs more expensive for American businesses, and ultimately hurt domestic jobs. The broader disruption and uncertainty they create in financial markets is both significant and damaging.
So while Trump voices valid concerns, tariffs remain a flawed solution. If his endgame is to lower global barriers to trade through negotiation, that would be a win—one that makes everyone richer. But the greatest gains would go to developing countries that drop their barriers, not to the U.S. for raising its own.
Photo by Anna Moneymaker/Getty Images
