Book: The Economic Impact of a "Border Tax"

There's been a lot of talk about President Trump's proposal to tax imported goods coming through our southern border that has led to a debate about the benefits of trade (specifically "free trade" agreements) and the real costs of protectionist policies ("border taxes," aka tariffs, as well as quotas, etc., are all specific types of "protectionist" policies). I hope the following, adapted from my book The Common Sense behind Basic Economics (used copies now available here at Amazon for as low $16, an absolute steal! Ha!) helps to explain why trade benefits everyone, and how tariffs, taxes, etc. on imported goods rarely benefit the intended beneficiaries (us).However, there are a couple of caveats that I did not explicitly discuss in the book.  First, there is a difference between trade in general and free trade.  If trade in general is beneficial, free trade is generally even better, but it works best if it's truly free.  It may not be helpful to enter a "free trade agreement" when the trading partner then manipulates its currency or alters other domestic policies that undercut the intention of the agreement and benefit one country over another.  Also, political leaders interested in obtaining better trade agreements may use protectionist policies as temporary leverage in the negotiation process.  I suspect, and hope, that the new President (known for his negotiation skills) is currently pushing for a "border tax" as a means to achieve the latter.This first snippet is on the Theory of Comparative Advantage, describing the benefits to all countries from trade:

The Theory of Comparative Advantage helps to explain how this worksand how all countries benefit from trade. Yes, all countries, even thosethat are trumped by other countries in virtually every skill and are lessproductive in every industry (poor Burundi), can still benefit from tradingwith the rest of the world. What makes this benefit beneficial is thefact that countries gain when they specialize in a service or producing agood that they are “most good” at compared to others. Basically, countrieshave to focus on what is most productive for them.

To get better insight in to why we all benefit from trade you'll have to buy the book (did I mention it's deeply discounted on Amazon right now?).But now for the good stuff.  This next section gets into the weeds to better explain tariffs and quotas...just keep in mind those caveats (and forgive the formatting and randomly-placed numbers, it's from the publisher's pre-published draft).

