Tariffs are often misunderstood as taxes on foreign countries, but in reality, they are paid by local consumers. Imposing tariffs increases the cost of imported goods, protecting certain industries at the expense of consumers, especially those with lower incomes. While some jobs may be protected, many more are lost due to higher production costs and retaliatory trade measures.
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By James Peron*
The historian and Parliamentarian, Thomas Babington Macaulay (1800–1859) observed, “Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular.”
If ever there was an example we can see the unity between a extreme leftist such as U.S. Senator Bernie Sanders and an right-wing nationalist such as Donald Trump. Sanders whined America must, “fight to end the disastrous unfettered free trade agreements” while tariff-loving Trump claimed, “A tariff is a tax on a foreign country. A lot of people like to say it’s a tax on us. No. It is a tax that doesn’t affect our country.”
A tariff is imposed on imported goods, it isn’t paid for by the country of origin, it is paid by the importers who then have to add it’s cost to the price of products they sell. That means locals pay this tax, not foreign countries. This is true in every country in the world.
In addition, the goal of this tax is to drive up the cost of imported goods so local producers can charge more for their own products. It helps keep the prices of goods produced locally higher by making price competition more difficult. Tariffs exist to protect politically-connected industries from competition which will harm consumers — particular lower-income consumers.
David Frum wrote tariffs punish lower-income individuals more because a typical tariff is on lower priced items for mass consumption. While they get targeted the additional tax on a luxury good is often taxed at lower rates or no rate at all. Even if applied to all goods equally the impact would still be regressive, “because the richer you are, the less of your income you spend on tariffed goods.”
Tariffs have also been justified with the claim they protect “local jobs,” but while some jobs are protected others are harmed. The Brookings Institute looked at Trump’s massive taxes on imports and reported:
“Trump’s tariffs have helped some workers and hurt others. Nothing is particularly surprising about this; trade policy almost always has important distributive effects, and any change in trade policy is a choice to benefit some groups at the expense of others. Yet, overall, when economists have attempted to add up the net effect of Trump’s tariffs on jobs, any gains in importing-competing sectors appear to have been more than offset by losses in industries that use imported inputs and face retaliation on their foreign exports.”
Even the jobs “created” came at incredible cost. Brookings noted tariffs were meant to protect manufacturing jobs regarding washing machines but the cost to consumers totaled $817,000 for every job protected. Consumers spending that money would have created far more jobs than the tariff “created.”
Moody’s estimated that just a 10% tariff in the U.S. would destroy 2.1 million jobs and reduce the economy by 1.7%. That makes everyone worse off. The International Monetary Fund warned about tariffs as policy, whether in a rich economy or a poor one, “What proponents often fail to realise is that such tariff policies, while certainly hurting their targets, can also be very costly at home. And surprisingly, the self-inflicted harm can be substantial even when trade partners do not retaliate with tariffs of their own.”
In any economy there are jobs that produce goods for local consumers, jobs that exist for exported goods, and jobs for imported goods. A local producer with political influence may get a tariff to increase his profit, he may even give more to his employees — but there is no guarantee of that. Local production of that good may create some jobs.
But a massive number of jobs rely on imports which means jobs will be destroyed in those sectors. Tariffs don’t stop there. It is often the case that when one nation imposes a tariff on another, a trade war begins, and retaliatory tariffs are put on goods from the nation that started the economic conflict. That makes goods they produce for export more expensive in other nations thus reducing demand. Less demand lowers production and lower production means fewer jobs.
IMF economist Maurice Obstfeld wrote:
“Economic policies aimed at attaining an artificial export advantage are a legitimate topic for international consultation and peer pressure. In some cases, unilateral retaliation is sanctioned by WTO rules. But those who promote “getting tough” with foreign trade partners through punitive tariffs should think carefully. It may be emotionally gratifying; it may boost specific industries; the threat may even frighten trade partners into changing their policies; but, ultimately, if carried out, such policies cause wider economic damage at home.”
The one benefit in a developing country is they can learn from mistakes elsewhere and tariffs are one major mistake South Africa should avoid, particular if they wish to create jobs.
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*James Peron has written for multiple publications and author of several books, including Exploding Population Myths and The Liberal Tide. James is a Free Market Foundation Associate.
