If you’ve taken Econ 101, this will make perfect sense.
If you haven’t, you shouldn’t be passing economic laws that hurt everyone.
There’s been a lot of talk lately about the new government industrial policy of threatening to penalize U.S. manufacturers that move production and jobs overseas by imposing 30-40% tariffs on the American customers of those companies if their goods return to the U.S. as imports. There’s also a lot of talk about imposing punitive tariffs in general on Americans who purchase goods from Mexico, Japan and China, because according to president-elect Trump, those countries are “absolutely crushing and killing us” on trade as they completely “rip us off, steal our jobs and then laugh at us.”
Given the economic illiteracy reflected in those discussions, I thought it might be a good time to combine and update several CD posts on this topic (“ECON 101: Protectionism for Dummies” and “Simple Economic Analysis of the Tire Tariff: Americans Will Be Punished By the Punitive Tariffs“) and go through a basic lesson in the underlying economics behind trade protectionism and tariffs that is summarized graphically in the chart above.
The chart above helps us understand very clearly and simply what happens economically to a country when it moves from: a) free tradewith the rest of the world, with consumers paying the world price (P world) for a given product like Good X, to a b) protectionist trade policies like the ones Trump is proposing and a new higher price (P tariff) that includes a tariff (tax) imposed by the government that reduces the amount of trade that takes place. Here’s a detailed summary of the key economic outcomes that would unavoidably result from the type of trade protectionism that Trump is proposing (30-40-50% tariffs):
Read more at AEI