Yes, tariffs are taxes, and taxes are bad. Tariffs tax your own people when they buy foreign goods. Tariffs raise prices and increase inflation. They impede transactions that benefit both sides. Consumers and producers in both countries would be better off without trade impediments. Yes, the ideal level of tariffs is zero.
But circumstances are rarely ideal. Paradoxically, if you value free trade and economic competition, sometimes tariffs are the best choice.
A small town has two bakeries. They offer delicacies of the highest quality. The owner of the Indigo Bakery is friends with the mayor. The mayor uses his office to benefit his friends. He arranges for the town to subsidize the Indigo Bakery.
The Indigo Bakery uses its largesse to undercut the prices of its competitor, the Violet Bakery. The Violet Bakery cannot compete. It goes bust, not because its products were inferior but because it lacked influence in the political sphere. The town breached the first principle of free markets: The same rules apply to everyone.
Two car manufacturers are in adjacent countries. Each sells its cars on both sides of the border. The government of the Indigo Country imposes a tariff on cars from the Violet Country. Indigo importers pay the tariff tax to the Indigo Country’s government. Under a 20 percent tariff, importers pay $20 in tax for every $100 worth of car. They pass on that expense to Indigo purchasers. Inside the Indigo Country, the price of Violet cars goes up. More Indigo consumers buy Indigo cars instead. Like the Indigo Bakery, the Indigo manufacturer has an artificial advantage.
Of course, the best solution is to remove the tariff. But the Indigo government refuses. It protects its domestic friends. If you are the government of the Violet Country, what to do? You cannot remove the tariff, but you can remove the advantage it creates.
Match the tariff. Level the playing field. Subject competitors to the same rules.
Free trade purists object. Even reciprocal tariffs, they say, are bad. They would cause the same harm on the other side of the border. Indigo Country tariffs disadvantage Violet businesses but not Violet consumers, who can buy Indigo products tariff-free at cheaper prices. A reciprocal tariff, the argument goes, would increase prices, reduce transactions, and be less “efficient,” just like the original tariff.
But that’s a chimera. For real “free trade,” the same rules apply to all competitors. That’s as true for exporting manufacturers as it is for small-town bakeries. In every country, people both produce and consume. If they don’t produce, they can’t consume. If Violet workers lose their jobs, they won’t be able to buy Indigo cars, even tariff-free.
Back in the small town, the Indigo Bakery used its windfall to lower its prices—but only until the Violet Bakery went bust. No longer subject to competition, the Indigo Bakery was free to raise its prices to new highs. So too between countries. If foreign tariffs cause Violet manufacturers to go out of business, prices in the Violet Country will go up.
The United States is the most lucrative domestic market in the world. For some reason, Canadian business and governments seem to believe they have a right to access it. Yet Canada insists upon imposing a plethora of tariffs and trade restrictions of its own.
Yes, the best tariffs are no tariffs. But imposing reciprocal tariffs at least preserve a level playing field and a fair fight. If I was President Trump, that’s what I would do.
