Before you read on: in 2018 the United States put tariffs on steel, aluminium and many Chinese goods. Who ended up paying them?
Mary Amiti, Stephen Redding and David Weinstein found the tariffs passed in full into the prices Americans paid, cutting US real income by about $1.4 billion a month by late 2018.
- The two sides
- Free traders, such as Smith and Ricardo, against protectionists, such as Hamilton and List
- When
- Since the 1770s. It flared over Britain's Corn Laws, repealed in 1846, over the tariffs of the 1930s, and again since 2018
- The question
- Should a country let imports in freely, or tax them to protect its own producers?
- Key works
- Smith, The Wealth of Nations (1776); Ricardo, On the Principles of Political Economy and Taxation (1817); Hamilton, Report on Manufactures (1791); List, The National System of Political Economy (1841)
What the argument is about
A tariff is a tax on imports. It makes foreign goods dearer, so buyers switch to home-made ones. Adam Smith attacked the import restrictions of his day as favours to the merchants who lobbied for them.
In 1791 Alexander Hamilton, the first US Treasury Secretary, sent Congress his Report on Manufactures, proposing tariffs and bounties (payments to producers) for new industries. Friedrich List, a German economist who lived in Pennsylvania in the 1820s, took the argument back to Europe.
The two cases
Free trade
The case
Adam Smith argued that a country, like a household, gains by buying goods from whoever makes them most cheaply and paying with what it makes well. Ricardo added that both gain even when one country is better at everything, because each can specialise where its advantage is greatest. Tariffs raise prices for shoppers and for firms using imported parts. They save jobs in one industry by costing jobs in another, and invite retaliation.
The evidence it points to
After 1947, rounds of talks under the GATT, an agreement among trading nations, cut average tariffs in industrial countries from about 40 per cent to about 5 per cent. Alan Blinder cited estimates that US import barriers in the early 1990s cost consumers about $1.3 million a year per luggage job saved. The US Smoot-Hawley tariff of 1930 became a symbol of the 1930s rush to shut out imports.
Protection
The case
A new industry cannot match established foreign rivals at first. Hamilton and List argued that a tariff should shelter it while it learns. List saw the cost as worth paying, with protection dropped once the country could compete as an equal. Some industries are needed for defence, a case Smith himself accepted.
The evidence it points to
Germany adopted protective tariffs on iron and grain in 1878-79, and the United States kept high tariffs for much of the 19th century. Douglas Irwin found that US growth then came mainly from more workers and capital. Protectionists also cite research by David Autor, David Dorn and Gordon Hanson on the China shock, the surge in Chinese imports. In their main estimate it explained about a quarter of the fall in US manufacturing jobs from 1990 to 2007, and wages in the worst-hit areas stayed low for at least a decade. The authors did not call for tariffs.
Ideas from the debate
Can you name the four ideas, two from each side?
A country gains by making the goods it produces at the lowest opportunity cost, meaning the least of other goods given up, and trading for the rest. This holds even if another country is better at making everything.
Can you think of an example?
One country makes both cars and cloth more cheaply than its neighbour, but its lead in cars is far bigger. If it makes cars and buys cloth, both end up with more.
Imports give buyers cheaper goods and more choice.
Can you think of an example?
A tariff on imported shoes lets home shoemakers charge more, so every family pays more.
A young industry that cannot yet compete with established foreign producers. Hamilton and List argued for protecting it while it learns.
Can you think of an example?
A country starts making steel. A tariff keeps out cheaper foreign steel until its own mills can compete.
Industries a country keeps at home because it would need them in a war or crisis, even if imports are cheaper.
Can you think of an example?
Hamilton wanted the United States to make its own military supplies. Smith backed Britain's shipping laws because, he said, defence mattered more than wealth.