The Mercantilist Consensus

I watched Joe Biden’s speech to his nomination to be the Democratic Candidate when it was done, and the first thing I thought was how similar he was to Trump and Sanders in one aspect, which is his views on foreign trade. He made a brief comment on how he would work to save American jobs by hiring American companies only.

This is a sign of a policy which has almost uniquely dominated American international foreign relations since independence, which is that of Mercantilism.

Mercantilism is a theory of economic thought which rests on a few major assumptions:

  • The world economy is a zero sum game.
  • In order to grow our economy we need to aim to increase exports and reduce imports.
  • Maintaining a positive trade balance is important.
  • Imports of goods is a threat to national security.

There are many, many problems with these 4 main assumptions of Mercantilism, and they do not hold up under strict scrutiny when studied by economists. There is almost near unanimous agreement among economists after centuries of research that tariffs are not worth it, and the benefits of trade far exceed the costs. There is near universal understanding of this among people who study economists as show in this Forbes article.

A few things to understand… every country has tariffs. The question here becomes the level of  tariffs each country has in reality. The World Trade Organization

The second important thing to understand with tariffs is how they impact economic growth and inequality. The Congressional Budget Office estimates that the tariffs in the 2018 tax bill Trump signed reduced American GDP in 2020 by 0.3 percent. This of course is significantly increased by coronavirus, but the impact of tariffs on economic growth is very real.

This is significant in particular when compared with changes in income taxes, particularly for high income earners, which have small or negative impacts, in other words, insignificant overall.

Also, there are many articles which will try to convince you that either American consumers will pay the tariff, or that foreign countries will pay the tariff, the reality of course, as know from our tax wedge is that both American consumers and foreign producers will pay the tariff, how much depends of course on the elasticities of the supply and demand of the good being taxed.

Supply and Demand

I am clearly going to get a lot of use out of that image I made earlier this month.

In short, most things people think they know about tariffs are indeed wrong.


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