James Hartley provided a thought-provoking and insightful discussion of tariffs at a recent Acton Lecture Series event. Far be it from me to say he is completely off-base when it comes to tariffs. In fact, quite the opposite. To my mind, he and I are in more agreement on tariffs than almost anyone I’ve spoken to about them in quite some time.
Hartley correctly points out that economic history illustrates that tariffs are bad policy. Adam Smith, David Ricardo, Karl Marx, John Maynard Keynes, Friedrich Hayek, and Milton Friedman—scholars from across the ideological spectrum—all agree that tariffs are a counterproductive idea. This mercantilist theory has been tried, has failed, and has been resoundingly refuted within the economics profession to the point that very few economists consider them worthwhile tools of economic statecraft.
But if there is one thing that we have learned since January of this year, it is that, despite all the economic and historical evidence, tariffs remain a popular political tool. Why?
Just Tariff Theory
Many economists would suggest an answer along the lines of rent-seeking/lobbying and the logic of concentrated benefits and dispersed costs. The idea here being that the benefits of tariffs are concentrated on a small, highly visible group of people, while the costs are diffuse throughout the rest of society. For example, the 2017 steel and aluminum tariffs did save about 1,000 American jobs. This means that there is a factory somewhere that did not close and the community around it continues to enjoy the economic benefits of its existence. This is highly visible, in terms of both media coverage and just observationally. However, those same tariffs also resulted in 75,000 manufacturing jobs nationwide being eliminated due to the higher prices of steel and aluminum. An extra job or two being eliminated per factory in America does not, however, make the national news and can certainly be dismissed in the minds of many as nothing to worry about.
Hartley summarizes this scenario beautifully, but offers a novel explanation for tariffs’ ongoing popularity: “Just Tariff Theory.”
In his own words, Just Tariff Theory has much in common with Just War Theory. Everyone recognizes that war is costly, destructive, and to be avoided at almost all costs. But there are some wars that must still be fought in the name of justice. World War II comes quickly to mind; it is difficult to dispute that stopping the Nazi aggression in Europe and Imperial Japan’s expansion in the Asia-Pacific region meet all the classic criteria of Just War Theory.
But can the same be said about tariffs and other trade restrictions? Hartley gives the heartwarming tale of President Donald Trump’s using tariffs and economic sanctions against Turkey to impel them to release Pastor Andrew Brunson. The strategy worked. Hartley implicitly refers to this as a “just tariff.” But how can we in know in advance whether a tariff is just or not?
In other writings, Hartley has provided four rules for determining a tariff’s propriety:
- The harm done by the tariffs must be less than the harm the tariffs are meant to correct.
- The harm done to people must be justly distributed. (For example, a tariff on goods primarily purchased by the poorest or most vulnerable members in society may be unjustifiable.)
- The tariff must have a reasonable chance of accomplishing its aim.
- There needs to be a clear, viable condition under which the tariff will be removed.
One would be correct to point out that Adam Smith expressed similar views in The Wealth of Nations. As Smith put it:
There may be good policy in retaliations of this kind when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconvenience of paying dearer during a short time for some sorts of goods. … When there is no probability that any such repeal can be procured, it seems a bad method of compensating the injury done to certain classes of our people, to do another injury ourselves, not only to those classes, but to almost all the other classes of them.
Hartley’s Just Tariff Theory is essentially a further elaboration and explication of Smith’s view of tariffs. However, while tariffs can be used in the service of accomplishing noneconomic goals, their functional power is certainly an economic one.
When to Tariff
Hartley and Smith both write that tariffs are useful only insofar as they achieve their stated and specified goal, whatever that goal may be. If they do not, or are unlikely to do so, then tariffs cause only pain to the domestic producers and consumers, with no long-term benefits. The likelihood of success is a multifaceted issue, but one key factor would be the economic dependency of the targeted country. A country that is more dependent on international trade with, for example, the United States would be more likely to respond to tariffs or even threats of tariffs than one that is not.
Consider Canada, Mexico, and Columbia, three countries targeted by Trump in 2025 and that have, to varying degrees, capitulated and attempted to accede to the administration’s demands. When threated with tariffs, Columbia accepted deported migrants after initially refusing them, Mexico increased the number of their agents working security at the U.S.-Mexican border, and Canada agreed to increase their efforts at preventing fentanyl from coming into the U.S. Their economies’ are intricately intertwined with the U.S., with the U.S. dominating both their imports and exports. Threatening those economic relations would imperil their citizens’ livelihoods, not just their economies. That these three countries capitulated, at least in the short run, is no surprise.
Against larger economies with a more diversified set of international trading partners, though, tariffs are less likely to work for two reasons. First, because the economic harm caused by them is much smaller. Second, because a country with more diverse trading partners has other options for purchasing their imported goods and selling their exported goods. In these situations, a tariff (or any other trade policy for that matter) is simply much less likely to lead to the desired outcome. This is why the U.S. motorcycle industry is not irreparably harmed by the E.U. tariffs they now face: They can sell their product to other, non-E.U. countries instead.
