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Tariffs Reduce Industrial Capacity

Here’s a letter to “proud Trump man” Nolan McKinney:

Mr. McKinney:

Writing that “our industrial capacity is now the highest it’s ever been,” you wonder why I “don’t give President Trump’s tariffs at least partial credit for this important outcome.”

Here’s why I, like any informed economist, give Trump’s tariffs no credit for this fact.

First, U.S. industrial capacity has been rising for decades. More precisely, as shown here this capacity rose steadily from 1967 to 2007, when it fell flat until 2011, and has risen steadily ever since. I don’t recall you e-mailing me in, say, 2015 to applaud Pres. Obama’s trade policy for the then-all-time high U.S. industrial capacity.

Second, industrial capacity is affected by many policies and factors in addition to those having to do with international trade. As explained in point three below, I’ve little doubt that the increases in this capacity over the past couple of years occurred in spite of, rather than because of, Trump’s tariffs.

Third, rising industrial capacity is a benefit because it enables us to produce more – because it enables us to be supplied with a greater abundance of goods. Trump’s tariffs work against this happy outcome. They do so most obviously by decreasing many American producers’ access to the lowest-cost inputs available. For example, because American manufacturers of lawnmowers are led by Trump’s steel tariffs to spend unnecessarily large quantities of resources to produce their products, American manufacturers have fewer resources available to produce other goods.

Trump’s tariffs reduce American industrial capacity in yet another, more subtle way.

Trade is a means of production; it’s a means of transforming goods and services produced here into goods and services produced abroad. And so the more we import for any given amount of our exports, the greater is our production capacity.

Because industrial capacity ultimately is a measure of the value of the output that we can obtain from available industrial inputs, by artificially reducing the amount of imports that we receive in exchange for any given amount of our exports, Trump’s tariffs cause American fields, factories, and facilities to generate for us Americans fewer goods. Thus, Trump’s tariffs, in a very real way, cause American industrial capacity to be lower than otherwise.

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