The Cost of Protectionism: A Misguided Tariff Policy

As the world grapples with a new era of increased friction in the flow of goods and services between the US and China, the global economy will carry a significant cost. Economists agree that a policy of imposing higher, permanent general tariffs to increase US wealth is misguided and will not achieve the goal of restoring American manufacturing. The benefits of trade, as demonstrated by David Ricardo's theory of comparative advantage, are that specialization and trade can increase the overall welfare of nations by raising the availability of goods and services.

Key Takeaways:

• The idea of imposing higher, permanent general tariffs to increase US wealth is a misguided policy that will not achieve its goal.
• The benefits of trade, as demonstrated by David Ricardo's theory, show that specialization and trade can increase the overall welfare of nations.
• The example of aluminium and wheat production in the US and Canada demonstrates the advantages of free trade, with Canada having a comparative advantage in aluminium production.
• Imposing punitive tariffs on Canada could lead to the loss of 20,000 jobs in the aluminium industry and 80,000 jobs in supporting sectors.
• Reshoring of aluminium smelting may not be possible due to the lack of available power and the complexities of rebuilding the US power grid.
• The solution to the issue of losing jobs due to unfettered trade lies in investing in education and providing training for new economic opportunities.
• Cutting ourselves off from the benefits of free trade will not make us richer in the long run, but rather make the US and foreign nations considerably poorer.

Statistics:

• 100 hours of labour available in Britain and France (Ricardo's example)
• 50 units of cloth and 10 barrels of wine produced by Britain and France, respectively, if they each produce everything themselves (Ricardo's example)
• 70 cloth and 60 wine units produced both countries if they specialize in their respective products (Ricardo's example)
• 100 units of cloth and 100 barrels of wine produced if Britain and France specialize and trade (Ricardo's example)
• 40 units of cloth traded for 40 units of wine (Ricardo's example)
• Billions of dollars required to build new facilities for primary aluminium production in the US (Oplinger's estimate)
• 20,000 US aluminium industry jobs and 80,000 jobs in supporting sectors at risk due to tariffs (Oplinger's warning)
• 7-10 years required to build new facilities for primary aluminium production in the US (Oplinger's estimate)

Sources:

• Ricardo, David. "The Principle of Political Economy and Taxation"
• Malkiel, Burton. "A Random Walk Down Wall Street"
• Oplinger, William. Interview with Bloomberg (February)