When I was a full-time economics professor at the Naval Postgraduate School, I always taught my master’s students about comparative advantage. I showed them that if two people were on a desert island and discovered each other, they could each have more by specializing in producing the good in which they had a comparative advantage and trading for the other good. I would then go from a simple numerical illustration to three other important points.
First, I expanded from an island to a country, showing why it makes sense for people in California to trade with people in New York. Second, I expanded from a country to the world, showing that national borders don’t change the reasoning: people in the United States gain from trading with people in China, in Canada, or in any other country. Third, I showed how they implicitly recognized comparative advantage in their jobs. Many of my students had overseen dozens to hundreds of people. They realized, if only from experience, that even if they could do the jobs of their underlings better and more quickly, it was a fool’s errand to do their underlings’ jobs because that left less time for them to do their jobs.
I would then get into the fact that when trade is opened to the world, some businesses lose their business, and some workers in those businesses lose their jobs, to lower-cost foreign producers. Some workers will be worse off, I noted, for at least a few years, finding jobs that might pay 20 percent less than what they previously had earned. The threatened loss from foreign competition would lead some businesses and workers to lobby for tariffs or import quotas to make foreign goods less attractive to domestic buyers.
Students were excited about their new knowledge, but some were pessimistic about the prospects for free trade. They realized that most people don’t understand the argument they had just mastered and, therefore, the students figured that we were stuck with high tariffs. Then I gave them a pleasant surprise. I showed that tariffs had fallen every decade since World War II and were now a small percent of what they were before World War II.
I should have added this: the move toward free trade, besides making billions of people more prosperous, was one of the biggest postwar accomplishments in worldwide economic policy and one of the biggest increases in worldwide economic freedom. The tragedy is that some of President Trump’s moves are putting that accomplishment at risk.
The steady move toward free trade
In a 2012 article, Italian economist Silvia Nenci showed the large progress toward free trade after World War II. Her Figure 3 in the linked article shows that US tariffs on imports hit a post–World War I peak in 1934 of just under 20 percent. That was the result of the trade war that began after the US Congress passed, and President Hoover signed, the infamous Smoot-Hawley Tariff Act of 1930. After 1934, though, as her table shows, tariff rates continued falling and fell more after World War II, reaching a low of about 6 percent in the mid-1950s. They then rose a little in the late 1950s. The 1967 Kennedy Round of negotiations (named after John F. Kennedy) brought tariffs down through the late 1960s and early 1970s to under 5 percent. They then rose slightly, but the Tokyo Round of 1979 brought them down to under 4 percent. The Uruguay Round of 1994 brought them down to under 3 percent by 1999.
Similarly, other countries’ governments reduced their tariff rates as a result of these rounds of negotiation. Nenci’s Figure 4 shows that the average world tariff rate peaked at about 22 percent in 1934 and then fell to a temporary postwar low of about 12 percent in the early 1950s. It then rose to about 17 percent in the mid-1950s. With various rounds of negotiations noted above, the average tariff rate fell to under 4 percent by 1999.
This was huge progress. It was brought about not mainly by unilateral action on the part of any one major country, but, as noted, by negotiations among many countries.
This widespread reduction in tariff barriers was the major policy factor—the major non-policy factor was containerized shipping—behind the postwar boom in international trade. To put that boom in perspective, consider an approximate measure of US trade: US imports as a percentage of US gross domestic product. In the first quarter of 1947, they were a measly 3.1 percent of GDP. They peaked at 18.2 percent of GDP in the third quarter of 2008, at the start of the financial crisis. In the fourth quarter of 2024, they were 14.0 percent. US exports as a percentage of GDP tell a less striking story, but the move has been in the same direction. From 7.6 percent of GDP in the first quarter of 1947, when the United States was the only major country left undevastated by war, exports fell to 3.7 percent of GDP by the first quarter of 1954 as European manufacturing recovered. Then they rose in fits and starts to 13.6 percent of GDP in the fourth quarter of 2011 and fell to 10.8 percent of GDP in the fourth quarter of 2024. Both measures tell the same big-picture postwar story: US trade with other countries is far more important than it was just after World War II.
How did countries’ governments get so close to free trade? Before answering that, we need to consider why governments often move away from free trade. And that brings us to politics.
The political and economic science of trade restrictions
Does the fact that people gain from increased trade across borders conflict with the fact that some people lose? Not at all. The reason is that the losers are not parties to the trade. That’s where politics enters. Many government programs create benefits for a relatively small group of people and impose costs on a much larger group of people—typically taxpayers and/or consumers—but the costs per individual taxpayer or consumer are much lower than the benefits per beneficiary. The US government’s restrictions on sugar imports, for example, cause the price of sugar in the United States to be approximately double the world price. We consumers pay a little more for sugar, but the annual cost per consumer is only about $10. By contrast, the higher price of sugar gives US sugar producers tens of thousands or even hundreds of thousands of dollars more per year. Economists have shown that the gains to producers are less than the losses to consumers.
