The Free Trade Movement and Deviance in Trade Barriers
“There are two technologies for producing automobiles in America. One is to
manufacture them in Detroit, and the other is to grow them in Iowa” (Landsburg, 2012).
Introduced in Steven Landsburg’s “Armchair Economist”, the Iowa Car Crop Model uses the
metaphor of “growing” cars in Iowa to explain the concept of trade between Iowa-made crops
and Japan-made cars. Through this metaphor, Friedman introduces trade as an equally legitimate
means of production as domestic manufacturing. Friedman further emphasizes the need to
liberalize trade, saying, “A tax or a ban on imported automobiles is a tax or a ban on Iowa-grown
automobiles.” (Landsburg, 2012). Ultimately, the Iowa Car Crop Model is an intriguing thought
experiment significant for promoting free trade.
In the same spirit, conventional economic theories, such as comparative advantage,
establish the need to liberalize international trade. Many countries are taking more practical
measures by lowering trade barriers and taking part in Free Trade Agreements (FTAs). Despite
this directive, tariffs are still a major part of international trade policies, as depicted in Figure 1.
This research paper aims to provide insight into the modern usage of tariffs during the era
of trade liberalization. The paper will demonstrate the impact of trade barriers using empirical
evidence and real-life case studies.
A tariff, a tax on imports, increases the price of a good to discourage consumption. An
import quota is also a trade barrier, however, it puts a physical cap on the quantity of goods
exchanged. In use, tariffs are effective trade barriers to collect government revenue and protect
domestic industries. Import quotas only function for the latter, but provide a stricter, hard trade
barrier.1
The benefits of increased government revenue from tariffs are intuitive. Government
spending is a vital part of a country’s economy, notably in the expenditure approach of GDP,
where government spending is the greatest influencer. Effective government spending can
promote economic efficiency and growth. Common strategies include investing in human capital
and offering public services to citizens.
Increased government spending grows production possibilities and changes the long-term
economic outlook. For a recessionary economy, increased government spending would be crucial
for an expansionary fiscal policy, such as increasing transfer payments, providing more welfare
programs, and offering tax cuts. Former US President Donald Trump once jokingly tweeted that
tariffs are a great revenue source to make up for government deficits.2 However, as seen in
Figure 2, increasing government tax revenue is not the main cause for tariffs, especially for
high-income countries.
Instead, the main reason high-income countries impose tariffs is to protect domestic
industries. Figure 3 explains this rationale. Implementing a tariff raises the price level from P1 to
P2. As a result, domestic consumption reduces from Q4 to Q3. Net welfare loss for foreign
producers occurs in Blue Areas 2 and 4, but domestic producer surplus appears in Red Area 1.
Therefore, tariffs successfully protect domestic producers at the cost of foreign producers.
Protecting domestic producers is vital for infant industries. A well-known example is the
history of the US steel industry.3 Protection, in the form of tariffs, started as early as the 1790s,
when the American steel industry boomed.4 The infant steel industry was able to thrive and
tariffs vanished accordingly. However, when domestic steel producers faced intense international
trade competition in the late 1900s, President George W. Bush reinstated tariffs to protect the
industry.
Another historical use of trade barriers to protect domestic industries was during the
Great Depression. Mired in recession, US industries were at risk, battling competitive foreign
industries. To save its industries, the US imposed the Smoot-Hawley Act, or the Tariff act of
1930, raising tariff rates by 21% over the following years. This is a great example of a US
government initiative to use tariffs to protect domestic industries from foreign competition.
Although governments have aggressively used tariffs and trade barriers, recent data
shows a continued decrease in usage.5 Not only the US, but most countries have shifted towards
free trade, signified by a decrease in tariffs and an increase in FTAs. The sheer quantity and
interconnected quality of FTAs make it difficult to even organize a list. Looking at Asia,6 nearly
every Asian nation, excluding East Timor, has signed a FTA. Economic strongholds such as
Japan and South Korea have signed at least 30 FTAs.
However, the US and China, the two leading economic countries, stand out from the
pack. While they have indeed signed multiple FTAs, their ongoing trade war stands against any
free trade movement. The US and China are deadlocked in a trade war that is not economical,
but political. Trade barriers have taken over as political weapons, gaining popularity during the
Trump administration and continuing throughout the Covid-19 pandemic. This atypical usage not
only hurts each other’s industries, but is harmful domestically as well. Therefore, governments
wielding trade barriers as distorted threats is a grave issue that requires the attention of the
international society.
President Trump’s “America First” slogan has long been associated with American
exceptionalism. This meant combative foreign trade policies, such as around $80 billion worth of
tariffs on an estimated $380 billion worth of imports, targeting Chinese steel and aluminum.7
One of the largest tariffs in the past decade, a continued series of tariffs on multiple imports
resulted in retaliating tariffs from several countries. In particular, tensions with China flamed into
the ongoing trade war. Inevitably, Trump’s trade policies have been criticized for neglecting
economic consequences. Although he reduced the trade deficits and funded some investments,
economists criticized him for an economic downfall. A model by the Tax Foundation projected a
0.21 percent decrease in long-run GDP, 0.14 percent drop in wages, and loss of 166,000 full-time
jobs (York, 2023).