Already we can see that the applicability of Just Tariff Theory is quite limited, if only because the number of countries dependent on the U.S. is quite small. However, this is a static view of the world. If we take a more dynamic view and realize that trade relationships can and do change over time, the applicability of tariffs and other trade restrictions decreases further.
Consider the case of Canada, whose Trade Minister, Mary Ng, is aggressively pursuing a trade diversification strategy in an attempt to reduce Canadian dependence on the U.S. economy. While rumblings of this have been heard for years now, the difference between then and now is stark. Canada is no longer looking to supplement trade with the U.S. with increased trade with other countries. Rather, it is looking to supplant trade with the U.S. with increased trade with other countries. Trade Minister Ng is encouraging Canadian businesses to find sources for “[parts] or whatever it is that you need for your business” other than the United States, in countries “where Canada has a trade agreement.”
Ironically, by using tariffs where they may be effective, we accelerate the decline of their applicability.
Just Tariff Theory in Practice
James Madison, writing around the same time as Smith, provides insights into the nature and scope of government that are relevant here. In Federalist No. 51, he writes:
If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.
While this quote is often invoked as support for limited government to prevent abuses, it is also important to point out that Madison writes about how men are no angels. This implies an imperfect, or “fallen,” nature of man. Even the best among us makes mistakes.
In the case of Just Tariff Theory, we can imagine that a good, honest, and well-meaning person would use the power of tariffs in a way that comports with Hartley’s rules. Likewise, we can imagine a Congress that was willing to step in and serve as a safeguard against the abuse or misuse of this power.
We must confront the reality, however, that errors will be made. These errors can be honest or less-than honest. In the context of tariffs, we could think of honest errors such as setting tariffs too high or too low. But more fundamental errors would be: using tariffs too frequently (in cases where they would be unjust) or too sparingly (not using tariffs exclusively). Error is an unavoidable reality of the world, but we can influence which type of error to allow. This means that in the real world we are faced with the question: Should we use tariffs too frequently or too sparingly? Given the preponderance of evidence on the harms of tariffs, prudence would dictate that we should err on the side of using them too sparingly.
Tariffs in Practice
The truth of the matter is that tariffs have been used far too frequently. These were not “honest errors.” Indeed, calling them “errors” at all is a charitable interpretation. The problem, as Edmund Burke once wrote, is with “the thing itself.” With political decision-making, primacy is given to sentiment rather than to reason.
Adam Smith warned us about these less-than-honest errors in the ellipses of the quote above.
To judge whether such retaliations are likely to produce [a long-run positive effect] does not, perhaps, belong so much to the science of a legislator, whose deliberations ought to be governed by general principles which are always the same, as to the skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs.
In other words, Smith is warning us that tariffs and other trade restrictions are ultimately set by people whose incentives are not in line with Hartley’s Just Tariff Theory. This is especially true in the past couple of months, but it is equally true if we consider their use over the past 25 years.
In the case of the 2017 tariffs imposed on steel and aluminum products, we saw approximately 1,000 jobs saved in the steel and aluminum producing sectors. However, because of the rise in the price of steel and aluminum, we also saw a decrease of about 75,000 jobs in the rest of the manufacturing sector, which uses steel and aluminum as essential materials. Critically, the job losses were concentrated in industries that were “more exposed to the tariff increases,” according to a 2019 Federal Reserve study.
Going back to 2009, we saw President Barack Obama impose tariffs on Chinese tires in an effort to protect the domestic tire industry from the alleged dumping of cheap Chinese tires on the American economy. The result was eerily similar: about 1,200 jobs saved in the domestic tire producing sector with an accompanying decline of an estimated 3,731 jobs in the U.S. retail sector due to the higher price of tires in the U.S.
In 2002, President George W. Bush used tariffs on steel as a means of protecting the domestic steel industry from a surge in imported steel. In the years preceding their imposition, roughly 30 steel mills had closed, leaving America, Bush and his advisers contended, at a strategic disadvantage militarily. The backlash from this was swift. Republicans criticized the tariffs as an abandonment of free-trade principles, Democrats criticized them as not going far enough, and the international scene was replete with retaliatory tariffs and a lawsuit at the World Trade Organization. These tariffs, which were imposed on March 5, 2002, were supposed to remain in effect until December 2005. In fact, in response to the backlash, they were lifted on December 3, 2003, but the damage had already been done. Rather than protect jobs in the manufacturing sector, a 2003 study found that there were more jobs lost in the U.S. manufacturing sector due to the higher price of steel than there were jobs in the entire U.S. steel industry itself.
While Hartley has proposed an interesting and internally consistent idea of “just tariffs,” the political and economic reality is such that the theory is inapplicable in the real world.
Tariffs have been, currently are, and will be a rotten deal for Americans and everyone else, except the interest groups who lobby for them. Rather than worry about whether they are being used “justly,” we should be concerned with their use period. Given their track record, we should abandon this tool altogether and use other, more effective tools instead to gain economic advantages globally.
