President Trump has launched tariffs on Canada, Mexico, and China this past week. Courtesy | Wikimedia Commons

President Donald Trump launched new tariffs on three major U.S. trading partners this month, wielding trade policy as leverage to combat the fentanyl crisis.

Several Hillsdale economics professors weighed in on the potential impacts of these new tariffs. Though they can lead to increased prices in the short run for American consumers and businesses, the professors agreed the tariffs serve as a strategic tool to pressure trading partners into addressing the fentanyl crisis.

The measures would impose a 25% tariff on imports from Canada and Mexico and a 10% tariff on Chinese goods. Trump agreed to delay the Canadian and Mexican tariffs for 30 days after both nations promised enhanced border security measures and strengthened efforts against fentanyl trafficking into the United States.

China has announced retaliatory measures since, including a 15% tariff on U.S. coal and natural gas imports and 10% tariffs on crude oil and agricultural machinery, according to The Daily Caller. China also filed a complaint with the World Trade Organization, claiming the U.S. tariffs violate international trade rules.

“As with any policy decision, there are tradeoffs,” Director of Economics and Professor of Political Economy Gary Wolfram said. 

Associate Professor of Economics Christopher Martin agreed that tariffs have a mix of costs and benefits. 

On the beneficial side, Martin said tariffs can bolster national defense by weakening adversaries and reducing reliance on potentially hostile nations for critical defense technologies. They can also serve as a source of tax revenue and protect certain domestic industries from foreign competition.

Furthermore, Martin said tariffs act as a powerful negotiating tool. They can be used to secure concessions from trading partners, such as persuading them to lower their own tariffs or to make other favorable adjustments. This strategic use of tariffs is designed to strengthen the U.S. position in international trade negotiations, according to Martin.

Martin explained that tariffs don’t reduce the trade deficit, which is more a reflection of the balance between savings and investment in the economy. To lower the deficit, the U.S. would need to increase savings, reduce borrowing, or make itself less appealing for investment.

It is important to note that imports don’t inherently lower GDP, according to Martin. While imports are subtracted from the GDP calculation, this is merely to avoid double counting, as import spending is already included in consumption, investment, and government spending figures. Imports can even support GDP by providing necessary materials for other production, Martin said.

“Trade restrictions are always costly; they cannot make a country wealthier,” Associate Professor of Economics Charles Steele said. “However, as both Adam Smith and Ludwig von Mises pointed out, they can have a useful role as foreign policy and defense tools if used judiciously and wisely. Smith says this is the role of the crafty statesman.”

Associate Professor of Economics Roger Butters said if the goal is to minimize material want, more trade is good because trade creates wealth. 

To pursue more trade for the sake of itself would be foolish, according to Butters. In this context, using trade as a negotiation tool may be the cheapest way to achieve the stated objective. While tariffs do not explicitly create wealth, they can be significantly less costly than war, Butters said. 

“One thing people forget is trade creates wealth, but you have no duty to trade with someone that will use the wealth that gets created to destroy you,” Butters said. “It is completely legitimate to refuse to trade with people that seek your destruction.”

Trump is using tariffs as a useful foreign policy tool, according to Steele.

“That’s why the tariffs on Canada and Mexico were immediately put on hold as soon as their respective leaders promised to actually crack down on fentanyl trafficking into the U.S.,” Steele said. 

China’s economy is very weak, according to Steele. The precise impact of the tariffs remains uncertain; however, Steele said he expects these economic measures to impose difficulties on them. 

“The Chinese Communist Party is a threat to the United States and the world,” Steele said. “This will hurt them.” 

Steele referenced a recent study from economists at Iowa State University, which concluded that if the U.S. engages in a tariff war with China independently, American consumers will primarily bear the costs. If the U.S. can get the European Union to join the efforts, however, the financial burden shifts predominantly onto China. 

“I suspect something like this will happen,” Steele said. “This is what statesmanship and the art of the deal is about.”

Steele said Trump supports genuine free trade. 

“At the 2018 G-7 meeting, Trump suggested that everyone simultaneously drop all trade restrictions,” Steele said. “The hypocrites accusing him of sabotaging trade had zero interest in this.”

Wolfram added that while tariffs are generally harmful to the economy, it’s possible that “the threat of tariffs may result in other countries lowering their tariffs and other restrictions on U.S. goods, and thus Trump’s threat may end up with lower tariffs worldwide.”

Steele said Trump’s recent tariffs are entirely different from the Smoot-Hawley tariffs.

The Smoot-Hawley tariffs, enacted in 1930, were a series of protectionist trade policies that imposed high taxes on thousands of imported goods, contributing to a global trade war and exacerbating the Great Depression. 

“This is not even vaguely like the Smoot-Hawley tariffs,” Steele said. “Trump is using targeted tariffs and offers conditions under which the tariffs can be averted. This is a foreign policy tool.”

During his first term, Trump also leveraged tariffs as negotiating tools, especially against China, according to the Daily Caller.

As global markets adjust to Trump’s recent actions, the effectiveness of using trade policy to address drug trafficking will unfold. But as Wolfram notes, quoting former New York Yankees catcher Yogi Berra, “It’s tough to make predictions. Especially about the future.”