The Political Problem of Tariffs

To listen to protectionists, one would think tariffs are something of a miracle drug. Anything and everything can be solved by tariffs. Prices too low? Tariffs will raise ‘em. Prices too high? Tariffs will lower ‘em. Sprained knee? Just take two tariffs and call me in the morning.

Yes, tariffs may seem like a miracle drug that can be applied to any situation (no matter how contradictory). But what many tariff supporters’ arguments are missing is reasonable political analysis. I mean “reasonable” in the literal sense: derived from reason. Or, as put more poetically by James Buchanan, “politics without romance.” Politics matters. A lot. So, we need a reasonable political model. The basic behavioral assumption of public choice models is that people in the political sphere are just the same as they are in the market sphere. If they are selfish in the market, they will be selfish in politics. If they are benevolent in the market, they will be benevolent in politics. And most importantly, people in the political sphere respond to incentives, just like anywhere else.

Tariff supporters often misapply this last point about incentives. True, they will sometimes model politicians as facing incentives, but misapply the analysis. Take, for example, the argument that tariffs can be used as negotiation tools. The argument goes that you can threaten another nation with tariffs, impose the costs of the tariffs on them, and force them to bend to your will (whatever that will may be).

The problem with this line of reasoning is that it incorrectly assumes that the politicians face the full costs of the tariffs. Of course, they do not. At best, politicians face just a small portion of the costs. The overwhelming majority of the costs fall upon the citizens of the two countries in the form of lost revenue and lost imports. It is highly improbable that the politicians are made worse off from the tariffs while their citizens are. Consequently, there is no incentive for the politicians to change their behavior. It is for this reason we see tariffs consistently fail as a negotiation tool.

Indeed, so-called trade sanctions and tariffs end up having the opposite effect. The American embargo of Cuba entrenched the Castro regime. Tariffs and embargoes on Iran failed to halt their nuclear program or weaken the regime. Putin still wages war in Ukraine despite (or because of?) trade sanctions. Perhaps most damningly, the Chinese government developed DeepSeek as a direct response to Trump’s original “economic statecraft” against the Communist Party (continued by Biden).

Adam Smith recognized this problem. In the Wealth of Nations when he is laying out theoretical exceptions to his preferred “system of natural liberty” (ie free trade), he discusses using tariffs as a means of reducing trade barriers (pg 468 of the Liberty Fund Edition. Common citation: Book IV, Chapter II, paragraph 38-39). He notes that tariffs could be a potential tool to negotiate lower barriers in other nations. However, he points out that when judging whether these tariffs will have these effects, one shouldn’t rely on the “science of the legislator,” who has general principles, but rather the politician who is guided by momentary affairs. Such negotiations could work, he states, but could also lead to war, as he argues they did in 1672.

Politicians face a different set of incentives. The major issue with many tariff supporters’ models is that they improperly model these incentives. This is a side effect of collectivist thinking; we must always remember that a “nation” is a useful abstraction, but ultimately is made up of individuals who choose. A “nation” never, ever chooses. And a government is not synonymous with the nation or the people located therein.