- Cafe Hayek - https://cafehayek.com -

On the Welfare Burden of Tariffs

Tweet [1]

Here’s a letter to the wise and insightful Cafe Hayek patron Warren Gibson (who teaches economics and engineering at San Jose State University):

Warren:

Thanks for your e-mail in which you correctly note that part of the burden of tariffs is borne by foreign suppliers who suffer reduced sales because of tariffs.

I didn’t mean to deny this reality when I called for tariffs to be described as restraints on domestic consumers rather than – as they are typically described – as restraints on foreign suppliers [2]. Tariffs indeed are, after all, restraints on domestic consumers. Yet this fact is hidden by the near-universal practice of describing them as if they are impositions only on foreigners.

But there’s a more fundamental reason for describing tariffs as restraints on domestic consumers. This reason is rooted in the fact that, although free trade enhances net welfare both at home and abroad, the conventional case for a policy of free trade focuses exclusively on the welfare effects of trade at home. The conventional case for free trade ignores the welfare gains that free trade brings to foreigners.

And so, it seems to me, if the conventional analysis of trade ignores foreigners’ welfare gains, consistency requires that it ignore also foreigners’ welfare losses. That is, if when analyzing the welfare consequences of trade the only welfare that is reckoned as being relevant is that of citizens of the home economy, then the welfare losses that foreigners suffer as a result of home-economy tariff hikes should be ignored just as the welfare gains that foreigners enjoy as a result of home-economy tariff cuts are ignored.

In short, because in the conventional case for a policy of free trade the relevant welfare gains from tariff cuts are only those that are experienced in the home economy, in this conventional case the relevant welfare losses from tariff hikes are only those that are experienced in the home economy.

My strong belief is that this conventional case – while analytically sound – is ethically too narrow. I see no reason to ignore foreigners’ welfare. But any analysis of trade, such as the conventional analysis, that does ignore foreigners’ welfare gains must, to remain internally consistent, also ignore foreigners’ welfare losses. It is thus appropriate, in this conventional case, to regard the relevant welfare costs of home-economy tariffs as falling exclusively on home-economy citizens.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

Comments