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Tariffs

The Misguided Critique of Tariffs: How a Real-World Economy Differs from Economic Theory

Strategic Insights

— 1 min read

The debate over tariffs has led to a common but misguided critique of President Trump's trade policies, arguing that tariffs placed on intermediate goods will ultimately harm domestic manufacturers. This critique is based on a flawed assumption that the global economy operates like a free market, where productivity rises and prices fall as capital flows to its best use. However, in reality, the global marketplace is dominated by government-built national champions, where capital flows towards the biggest subsidies and the most exploitable labor.

Key Takeaways:

  • The concept of comparative advantage, where trading partners benefit by specializing in what they are relatively more productive, has ceased to function in the modern global economy, where export-led growth is no longer an option for the US.
  • The US trade balance in advanced technology products has fallen from a nearly $100bn surplus at the end of the Cold War to a $300bn deficit last year.
  • American manufacturers could experience years of growth by winning share in the US domestic market, which is the world's largest consumer market, and where imports exceed exports by more than $1tn annually.
  • A global tariff rewards US manufacturers by making their domestic production more competitive, as they source and produce more locally, and foreign producers by making it more attractive to relocate production into the US.
  • Tariffs do not reduce competitiveness in the domestic market, as exemplified by Taiwan Semiconductor Manufacturing Company (TSMC) building leading-edge chip factories in Arizona, where a 10% global tariff makes those factories less competitive due to imported inputs, but that Arizona-made chips will be absorbed by US demand.

Statistics:

  • The US trade balance in advanced technology products fell from a nearly $100bn surplus (in 2025 dollars) at the end of the Cold War to a $300bn deficit last year.
  • American imports exceed exports by more than $1tn annually.
  • Taiwan Semiconductor Manufacturing Company (TSMC) is building leading-edge chip factories in Arizona, with a 10% global tariff making those factories less competitive due to imported inputs.

Sources:

  • Cass, O. (2022, date not specified). Byline: ECONOMICS Oren Cass. The Financial Times.

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