Anyone who has studied Adam Smith understands the downside of President Donald Trump’s new tariff plan.
In “The Wealth of Nations,” Smith spelled out the benefits of the division of labor. He wrote that someone working alone might be able to “make one pin in a day, and certainly could not make twenty.” But production greatly increased when the job was broken into individual tasks in which a person could specialize. At a production facility with 10 employees, the men made 48,000 pins in a single day.
This principle applies to companies in different countries. Some countries are more efficient at producing things such as automobiles, software, lumber and steel than other countries.
This happens for a number of reasons. Natural resources, such as iron and lithium, aren’t evenly distributed. Different crops need different types of soil and weather to grow. Knowledge isn’t evenly distributed either, which is why you often see industries cluster in specific cities. Think of all of the technology companies in Silicon Valley or financial institutions in London.
Efficiency jumps when producing at scale and using automation. Significant capital investments can dramatically reduce per-unit costs. Those facilities usually aren’t mobile, giving certain locations major advantages in production.
The government can hinder companies as well. A company in a country with fewer government regulations will have an advantage. Exorbitant union contracts can also make companies less competitive.
Bottom line: Free trade promotes increased specialization, leading to higher production. Greater supply lowers costs. This isn’t just good for GDP overall. Workers who are more productive earn more money, while the cost of stuff decreases.
In contrast, tariffs are a tax on goods that come from a different country. By artificially raising the price of imports, U.S.-made products become more appealing to consumers. Tariff supporters argue that this helps American industries. Tariffs force companies to invest in U.S. facilities and hire more American workers.
That’s true but incomplete. Tariffs raise prices for consumers and American companies, such as homebuilders, that rely on foreign products. If countries raise their tariffs in response to U.S. tariffs, American companies that export and their workers will be hurt.
The stronger arguments for tariffs are noneconomic. For one, China is an ambitious and powerful global rival. Tariffs on Chinese goods will raise prices in America. But it’s worth that pain to force companies to move their businesses out of China, which will weaken its economy. Tariff policy can and should incentivize companies to shift investments from China to U.S. allies, such as Taiwan and Japan.
Another is that the United States should have a sufficient manufacturing infrastructure to support its military and society in a war. Even if manufacturing weapons outside the United States is cheaper, it would be a national security risk to rely on China to do so.
Finally, presidents can use tariffs as leverage to reduce the tariffs imposed by other countries. Even in his tariff speech Tuesday, Trump hinted at that approach, attacking the high tariffs other countries place on U.S.-made vehicles. But he spoke glowingly of the economic benefits of tariffs.
It’s unclear which path Trump wants to take. For now, he has put the country on the tariff tightrope.
Contact Victor Joecks at vjoecks@reviewjournal.com or 702-383-4698. Follow @victorjoecks on X.
