Mr. Donald Trump
1600 Pennsylvania Ave., NW
Washington, DC 20500
Mr. Trump:
Earlier today you demanded that Walmart and China “EAT THE TARIFFS.”
Let’s suppose that American retailers and foreign suppliers accede to your wish and not raise prices. Have you considered the consequences? I’m guessing not. So let me spell these out for you.
American buyers, facing no higher prices, will continue to buy just as many imports as they bought prior to the tariffs – meaning American buyers will not increase their demands for the outputs of American-based producers whose outputs compete with imports. Your tariffs’ failure to raise the demand for the outputs of American-based producers will do nothing to expand those producers’ operations. Those producers will thus hire no new workers. In short, if you get your wish that your tariffs will cause no American buyers to pay higher prices, you will not get your often-repeated wish that the tariffs you impose will increase the outputs and employment of American manufacturing firms.
That the president of the United States is oblivious to this logical inconsistency is, to say the least, troubling. But in the end, economic reality will ensure that you’ll get neither of your wishes.
Walmart’s profit margin is less than three percent; that company’s success depends on selling high volumes at low prices. It will lose money if it tries to ‘eat’ your tariffs. You, being a businessman, surely must know that the moment a company commits to pursue a money-losing strategy – even if that strategy is recommended, or demanded, by the president of the United States – investors will abandon it, causing that company’s capitalization rapidly to tank. Therefore, Walmart’s executives, being competent business leaders, will not eat the tariffs. They will instead, because they must, raise their prices. And although Walmart will sell less by doing so – and suffer because your tariffs are sand in the gears of its business model – at least it will sell enough at prices above costs to stay afloat. Were it instead to succumbed to your threat, it would commit commercial suicide.
As for your wish that tariffs will increase American production and employment, that, too, won’t happen, even though your tariffs will result in Americans paying higher prices.
These higher prices, of course, will cause the outputs and employment of some domestic industries to rise. But the benefits that your tariffs will bring to these industries will come at the greater expense not only of American consumers, but also of other American industries and workers. The reason is that the consumer and investor demands that your tariffs artificially direct to buoy some domestic industries will necessarily be drawn away from other domestic industries, causing these other American industries to decline.
And because economic activities that survive only by being protected by special privileges like tariffs are less productive than are economic activities that survive without government coddling, the pattern of economic activities that America will be stuck with as your tariffs work their dark magic will be less productive than is the pattern of economic activities that your protectionist policies foolishly destroy.
Your tariffs, sir, are economic poison for America. That you do not grasp this reality is tragic.
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
