Protectionism is a combination of those two bad policies. Government takes more of our money and does so in a way that allows politicians to distort the economy.
But, unlike in math, where two negatives can produce a positive, the same is not true in economics.
Unfortunately, America’s president doesn’t understand economics or economic history. Donald Trump has just announced that he will unilaterally impose big new trade taxes on Americans who want to buy goods and services from Mexico or Canada.
Mary Amiti, Matthieu Gomez, Sang Hoon Kong, and David E. Weinstein looked at what happened when Trump imposed taxes on Chinese products during his first term.
Here are some excerpts from their study.
…our recent study found large aggregate losses to the U.S. from the U.S.-China trade war. …most firms suffered large valuation losses on tariff-announcement days. We also document that these financial losses translated into future reductions in profits, employment, sales, and labor productivity. …To understand why tariffs can cause the domestic industry to shrink, we need to distinguish between tariffs on inputs and outputs. …U.S. import tariffs were largely levied on industry inputs, for example, steel. Input tariffs raise the cost of producing final goods like cars in the U.S., making domestic production less competitive. …The fact that U.S. tariffs affected industry inputs more broadly than outputs foreshadows our finding that most U.S. firms suffered on net. In addition, the U.S. import tariffs imposed during the trade war resulted in retaliation from China with high tariffs on U.S. exports, making U.S. exports less competitive in China, leading to losses in their export sales revenue.
The study included this chart showing that financial markets reacted negatively whenever Trump announced his tax increases on cross-border commerce.
It is possible, of course, that financial markets were wrong. Maybe investors were too pessimistic.
To test that hypothesis, the authors of the study looked at actual company performance.
Lo and behold, this table shows that investor expectations were very accurate. Trump’s protectionism led to lower profits, fewer jobs, reduced sales, and less productivity.
Dan Mitchell is co-founder of the Center for Freedom and Prosperity and Chairman of the Board. He is an expert in international tax competition and supply-side tax policy.
