Here’s a letter to a new correspondent.
Mr. H__:
Last week you wrote to criticize me for allegedly “being unaware of the case for retaliatory tariffs made by Adam Smith.” (I responded that I’m not unaware of Smith’s case.) Today you write to praise what you describe as Pres. Trump’s “efficacious use of tariffs to drive more investment to the USA.”
With respect, your argument is internally inconsistent, and not only because Trump continues to be blind to the fact that increased global investment in the U.S. fattens his bête noire: U.S. trade deficits.
Although Adam Smith doubted that politicians can be trusted to use retaliatory tariffs in economically productive ways, he acknowledged the theoretical possibility that tariffs imposed at home in response to foreign tariffs might serve the cause of economic efficiency if they pressure foreign governments to eliminate their tariffs. Importantly, Smith recognized that retaliatory tariffs are useful and justified only insofar as they, by lowering trade barriers, improve the allocation of capital, labor, and other resources across countries by leaving that allocation to be carried out by market forces.
Trump, however, uses tariffs to achieve exactly what Smith argued well-designed retaliatory tariffs might prevent – namely, resource misallocation caused by protectionism. Smith wanted capital, labor, and other resources to be allocated by market forces; Trump wants capital, labor, and other resources to be allocated by Trump.
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
