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Tariffs Reduce Domestic Supplies and Raise Prices

Here’s a note to a Wall Street Journal reader unhappy with my letter there yesterday:

Mr. G__:

Unconvinced by my letter in yesterday’s Wall Street Journal in which I point out – contrary to Donald Trump’s belief – that protective tariffs necessarily raise prices, you express hope that I “don’t teach such stuff” to my students. I’m afraid that I must dash your hope, as I certainly do teach such stuff to my students. So, too, does every competent economics professor.

To “prove” me wrong about tariffs, you assert that the following occurs: When they learn of hikes in American tariffs, foreign producers immediately reduce their exports to America. American producers anticipate this action by foreign producers and, in response, immediately increase production domestically of those goods that foreigners will no longer export to the U.S. These increased domestic supplies of the tariffed goods fully replace the decreased foreign supplies, resulting in no rise in the prices of tariffed goods. You conclude triumphantly with “Q.E.D.”

Even if your account is correct – that is, even if (contrary to empirical findings) there was no rise in the prices that Americans paid for tariffed goods – it’s still the case that Trump’s tariffs raised prices paid by American consumers. The reason is that, by increasing production domestically of those goods no longer supplied in the U.S. by foreign producers, American firms necessarily drew resources away from the production of other goods and services. The reduced supplies of these other goods and services caused their prices to rise and, hence, lowered American workers’ and families’ purchasing power. Americans’ standard of living fell. Q.E.D.

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

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