PROTECTIONISM VS. OPEN BORDERSAlthough free trade benefits the world on the whole, some particularbusiness sectors, and those employed within them, may be harmed byfree trade. Everyone has seen the impacts on employees of a companywho decides to move its manufacturing abroad. When Americans losejobs to other countries, the pressure is on for legislators and governmentadministrators to make some changes.Well, never fear, our elected leaders have a number of tricks up theirsleeves to “help” those impacted by free trade (a.k.a. voters). Good orbad, all of these tricks impede free trade. One of the most popular impedimentsis a system of taxes on imported goods, or tariffs, ostensibly toteach those efficient overseas producers a lesson and to protect our domesticproducers. Unfortunately, Americans pay when prices on thosegoods rise, and so do the economies of the countries from whence theycome.Import quotas and other barriers and subsidies are also effective atcontrolling imports and exports, but in the end, all barriers effectivelyreduce competition and efficiency both at home and abroad. Why doesthis happen? Well, let’s go back to an example.Suppose the latest and greatest smart phone is produced by SamsungElectronics in South Korea and sold in the U.S. for 500 dollars. (We allknow that the phone is really made in China, but indulge me here.)Suppose a manufacturer in Michigan makes a good phone that costs 100dollars more than the Samsung, with a retail price of 600 dollars, but stilllacks the quality of the Samsung. So the two senators from Michigan gettogether and say to their peers in the Senate: “Hey, this is crap. We wantAmerican jobs and manufacturing to prosper, so let’s put a tariff of 21percent on those phones from Korea.”So now, the 605 dollars phone from Samsung is more expensive thanthe American phone. Well, the Senators were right and people now buyless of the Samsung phone, more of the American phone, and the production facilities in Michigan boom, jobs increase, and more money stays inthe American economy, for this particular transaction.[19.20] However, the reality is that no one really wins. Now that it’s moreexpensive to purchase a smart phone similar to the desirable Samsung,fewer people will buy it. “I was cool with spending five c-notes on aphone, but six? Nah, I need that money for some new kicks,” you mightsay. Those who do buy, have to spend more, reducing the money theymight have used to purchase other goods or to save. Many will actuallychoose the lesser-quality Michigan-produced phone, so they will spendmore and get less. Consumers lose. (I’m sure someone will think that I’mbashing American producers here, but that’s not my intention. Clearly, ifwe wanted to, we could make the best products in the world, but comparativeadvantage prevents us.)[19.21] On the other hand, one might argue that the Michigan producer gainsand the increased economic output are good for the local and nationaleconomy. Because of the tariff they receive the higher price and can addmore to the bottom line. Yes, this particular manufacturer, and its employees,will gain from the tariff. Clearly, this is why so many domesticmanufacturers are strong advocates (campaign donors) for trade barriersthat affect the competition. If you simply refuse to think past this localbenefit, you might miss the full economic impact. There are always economicrepercussions that extend beyond those directly and initially affected.[19.22] First, Samsung is going to take a hit. Who cares? They’re notAmericans. We have to look out for number one first, right? Think deeper.Koreans like to buy American products too. But when Samsung has toshrink production and lay off employees, South Koreans can’t afford tobuy as much from us as they wanted. Perhaps one of those employeeswas saving for a Harley-Davidson Fat Boy, but now can’t afford one. Onthe whole, Harley sales to South Korea will fall, which may push totalHarley sales down, decreasing production. If the Harley-Davidson manufacturingfacility in York, Pennsylvania has to lay off employees, theirlocal economy suffers. The negative impact may not be as dramatic as thepositive one in Michigan, but Harley-Davidson is only one of many othersthat will suffer. In the end, did the senators from Michigan hurt orhelp our country?[19.23] What about the additional revenues that the government gains fromthe tariff? That’s good for us, right? Well, not really. Although thegovernment does gain, the gain is really just a transfer of money fromconsumers to Uncle Sam. The net benefit to the economy is nil, zero, zip,zilch, nada. Uncle Sam basically just found a back door to your wallet.And what does he do with his money? Well, most likely he is going tohave to give some to help subsidize the economy through welfare benefitsor other economic support due to the local economic effects from thetariff.Besides the transfer of dollars to Uncle Sam, higher consumer costs, [19.24]and decreases in American exports, tariffs also have the net effect ofincentivizing inefficiency. That manufacturer from Michigan who is havinga hard time competing with Samsung now has no reason to improveits products or find a way to reduce its costs. Why would they? They’remaking cash money.Quotas Can BeWorse [19.25]Some legislators know a little bit about this, so they instead advocate [19.26]for quotas on imported goods. Our favorite Michigan senators might askfor a limit on the number of Samsung phones that are imported, so consumersthat want a similar phone, have no choice but to go with theMichigan producer. Well, they might have chosen the worst of the badoptions.Quotas have two effects. First, at least with a tariff Uncle Sam was the [19.27]one ripping off consumers, which would ostensibly be used in Americafor Americans somehow. But when a quota is enacted, we might as welljust send a check to foreign countries. Samsung isn’t going to stop sellingphones just because they aren’t being sold here. They’re taking their balland going to another court. Europeans might be perfectly happy buyingthe new phones at the price Samsung wants. And given our increasinglyconnected and globalized world, we all know how to get a product thatisn’t sold here in the U.S. if we want to. Since Samsung still has a comparativeadvantage over our Michigan manufacturer, many of us still want itmore than the Michigan phone, no matter what price it’s sold for, so welook for it on eBay, Amazon, and some other foreign companies, who willbe more than happy to ship us a phone. Except their price is going to behigher than it would have been if it was imported directly to Americanretailers. Why shouldn’t they profit off our government’s folly? And theripple effect extends from there. Americans lose doubly this time.As you can see, with free trade, the most efficient goods are produced [19.28]and the most efficient manufacturers are rewarded by consumers, whilewith tariffs, quotas, and other trade barriers our scarce resources aremoved to those who do not have a comparative advantage and are lessefficient. Again, you don’t have to take my word for it. Do a quick searchon Google Scholar and you’ll find numerous studies showing the net costto society from trade barriers.Are There Good Reasons for Either? [19.29]With so much evidence proving that trade barriers decrease efficiency, [19.30]why do we still have them? There are some good arguments and rationalreasons that go beyond the politicians need to help his precinct’s voters(or give the perception that he or she is helping them). Our nation’ssecurity is, and always will be, the most important issue to mostAmericans. If those Michigan senators can’t ensure that Detroit’s residentscan get their daily Starbucks Caramel Macchiato without fear ofgetting hit by an incoming missile from North Korea, there’s going to behell to pay.[19.31] It’s hard to argue against manufacturing our military’s equipmenthere in the U.S. If the Taliban, Al Qaeda, or Islamic State somehow finds acheap way to make the MRAPs (Mine Resistant, Ambush Protected vehicles)that our military personnel need, would it be wise to buy fromthem? At this point, I’d recommend a quota and/or tariff that prettymuch pushes them out of the market (combined with a missile up theirmanufacturing facility’s backside).[19.32] The only problem is that companies, and politicians, are really good atmaking this argument for whatever product they want. The case of thecell phone? Hey, if a foreign corporation makes the phone, can they thensell the technological know-how to our enemies that allows them theability to tap into it? Compelling as it may be, we have to resist thetemptation to restrict all of our imports in the name of security.[19.33] Security will always be number one, but there are a few other argumentsto be made for protectionist practices that you budding economistsneed to look out for. Sometimes a country wants to diversify the numberof successful industries within its border and also help the ones that arebudding, but just need a little extra push. So they “temporarily” restrictoutside competition, hoping to incubate and diversify. The problem isthat there is no way to ensure that these industries will be successful inthe long-term if they aren’t compelled by the forces of competition thatmake other industries better. What happens when barriers are removedand these companies aren’t ready to compete?[19.34] Human rights advocates are often critical of the low wages that employeesreceive in other countries, such as China and India. They arguethat we should implement protectionist trade barriers to “punish” thesecompanies into compliance. I won’t get into all of the logical fallacies ofthis argument, but what if we didn’t buy from a Chinese company thatwas employing former subsistence farmers in their factories? Those employeeswould either lose income altogether or go back to the lowerpaying farming gig they once had, while Americans pay higher prices forgoods and transfer resources to less efficient production. No one gains.[19.35] Absolute free trade has never existed on a world scale. Countries havealways found a way to get in the way of their own progress, sometimeswith justifiable and rational reasons. However, this hasn’t stopped numerousattempts to make trade just a little freer through trade agreementslike NAFTA, LAFTA, the WTO, and the European Union. Plug anyof these acronyms into your favorite search engine and you’ll find thousandsof both scathing reviews and unfiltered admiration. I only hopeyou now know just a little more to read them all with your own criticaleye.