Trump's Tariff Stupidity

Tariffs make us poorer.

Welcome back to The Burnett Breakdown. It has been a month since I last wrote, and in the meantime, I’ve had the stomach bug and been in two car accidents. So, let’s just say I’ve been too preoccupied to write. Hopefully, this month will be a little kinder to me, and I can actually write consistently.

Obviously, by the title of this newsletter, I am going to be writing about Trump’s recently announced tariffs. I’m not an economist so I am not going to be citing any economic research or creating any charts, but this will be an economic-heavy newsletter. Don’t worry though, my goal is to keep it understandable and clear so that it’s obvious why these tariffs suck so much.

I also want to preface all of this by acknowledging that Trump could very well change his tariff policy as soon as this is sent out because Trump and his economic policy are as erratic as a drunk person trying to jump rope backward on one leg through an obstacle course. As I will get to though, the uncertainty itself is bad economic policy as well.

What is Wealth?

I want to start with what seems basic and that is the question: what is wealth? This is important because it will help us think about what makes a person wealthy and, ultimately, what makes a country wealthy.

(By wealth, I mean material wealth. I am not interested in changing the definition to include nonmaterial things. That’s not to say nonmaterial realities are unimportant, but they are not what is meant by wealth.)

The temptation is to equate wealth with money but that is not exactly accurate.

Consider Person A who is trapped on a desert island. They have no access to fresh water, food, shelter, or anything else, but they have a million gold bars or billions of dollars with them. Is Person A wealthy?

They have lots of money but nothing to eat, drink, live in, enjoy, etc.

Now, imagine Person B who has one dollar (or gold bar or whatever form of money) in their possession but lives in a palace with access to anything they could possibly want or imagine. Is Person B wealthy?

I would argue that it’s obvious Person B is wealthier even though they don’t have as much “money” as Person A because wealth is access to goods and services. The greater one’s access to goods and services, the wealthier a person is. In our economic system, one’s access to goods and services (or wealth) is greatly enhanced by having more money but that’s not always the case.

This is why economists can look back in history and say the poorest American today is infinitely wealthier than an ancient Sumerian king. They may not have as much “money”, but the poorest Americans have access to more material goods and services than the richest of people throughout human history.

On the level of a nation, this same idea of wealth holds true but manifests itself a little differently. The wealth of a nation is NOT the amount of money that the government of that nation possesses or even the ability of the government to acquire goods and services. Rather, the wealth of a nation is the access to goods and services that the people within a nation have. Kim Jung-Un of North Korea has a lot of wealth, but the country as a whole is poor because the people of North Korea don’t have access to much of anything.

Adam Smith

With this idea of wealth in mind, I want to turn to Adam Smith, considered the father of capitalism (I won’t wade into whether that is an accurate description or not). In his book The Wealth of Nations, Smith addressed this very question of what made a country prosperous. This is a particularly important work to consider in our context because Smith was writing against governmental control of trade.

During Smith’s day, the dominant view of economics was that of mercantilism. This was the idea that a nation’s wealth was determined by the number of exports a country sent versus the number of imports it received (i.e. a country’s “trade deficit”). If a country exported more than it imported, then it was “wealthy”. In an attempt to increase their number of exports versus imports, countries would impose, you guessed it, tariffs on the goods of other countries.

Smith believed (and was right) that this was an inaccurate way of thinking about the wealth of nations. In Smith’s view, a nation’s wealth was determined by the degree to which that nation’s labor force was specialized. The “specialization of labor” and its relationship to wealth is what made Smith’s work so revolutionary and is worthy of explanation.

I think the best illustration of this idea was actually done by my mentor teacher years ago when I was student teaching. He divided the class into two groups and had each group make the same “product”. In this case, the “product” was a piece of paper that was folded into fourths, cut with a specific design, a certain number of circles were drawn on it, and a popsicle stick glued to it (I don’t remember the exact assignment but it was something like this).

One group could only create this “product” by each student doing every one of these steps themselves. In the other group, he assigned each student to only do one thing (for example, one student was only responsible for folding the piece of paper into fourths) and created something resembling an assembly line. My mentor teacher set a timer and had the two groups compete to see which group made more of the “product”.

The group in which every student was “specialized” and the labor was divided produced substantially more and it wasn’t close. This is what Smith understood on a national level. The more a nation’s labor force was divided into specialized fields, the more goods and services the people of that nation would produce as a whole and thus have access to through trading with each other.

Smith then took this idea further and proposed that this same idea would hold true on a global level as well. The more countries specialize in producing a particular good or service, the more goods and services are produced as a whole and could be traded between countries giving the people of every country in the world access to more goods and services. In other words, making everyone wealthier.

Why Tariffs Suck

With all of that background, let’s now consider tariffs and how they make everyone poorer. Advocates of tariffs, such as Donald Trump, claim that tariffs make people wealthier because it encourages the production of goods and services to occur within one’s own countries, which provides jobs for domestic workers leading to greater prosperity.

The United States doesn’t have many shoe factories because it’s cheaper for a company like Nike to produce those shoes in a country like Vietnam and send them on a ship to the United States. These are jobs that are “taken” from Americans. By imposing a tariff (i.e. a tax) on all shoes that are imported into the country, the American government is increasing the cost of manufacturing shoes in Vietnam which encourages Nike to “bring those jobs back” and manufacture shoes in America. These jobs are filled by Americans who otherwise wouldn’t have had a job and the American economy benefits.

This sounds pretty straightforward and is easy to understand (which is why it’s politically easy to sell) but is completely wrong. Notice, that the shoes produced in America are not cheaper. The increased cost of shoes impacts 330 million Americans and their businesses. How many shoe manufacturing jobs have to be created to make this worth the cost? Answer: way more than will ever be provided (there are a million economic studies proving this if you don’t trust me).

The reason is that everyone pays more for shoes (and all the other products that are tariffed) leaving less money in everyone’s pockets, including all of the other businesses in the country. When business costs go up, their profits go down, and they have less money to invest in future growth which inevitably means fewer future jobs. Even if you want to be cynical and say that really this just means “less money for their shareholders”, then this is even a net negative economically because those shareholders now have less money to invest in other companies or potential companies that create jobs.

Fewer companies and fewer jobs mean less specialization and therefore fewer goods and services being produced giving people less access to goods and services. All for what end? So the government can collect more revenue (even that won’t happen but I won’t get into that now)? So we can be poorer but proud that the fewer things we have say “Made in America”?

Tariffs suck because they increase the cost of goods, decrease future economic growth, and limit our ability to access goods and services. Is that what “liberation” looks like?

God Bless,

Hunter Burnett