Economist Milton Friedman Explains Why Tariffs Are A Terrible Idea

As talk of tariffs and trade wars continue among the political class, it’s vital that we, as conservatives, remember the lessons given by the great economic thinkers of the 20th century – individuals like Friedrich Hayek, Ludwig von Mises, and Milton Friedman.

During an exchange with a man in 1978 at Utah State University, Friedman perfectly described why tariffs, specifically on steel, are a poor idea:

The steel industry isn't in favor of free enterprise. It wants tariffs; it wants import quotas. Again, I don't blame them, they're trying to protect their own interests – but the rest of us are fools if we let them get away with it.

...There's a big hue and cry about the steel industry, and about imposing higher tariffs or import quotas on steel. Now, every [economist] in this country ought to be on the right side of that issue, which is a free trade issue. If Japan chooses to subsidize the export of clean air to the United States, why should we object? Isn't that what it's doing when it sends steel here? Here, we have this great hue and cry that we should somehow or other subsidize steel, either by tariffs or quotas or other ways, to enable steel to produce both its products and its pollution at home...

A member of the audience challenged Friedman with the following remarks about the Japanese steel industry: "We hear from the American steel industry that in Japan, for instance, steel producers are producing at less than cost with support of the government so as to keep employment up there, and as a result, the American steel industry here is not going to be able to compete. So they're going to shut down, and we're gonna have higher unemployment here. What is your answer to that?"

Friedman replied:

Well, that's a very good question, and it's a very easy answer. I may say, the answer I'm giving is not my answer, it was the answer that was given by Adam Smith...in 1776 in “The Wealth of Nations.” From that time to this, hardly any professional economist has believed in tariffs or protection or anything but free trade. But the answer is very straightforward.

Let us suppose for a moment that the Japanese flood us with steel – that will reduce employment in the American steel industry, no doubt. However, it will increase employment elsewhere in America. We will pay for that steel with dollars. What will the Japanese do with the dollars they get for the steel?

...they're gonna use those dollars to buy goods and services. They're gonna spend it. In the process of spending them, they may spend them directly in the United States, and that directly provides employment in the United States. They may spend them in Brazil or in Germany or in China or anywhere else – but whoever gets them, in turn, is gonna spend them. So the dollars that we spend for the steel will find their way back to the U.S. as demand for U.S. goods and services.

You will have less employment in the steel industry; you will have more employment in the industries producing the goods we export. Overall, total employment will not be affected. But overall, the American consumer will be benefited because he will get the steel more cheaply and the goods made from the steel more cheaply than he otherwise would. That's the benefit to the American consumer.

Now why is the steel industry, and similar industries, why are they so effective in their campaigns for protection? Because of a very common problem that affects not only this, but lots else. And that is the difference between the visible and the invisible. The people who are going to lose their jobs in steel are very visible; they're a collective group; you can name their names.

Suppose we restrict imports from Japan, then people are going to lose their jobs in these export industries. They will be widely spread over the country – you and I couldn't name one person – but that doesn't mean they're any less real. But the greater propaganda effect of the steel industry is because you can set the visible, [it] is a more potent political force than the invisible people who will lose their jobs.

I urge on those people who think there's some sense to the steel industry argument to consider it in a more absurd setting. You very often bring out the logic of an argument by carrying it to an extreme. You know, you can have a great employment in the city of Logan, Utah, of people growing bananas in hothouses. If we had a high enough tariff on the import of bananas, it could become profitable to build hothouses and grow bananas and those hothouses. That would give employment. Would that be a sensible thing to do? If that isn't sensible, neither is it sensible to artificially restrict the import of steel.

Now, with respect to the charge that the Japanese government is subsidizing the export of steel. Number one, it's very dubious that it's true, but suppose it were true, then that would be a foolish thing for the Japanese to do from their own point of view. But why should we object to their giving us foreign aid? We have given them quite a bit.

 
 
 

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