They don’t.
Tariffs lead to disastrous results and are nothing more than acts of theft against the public.
While some are celebrating Trump’s decision to cancel protectionist taxes against Mexico, we must realize that this is not a victory. Rather, this is a maintenance of the status quo. If President Trump chose to impose these taxes on consumers, the results would have severely harmed the economy. Even though the tariff was a seemingly small 5%, the American people would have drastically felt the impact. Even in Kentucky, my home state, the effect of these tariffs would have been higher prices, making it harder for the everyday person to live well.
Tariffs are Taxes on Consumers
If Trump increases tariffs on Mexican goods, then Mexican businesses will simply increase prices to offset the cost of these tariffs. If you are an American, you will pay for the tariff. This means that you will be less capable of providing for yourself and your family. Some would say that you could simply buy American, but American goods tend to be more expensive.
In other words, you wind up poorer either way. Since you are less capable of buying goods, businesses suffer. They rely on your ability to buy their good or service. If you cannot do that, then businesses will decrease production. Because they are decreasing production, businesses can lay off workers. This inevitably leads to the impacts of tariffs being far higher than the initial price increase.
In other words, tariffs have a very real capacity to crash an economy especially when the market has become so heavily globalized. This globalization is a good thing. The law of comparative advantage explains that economies are at their best when people can do what that which they perform at their best.
If factories are emerging in Mexico, that means that Mexican labor can produce more quality products at a lower price than American labor. This leads to lower prices, higher quality, and increased innovation. Inevitably, it also leads to increased development in poorer areas.
Because of the presence of jobs, people are more capable of meeting their basic needs. This allows them to partake in entrepreneurship as their wealth expands. Free trade, not government managed trade, is good for all.
Why Trump’s Threats Worked
It would be hard to deny the fact that Trump’s tariff threat did work. It worked because Mexico realized how devastating a tariff could be to the American consumer. In order to save themselves, they saved the consumer. Donald Trump is not the hero in this story.
Rather, he is the strongman villain who chose to force a nation to submit to his will, going so far as to threaten to crash the economy if they resisted. It is a good thing that these tariffs are not happening. What is unfortunate, however, is that Mexico has lost its sovereignty in the process.
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