The key is to determine the motives behind Trump’s trade policies. Any economic
decision can cause undesired results. However, it would be incorrect to say President Trump’s
goal was to benefit the American economy. Rather, his trade policies were highly political and
non-economic by nature. Thiemo Fetzer and Carlo Schwartz also analyzed how foreign
retaliatory tariffs targeted US regions,8 uncovering that they were focused towards Republican
voter-centered regions, highlighting a clear political agenda. On the Chinese side, not much
changes. Fetzer and Schwartz revealed China’s tariffs left negative consequences on their own
economy. Altogether, the US-China trade war has given rise to a new usage for tariffs that is
purely political with no regard for economic consequences.
Another potential usage of trade barriers is for national security measures. Since the
US-China technological war, nations have used trade barriers to prevent the inflow or adoption
of specific technologies. One example is TikTok. Because of national security concerns
regarding the owner of TikTok, Chinese company ByteDance9 TikTok has been banned for
federal and over 34 state employees. Trade barriers can be highly effective at preventing the
inflow of any unwanted technology. High tariffs can effectively set an obstacle, while also
fulfilling the need for government revenue. Import quota can also set a clear cap when importing
goods. The spectrum of trade barriers can apply to not just economic and political issues, but
national security considerations.
One potential counterargument may ask if recent trade barriers are truly only political and
not the subject of overanalysis. For instance, President Trump’s tariffs aided American farmers
using the Credit Commodity Corporation.10 This investment can mean that Trump’s tariff usage
is not entirely unusual for economic purposes. However, whether Trump’s investment was
meaningful for the domestic farmers is debatable. An article by Stuart Anderson analyzes the
farmers’ real benefit from the financial support. While the face value of financial support seems
extensive, Anderson argues Trump was merely helping the people he had harmed through tariffs.
Notably, US soybean exports 75% according to the US International Trade Commission11. This
evidence reinforces the idea that Trump’s tariffs ignored economic matters and placed political
agendas first.
While the world moves towards free trade, variant usages of trade barriers have also
emerged, especially related to politics. From the Trump administration’s use of tariffs to ongoing
trade and technological warfare between US and China, trade barriers are likely to continue to be
utilized as political weapons. However, policymakers should not abuse trade barriers. or neglect
the danger of causing harm to their own people. Policymakers must root themselves in the
foundations of economics to strive towards free trade and rational decision-making for all.
Footnotes
1. Tariff. Corporate Finance Institute. (2023, July 7).
https://corporatefinanceinstitute.com/resources/economics/tariff/
2. realDonaldTrump. (2019, Jul 12). When you are the big “piggy bank” that other countries
have been ripping off for years (to a level that is not to be believed), Tariffs are a great
negotiating tool, a great revenue producer and, most importantly, a powerful way to
get......[Tweet].https://twitter.com/realDonaldTrump/status/1149661694735474688
3. From “The Long-term Impact of Steel Tariffs on U.S Manufacturing”, by Lydia.C,2023.
4. From “Protection for the Steel Industry is as old as America”, by John Y.,
2018.https://www.npr.org/2018/04/24/604369759/protection-for-the-steel-industry-is-as-o
ld-america
5. From “U.S imports for consumption, duties collected, and ratio of duties to value,
1891-2016, by Office of Analysis and Research Services, U.S International Trade
Commission. 2017
6. From “FTA by economy” by Asia Regional Integration Center
. https://aric.adb.org/fta-country
7. From “Tracking Economic Impact of U.S Tariffs and Retaliatory Actions”, by Erica Y., 2021.
https://taxfoundation.org/tariffs-trump-trade-war/
8. From “Tariffs and Politics: Evidence from Trump’s Trade Wars”, by
Carlo C., Thiemo F., 2019.
https://cepr.org/voxeu/columns/tariffs-and-politics-evidence-trumps-trade-wars
9. From “Updated: Where is TikTok Banned? Tracking State by State”, by Andrew A., 2022.
https://www.govtech.com/biz/data/where-is-tiktok-banned-tracking-the-action-state-by-st
ate
10. From “Trump Tariff Aid To Farmers Cost More Than U.S. Nuclear Forces”, by Stuart A.
, 2020.
https://www.forbes.com/sites/stuartanderson/2020/01/21/trump-tariff-aid-to-farmers-cost-
more-than-us-nuclear-forces/?sh=d9028546c501
11. From “U.S Soybean Exports to China Crushed amid rising Trade tensions” by U.S
International Trade Commission. 2019.
https://www.usitc.gov/publications/332/executive_briefings/chinasoyebot.pdf
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https://www.usitc.gov/publications/332/executive_briefings/chinasoyebot.pdf
