Case for Tariffs

After postponing 25% tariffs on goods from Canada and Mexico until March, President Trump imposed 25% tariffs on imported steel and aluminum. Given Trump’s professed love of tariffs, tariffs are likely to be in the news frequently over the next four years. But while economists generally have a skeptical view of tariffs, Noah Smith explored the theories as to when tariffs can be beneficial to a country.

First, national security concerns may justify the use of tariffs. If the US and China are at risk of military conflict, then the US needs to prepare for such a circumstance. This means that the US would need to retain a significant manufacturing base; as an example, Smith argues that tariffs against Chinese batteries, which can be used in drones, may help ensure that the US retains its own battery manufacturing capacity.

Second, Smith suggests that tariffs could be reasonably used to protect certain industries—either national champions or infant industries. The national champions case can make sense when an industry has increasing returns to scale, in which a small number of very large companies are likely to be the “winners.” Tariffs to protect new industries from foreign incumbent firms may also help by buying time for these new industries to learn and grow and become competitive.

Finally, Smith cites Michael Pettis’ argument for China-specific tariffs. China heavily subsidizes export industries, and tariffs may help nullify some of the subsidies’ impact, and incentivize China to shift its economic model to focus more on domestic consumption.

What do these theories have in common? They all provide some support for tariffs that are done on a targeted basis. Smith is highly skeptical that broad tariffs on Canada and Mexico fit any of the above rationales. And unfortunately, as Smith notes, there is the downside to tariffs of higher consumer prices, as well as higher production costs for domestic firms who rely on imported components.

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