Best Tariffs: Ideas Behind Trump's Trade Strategy
For decades, American elites have spoken about free trade as if that were the case. Moral commandments engraved on stones– Unstable, sacred, eternal. They say tariffs are relics of the past. Economic heresy. Automated roads to higher prices, reduced production, and global retaliation.
What they don't tell you – what most of them don't know – some of the greatest economists in history have developed a theory that proves the exact opposite: Under appropriate conditions, tariffs can make the country richer.
This idea has a name Optimal Tariff Theoryand it has existed for a long time before modern economists pretended that free trade was a universal good. Long before Donald Trump uttered the word “tariffs,” British and classical economists had settled exactly how, when, why, why, and why powerful countries could support world trade.
And if that sounds familiar, then you should. Because Trump's trade policy, especially his 10% baseline tariff on all imports, is an almost perfect real-world application of this theory.
But it's worth pausing to understand what the theory actually says before we get there.
Here's the core insight: When the country is big enough, it can affect global prices. The United States is not a small, open economy. We are the largest buyers in the world. The world realizes when we buy something less. Prices change.
Now imagine us placing customs duties on imports. It's just taxes at the border. It raises the domestic prices of foreign goods. As a result, we buy it less. But if we are the main share of global demand for that product – steel, semiconductors, automobiles, solar panels, etc.Global prices begin to fall. The country that sells it cannot easily find other buyers. Supply and Outrip Demand. So the price will go down.
In this case, tariffs do not only make the product more expensive at home. It's pushing global prices down, so if we don't have tariffs, we'll pay less for it. We give up some trade. This is what we call an economist Gains of terms of trade.
Here the theory gets its name. If you use too high tariffs, the amount will be too large and profits will be eliminated. If you don't raise them at all, leave negotiation power on the table. But there's a “just right” rate –Points where improvements in trade conditions exceed lost trade volume. That's the best tariff.
Think about it like this. If the local supermarket doubles its prices tomorrow, you'll probably shop somewhere. But there's only one shop in town and if you raise the price a little, most people stay and pay. There is in that shop The power of the market. So is us too.
of course, There's a catch. If all countries do this, global trade could be reduced if all countries try to raise tariffs to extract better deals. Worse, other countries may retaliate with their own tariffs. That was the concern of many classical economists who developed this theory. And for decades it was a reason to ignore it. Free trade was treated not only as a policy but as a virtue.
But the theory never faded.
The Forgotten History of Strategic Tariffs
In the mid-19th century, the British economist was named Robert Torrence It showed how tariffs can improve the trading position of the country by changing the balance of demand between nations. John Stuart Mill A more strict treatment was then introduced, introducing the idea that the degree to which countries are gaining from tariffs depends on the elasticity of the supply of trading partners.
The second half of the century Alfred Marshall and Henry Sidgwick We have built a graphical model that shows how countries can adjust trade volumes to improve results. Francis Edgeworth Economic Map of National Welfare – introduced the idea of a trade indifference curve, demonstrating precisely where the greatest benefits from tariffs can be found. The theory has become more accurate, more elegant and difficult to ignore.
Then in 1906, cf bickerdike Mathematical knockouts were delivered. He has proven that a modest tariff imposed by a country with market power, that a person whose global supply is completely inflexible can raise national income. He derives the formula that is still cited today by economists who acknowledge that tariffs work only in footnotes.
at that time Nicholas Kaldor He published his now famous 1940 essay, “Notes on Tariffs and Trade Terms.” But Cardor did something important. He clarified, integrated theories, taught, illustrated and integrated into a framework that can be easily reproduced. He took the complex interaction of mutual demand and curves of indifference, and presented it in two good models of clean two-country. In Kaldor's version, tariffs shift the country's offer curve outwards. This means that it requires more favorable terms for the same level of trade. And there is the tangential point where the trade partner offer curve moves to a higher indifference curve representing welfare benefits.
Cardor walked the reader through each step of logic. If a country is large enough to affect global prices, tariffs will reduce import volumes, reduce the global price of that good, allowing the country to reimport it at a discount. result? Countries maintain more value from each trade –Net improvement in national welfare.
He was careful. He warned against the major tariffs. He had no intention of retaliation. He even bandaged his arguments by reaffirming his own general support for free trade. However, the effectiveness of the paper was clear. Even among free traders, the logic of optimal tariffs could not be denied.
The economists later ensed the illustrations of Cardor in their textbooks, but often stripped of the context. They presented it as curiosity and as theoretical rather than as it really was. A strong counterargument to the idea that free trade is always the best policy.
So why was it buried? This is because it has been a loss for the happy stories of mutual benefits. because It suggested that trade is not win-winbut often win. This is because it proves that powerful countries can become richer by changing their burdens to weaker countries.
Trump did not cite these economists. He didn't have to do that. His instinct told him what they theoretically proved: There is leverage in the United States. We are the buyers that everyone wants. And if you multiply a small price on our access to our market, you'll get better deals in return. This is the logic behind the 10% baseline tariff. That is the logic behind mutual tariffs. And that is the logic we explore in the second part of this discussion in tomorrow's Breitbart Business Digest, showing how Trump's tariffs will realize the optimal tariff theory.
I forgot the textbook. But Trump remembered.
