Considering the Implications of Tariffs

In my first In All Things tariff article, I focused on the context and history we need to keep in mind when evaluating tariffs. However, as Reformed Christians, our primary concern must be how our economic decisions—tariffs included—promote human dignity, support thriving communities and serve the common good. Despite the complex realities of tariffs, we must approach the issue with discernment, seeking what best promotes integrity, wisdom, and love for our neighbors near and far.

First, we need to understand the relationship between trade deficits and tariffs and the difference between fiscal deficits and trade deficits. It is particularly important not to assume that trade deficits (when a country imports more than it exports) are necessarily caused by unfair tariffs, a misunderstanding that seems to underlie recently-imposed tariffs—since the largest threatened tariffs were aimed at countries like Viet Nam and China with whom the U.S. has the largest trade deficits. Although trade deficits could be caused by unequal tariffs, this is more often the exception than the rule.

The primary driver of trade deficits is the benefit derived from trade. History shows us that wealthier economies can run trade deficits for decades while still seeing their income, wealth, and employment levels rise faster than many of their trading partners (this has been true for the U.S. in the past 60 years). Trade deficits can both persist and make us wealthier in part because they allow those with higher incomes to benefit from the lower prices associated with efficiently produced foreign products.

Perhaps the best way to understand this is to explore a domestic analogy: I have massive trade deficits with Walmart and Fareway because I am always buying stuff from them and they are not buying anything back from me. Does this make me poorer or jeopardize my job? No, because I could never produce these things on my own for the price they charge me. I am, of course, also running continuous trade deficits with orange growers in Florida, almond growers in California, and many others in probably every state in the Union. But would we want or try to produce these things in Iowa or tariff the states that are exporting them to us, causing major declines in our standard of living?

Despite the advantages associated with unimpeded trade, tariffs aimed at increasing national security need to be discussed. We can ill afford to compromise our national defense, power grid or satellite communications systems with faulty components, nefarious software, or critical raw materials from politically-motivated suppliers. Tariffs are one way of reducing our dependence on nations that have proven themselves untrustworthy. But given the history of tariffs it might make more sense to band together with other trustworthy nations and effect a complete ban on importing critical products from these nations.

Current arguments for tariffs, however, center mostly on the idea of “unfair competition.” While there is no denying that governments use subsidies and tariffs to try to give their citizens an unfair advantage, these attempts at advantage are both impossible to police and ill-advised. For example, if a country has low income tax rates, are they artificially lowering labor costs? If they subsidize ports, highways or airports, are they lowering private companies’ shipping costs? If they offer free public education, are they subsidizing companies’ training costs? When governments go too far with subsidies, they will as a nation become poorer as they provide subsidized products and services to the rest of the world at a loss. If they allow tariffs to persist too long their companies will become inefficient and uncompetitive. (Think, for example, how imported Hondas and Toyotas forced Ford and Chevy to “up their game.”) Because there is no such thing as a completely level playing field, the best policy may very well be to live with these ill-advised policies, and temporarily support the domestic industries damaged by these them until the “offender” comes to its senses.

Another reality we must consider is how other nations will respond when tariffs are imposed against them. Hearts that are fixed on getting an advantage will find new ways to do so. For example, tariffs make smuggling more profitable, so goods may be mislabeled or transported through another country to avoid tariffs, the detection of which—like tariff collections—requires significant administrative resources. Perhaps better to employ these resources in the slow and steady process of changing minds and hearts.

Additionally, tariffs can introduce complexity and controversy when it comes to defining domestic vs. foreign products. What is a domestically-produced or “foreign” product in a world where most things are made of countless minerals, parts, and labor from everywhere? What percentage of local content clears the bar for a tariff to be avoided? And what if the imported product contains locally-produced components previously sold to the foreign exporter? And is it fair for tariff policy to force companies to quickly change their production location to survive when politics could reverse these policies a few years down the road?

It is no surprise, then, that research finds positive correlation between lower tariffs, higher trade deficits and more domestic jobs. One example is a joint study by the BEA and the Bureau of Labor Statistics (BLS) that found a clear positive relationship between falling tariff rates, the size of the U.S. trade deficit, and job creation in the U.S. over the many decades between WWII and the recent tariff increases (Kamal).

There are many reasons for this. U.S. businesses earn large profits from importing low-cost foreign products, and that money circulates throughout our economy. In addition, the dollars they spend in other countries often return to the U.S. either as loans (lowering our interest rates) or as investments (creating jobs). Even more importantly, U.S. consumers buying low-cost foreign products have leftover money to spend on additional goods and services, many of which are tied to domestic jobs. A Federal Reserve Bank study verifies this line of thinking in its conclusion that benefits associated with import-related jobs, jobs tied to exports, and jobs related to the additional domestic production and spending made possible by lower-priced imports far exceed the number of jobs lost to foreign producers.

Studies of multinational company growth patterns back this up. It is fair to assume growing companies are likely providing customers with good value for their money. A joint study by the U.S. Census Bureau and The U.S. Bureau of Economic Analysis (BEA) found that not only did internationally-involved companies grow faster, but their domestic and overseas employee numbers grew in tandem. Despite multinationals making up less than 1% of companies, they accounted for 22% of the jobs, 30% of the wages, 65% of the exports and 60% of the imports (Chicago Fed Letter). In other words, their international activities were enriching people disproportionally both at home and abroad.

It is also instructive to look at the way other countries have been impacted by such policies. For example, many resource-rich countries (such as Venezuela and Russia) have remained poor, while other small resource-deprived countries like Taiwan, the Netherlands, or England became wealthy despite significant resource limitations. The answer seems to lie in their attitudes toward free markets and trade. Relatively unfettered trade allows countries to specialize in their comparative advantages, whether this be natural resources, unskilled labor, above-average education, creativity, technology, or capital.

For Christians, perhaps the most important consideration for imposing tariffs is our recognition that God “does not show favoritism” (Romans 2:11), but desires that all people love one another and live in peace. Not only does trade allow the poorest of the poor to benefit from their labor, it also promotes the kind of free exchange of ideas and experiences that have always been at the root of economic development. Trade also promotes healthy cross-border relationships, an appreciation for other cultures, and the potential for the kind of "peace dividend" that can come only from these things.

In conclusion, tariffs are part of a broader, complex conversation about trade, fairness, and national interest. As we continue to evaluate the role of tariffs, we should do so in the context of broadly improving the global trading system—avoiding simplistic solutions and focusing instead on policies that reward hard work, uphold integrity, and promote service to others, ultimately aligning our efforts with the values of the Kingdom of God.

References:

• Chicago Fed Letter No. 236 (March 2007), “Globalization and the Benefits of Trade,” Robert L. Thompson, Federal Reserve Bank of Chicago.
• Kamal, F., McCloskey, J., & Ouyang, W. (2022). Multinational firms in the U.S. economy: Insights from newly integrated microdata (CES 22-39). U.S. Census Bureau.