Politico reports:
The economic justification for the tariffs could be released by Trump allies in the coming weeks, said the person, and will show “the failures of economic models to accurately predict changes to the economy” as a result of tariffs. Trump’s proposals, which aim to promote domestic manufacturing and lessen reliance on foreign countries, include a “universal” tariff of up to 20 percent on all goods coming into the U.S. and at least a 60 percent tariff on all imports from China.
Traditional economic models “assume that tariffs can never stimulate domestic production,” the circulated document reads. However, it adds “[w]hen the U.S. [International Trade Commission] studied the Trump tariffs, they found that domestic production increased in every single industry — a result in the real economy that these models all assume could never happen.”
By “traditional economic models” here, they mean, roughly, actual economics, as opposed to magical thinking where we can tax our way to prosperity through higher prices. And it is not true that actual economics teaches that “tariffs can never stimulate domestic production.”
Economic analysis of tariffs frequently finds that they increase the domestic production of particular goods. (I made a list of some recent economic studies in this post if you want to read the details.) It actually expects that they would.
A tariff is a tax on an imported good. If you tax something, you get less of it. A tariff reduces imports of the good it taxes. That reduces total supply and causes the price to rise. The higher price tells domestic producers of that good to produce more. Therefore, economic theory teaches that tariffs increase domestic production of the goods to which they are applied.
That’s a description of what will happen when tariffs are imposed. To judge whether they are a good idea, we need to ask: At what cost? And that’s where economic analysis consistently finds tariffs lacking.
Especially in a tight labor market, as the U.S. currently has, government-generated increases in domestic production of certain goods are pulling workers and resources away from the production of other goods, which were profitable without government help. So tariffs do increase domestic production — at less productive firms and in less productive industries.
Just like other forms of redistribution by the government, this transfer from more productive firms and industries to less productive firms and industries is costly. All else equal, it reduces total domestic production compared to what it would be without tariffs.
And that doesn’t even factor in that — because the government has made higher-priced domestic goods more profitable by reducing their competition — other domestic producers that use those goods as inputs will have to pay higher prices. This leaves them with less money to hire workers or invest in new technology to increase their production.
Economic theory of tariffs predicts — and economic analysis of actual tariffs consistently finds — concentrated benefits and dispersed costs. The dispersed costs are consistently greater than the concentrated benefits, making the country as a whole worse off. Pointing to the concentrated benefits and claiming economics didn’t predict them is nonsensical; ignoring or downplaying the dispersed costs is malpractice.