And this is where another insight from economists comes in. In the 1950s and 1960s, economists started systematically analyzing the economics of democracy, using the same tools that they had so successfully used to analyze the economics of corporate and consumer behavior. The key assumption they made from the outset was that politicians, whatever their initial public-spirited motivations might have been, find that they need to cater to special-interest groups if they are to be re-elected. Four of the early innovators in this area, which came to be called “public choice,” were James M. Buchanan, Anthony Downs, Mancur Olson, and Gordon Tullock. They all pointed out that the asymmetry between consumer/taxpayer losses and special-interest gains caused an asymmetry in political activity.
Take the sugar example. Because consumers lose so little per person from restrictions on sugar imports, they have little incentive to do anything about those restrictions and virtually no incentive to become informed about them. Sugar producers, on the other hand, with so much wealth at stake per person or per company, have a strong incentive to be informed. So, if a politician produced a bill in Congress to allow more sugar imports, few consumers would bother expressing their support while many sugar producers would lobby against the bill. There is one complication to this story, but it doesn’t change the basics. Large companies that use a lot of sugar as inputs into production do have an incentive to be informed and to lobby in favor of freer trade in sugar. But their incentive is blunted by the fact that they can pass on much of the higher cost to consumers or, as most soft-drink companies do, shift from sucrose to corn syrup. (I buy Mexican Coca-Cola at Costco for approximately the price of American Coke. But when I was much less wealthy, I didn’t.)
Cost per job saved
Economists who write about trade have tried to offset the information asymmetry by noting the high cost per job saved that comes about due to restricting imports. The costs are often gargantuan.
The table in this 2017 study by Mark J. Perry, an economist with the American Enterprise Institute, shows that in every examined case of protectionism in the 1980s, the benefits created for the protected workers and companies were less than the costs to consumers. That makes sense. Because protectionism substitutes higher-cost domestic production for lower-cost foreign production, the benefits to domestic producers are necessarily less than the costs to domestic consumers.
The table shows something else interesting. The losses to consumers per job saved, in 2016 dollars, can be greater than $1 million per year. Protecting carbon steel production from foreign competition, for example, cost $1,642,500 per job saved. Protecting specialty steel cost a whopping $2,190,000 per job saved.
Why negotiations worked
I noted above why democratic governments often hold on to policies that restrict trade. Economists, including me, often advocate unilateral free trade. We point out that if, say, the US government on its own ended all trade barriers, American consumers would be better off, and their gains would exceed the losses to the few industries newly opened to foreign competition. Although our case is airtight, the politics are not. That’s why only a few governments in history have unilaterally adopted free trade. The outstanding example is nineteenth-century Britain.
If we take account of politics, can we find a way to reduce our trade barriers? Yes. It’s to negotiate with other countries to reduce their trade barriers in return for our reducing ours. Why does this work? It’s because in those negotiations there are concentrated interest groups in our country that want the other countries’ governments to adopt freer trade. Those groups are composed largely of US exporters who want to export even more. For the United States, one of the chief industries that gain from freer trade is agriculture. That’s why for many decades American farmers have been strong advocates of freer trade.
A country’s government, especially a government with as many competing interests as ours, has to deal with many interests in negotiating tariff reductions. We are not alone. Other countries’ governments face a similar situation. Reducing tariffs is difficult and not at all assured. That’s why every move towards freer trade deserves a loud cheer. If we go in the other direction—toward protectionism—it can take a long time to go back toward free trade.
Trump threatens to reverse decades of progress
And that brings us to the tragedy that will develop if President Trump persists in imposing higher tariffs.
Trump has used power that the US Congress gave the president to impose tariffs unilaterally on China and to threaten the same on Canada and Mexico. The threat to Canada and Mexico is ironic because if Trump were to impose tariffs on them, it would undercut the United States-Mexico-Canada Agreement (USMCA) that he initiated, approved of, and bragged about during his first term.
If Trump persists in imposing tariffs, other countries’ governments are sure to retaliate, just as they did in the 1930s in response to Herbert Hoover’s tariffs. Retaliation won’t help those countries. When governments retaliate against other countries’ tariffs, they are saying, in effect, “You screwed over your consumers and our producers to help your producers, so we’re going to screw over our consumers (and help our producers) to hurt your producers.” But that’s what governments do.
Trump has made a superficial argument: namely, that the United States should have reciprocal tariffs. If country A has 10 percent tariffs against their imports of our goods, then we should have 10 percent tariffs against our imports of their goods. But calling it an argument is too generous. He hasn’t made an argument for reciprocal tariffs. Such an argument would be hard to make. As noted earlier, when our government imposes new tariffs, we are hurt, no matter what the other government is doing. As Reason writer Eric Boehm noted, if Trump’s claims about the expected tariff revenues are correct—they’re not—he would be imposing the largest tax increase since World War II.
Moreover, I don’t think Trump believes in his own proposal. As Cato Institute scholar Scott Lincicome recently pointed out, forty-four countries have average tariff rates that are less than America’s average tariff rate. Most of those are small countries, but they also include Canada, France, Germany, Italy, and Japan. Will Trump start to lower tariffs against those countries? I’m betting not.
Conclusion
One of the most important gains in economic freedom since World War II has been the worldwide reduction in tariff rates. It took years of negotiation to achieve that result. It would be a tragedy if Trump blew it.
