Nations Don’t Trade. People Trade.

The history of trade protection has been written by advocates of free trade and they have not been above telling a one sided story. The mythology of free trade says that trade protection was invented in 1930 by Mr. Smoot and Mr. Hawley and their tariffs caused the Great Depression. In reality U.S. trade protection began in 1828 and lasted more than a hundred years. More than a hundred years of mostly prosperity (wages higher than the rest of the world, prices lower than the rest of the world, and innovation greater than the rest of the world) achieved with the trade protection maligned here.

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I agree that much news reporting indicates that ALL the burden of a tariff is on the selling country or company, which is wrong. But it seems like the articles that Cafe Hayek point to make the opposite mistake, indicating that ALL the burden of a tariff is on the buyers. For instance, Mark Perry writes "the tariffs (taxes) are being imposed not on the Chinese government or even the Chinese steel-producers, but on American companies."

In fact, as anyone who's taken an introductory microeconomics class (and paid attention) knows, as long as neither the demand curve nor the supply curve is perfectly elastic or inelastic, part of the tariff (tax) burden falls on the buyer (higher price paid) and part of the burden falls on the seller (lower price received).

I agree that tariffs are a bad idea, but please tell the WHOLE story, especially when criticizing others for not doing so.

No AJ the practical non-econ text reality is not what you suggest. When I buy Canadian paper I pay the tariff because the US government imposes it on my end of the transaction. The Canadian company, the directors of which I have talked to about this very issue, do not take ANY hit or lower their price to accommodate the tariff because the tariff is not on their products but on all imported products for which I would shop.

There is NO lower price received because the flipping tariff raises this cost on all buyers. The Canadians know that I will pay it, the people in Seattle will pay it, and everyone will pay it, so why lower the price.

Your reasoning sounds good, but fails the reality test. We buy Chinese and other products because they are far, far cheaper than competitors. Tariffs don't make you shop around unless they are prohibitively huge, which in the single purchases made, they are not. It doesn't stop US companies and individuals from buying foreign products, it just raises a tax on us.

Let's take your Canadian paper example. I'm sure you would agree that a tariff raises the effective price of Canadian paper. This higher price causes you to buy less paper. Possible reasons for this are:
1. You might be more careful with the paper you use;
2. You might shift your paper purchases to other sellers, whose previously higher prices are now more attractive;
3. The higher paper price may make you shift to some kind of paperless system, which was previously too expensive, but now is more economical due to the higher price of paper; or
4. The higher paper price could cause your business to suffer, causing it to need less paper.
There are probably lots of other reasons I'm not mentioning. And even if YOU don't change your paper purchases and just eat the higher prices, there are other buyers whose circumstances are different, causing them to buy less paper. Thus, the effect of the tariff is that less Canadian paper is purchased, thus harming Canadian paper producers/sellers. This is the Law of Demand.

Because of this, these Canadian paper producers/sellers will tend to reduce their prices. Possible reasons for this are:
1. They want to keep up their sales as much as possible, and lowering their prices will keep their customers from reducing their quantity purchased, as described above; or
2. The last paper they produced is marginally the most expensive to make and thus, sets the price at which they sell their paper in order to make profit. Now that customers are not buying this most expensive paper, they have some freedom to lower their price, knowing that they won't have to lose money on any production.
Again, there may be many other reasons. And even if one particular seller (for instance, the company you talked to) isn't immediately affected by the tariff enough to change their prices, other sellers have other circumstances, and they will lower their prices, causing other companies to lower their prices to keep buyers from shifting their purchases to a now lower-priced seller. This is the Law of Supply.

The net result, is that buyers will pay higher prices, sellers will receive lower prices, and the total amount of paper bought and sold will be less. Both buyers and sellers are worse off, not just buyers. And if the higher price of imported paper causes some Americans to shift their paper purchases to domestic paper sellers whose higher prices are now more attractive, then some domestic seller can actually be helped by the tariff, although I agree that domestic sellers are never helped as much as domestic buyers are hurt. (But sellers tend to have the lobbyists.)

If the supply curve for the Canadian paper is perfectly elastic, which means that they'll sell their paper at the same price no matter how much they sell, you're right - they'll completely pass the amount of the tariff onto their buyers, in the form of higher prices. This could be the case if the tariff isn't enough to cause buyers to shift their purchases to domestic (or other foreign) paper. In this case, the tariff is just a way for the government to generate revenue, at the expense of the buyers. But even in this case, sellers are harmed due to lower sales. But the way our political system works, I doubt that any administration would impose tariffs without lobbyists pushing for it, in which case, there must be some competitors to Canadian paper who would benefit from the higher tariffs. But these competitors don't have to be domestic paper makers - other foreign producers have lobbyists to or it could be lobbyists for some paper substitute such as makers, domestic or foreign, of computers, which could serve as paperless systems.

Since you seem to be saying that I'm stuck is econ text unreality (is that a word?), let me give you a practical example, that doesn't involve tariffs, but demonstrates how sellers are (or at least should be) careful about raising their prices. In the early 2000s, I was the president of a small condo association. After 9/11, our insurance company tried to use the excuse of the higher threat of terrorism to raise our insurance premiums by a sizeable amount. (I think it was about 50%, but I may be remembering this incorrectly.) Before this, previous rate increases had been small, but this large increase (in a small Iowa town that I'm sure is low on any terrorist list of targets) cause me to get quotes from other insurance companies. By doing this, not only was I able to avoid the 50% price increase, but I even found a policy with a lower price than price before the 50% increase. So our previous carrier, which was profitably screwing us, lost our business due to their price increase. Since we had NEVER filed a claim, our old carrier became instantly less profitable by approximately the amount of our old premium. Maybe they should have thought twice before trying to pass on a (in my opinion bogus) price increase to us? (Or maybe enough of their customers meekly accepted their rate increase that it was an unqualified success and the employee who suggested it got a big raise?)

Tell it to Krugman--and to the committee that gave him the big prize in 2008 (not officially a Nobel, but similar to it).

A very nice article. The rampant use of synecdoche in commentary on *international* is quite frustrating as it reflects a poor understanding of trade and further promotes a poor understanding of trade.

As Don has nicely pointed out several times, there's a strange tendency to treat trade by individuals across international borders as somehow fundamentally different from trade within.

More generally, if trade could be understood as the positive-sum phenomenon it is, the world would be a far, far better place...