Four months after the day of liberation, President Trump is set to announce victory in the ongoing trade war. He hailed a recent agreement with the EU in July as “the biggest deal he’s ever made.”
When Trump reignited the trade conflict in early August, there was a wave of trade news. Diplomats flocked to the White House to negotiate. Even if significant reductions in tariffs come about as a result of these agreements, it’s clear that the U.S. is diving into a deeper era of protectionism.
Trump seems to enjoy proclaiming the “success” of his trade actions, emphasizing the reopening of factories. It’s savvy politics—ceremonial ribbon cuttings at revived plants, where you see smiling workers and all, make for great visuals.
However, this promotional tactic flirts with an age-old economic fallacy: the “Broken Window Fallacy” articulated by Frédéric Bastiat.
Imagine a shopkeeper whose window is shattered by a rock. He’s understandably upset—that’s a loss of $1,000 for him. But then a local guy reassures him, saying, “Look on the bright side! That broken window is creating jobs for the local glazier. Maybe he’ll spend that money on new shoes from the cobbler.” Ultimately, they argue that society becomes better off from the aftermath of the shopkeeper’s misfortune.
It’s a nice narrative, but as Bastiat pointed out, it’s missing key details. If the window hadn’t been broken, the shopkeeper might have used that $1,000 differently—perhaps buying a new suit that benefits the local tailor or throwing a party that brings in income for various businesses.
Bastiat concludes that this flawed reasoning restricts the focus to only what can be seen—like the income for the glazier or cobbler—while ignoring the “invisible” consequences.
Unfortunately, what the shopkeeper could have done with that $1,000 remains unknown. The potential purchases and jobs created are forever hidden in a world of counterfactuals. What is clear is that society suffers from the broken window itself.
While Bastiat’s argument wasn’t originally about tariffs, it still holds relevance. The principle is similar: whether it’s broken windows or blocking imports, the visible gains in one sector often come at the cost of hidden losses elsewhere. In either case, resources are directed toward less productive uses.
The objective of U.S. trade policy should be about raising the living standards for millions of Americans, not just focusing on assembly jobs. Chief Howard Lutnick once suggested that the focus shouldn’t come at the expense of more skilled work, like iPhone design. If a $25,000 assembly job replaces a $125,000 design position, it doesn’t mean America is richer—it signals a loss of opportunity of $100,000. Also, most people prefer to buy an iPhone rather than just making one.
Today’s protectionists exemplify this misunderstanding. Trade has taken a hit in American political discourse, which is a testament to the enduring nature of this myth. Tariffs create visible problems that politicians then use to claim credit for creating jobs to address those very issues.
Trump claims that thanks to his tariffs, he is focusing on what’s evident, like American manufacturing: look, new factory jobs! New, made-in-the-USA products!
Economists often highlight the immediate effects of tariffs, such as rising prices, because those outcomes are easy to identify. But Bastiat’s story brings attention to the less visible results, which are complex to measure yet significantly damaging to the economy.
On the other hand, free trade helps prevent these economic disruptions from occurring. By opting for affordable imports, Americans save money that they can redirect into spending, saving, or investing elsewhere. Globalization isn’t just about low-cost goods; it allows us to focus on higher-paying, specialized jobs.
Instead of hearing screams about the middle class or fears of jobs vanishing abroad, we should be talking about prosperity.
The Trump administration’s trade war originated from perceiving our longstanding trade deficit since 1975 as a “national emergency.” Yet during these five decades, the real GDP has more than doubled, and household net worth has tripled. Simultaneously, the portion of the global population living in poverty has dropped significantly.
Trump is quite adept at maneuvering through political challenges, but economic laws are different. Limiting trade doesn’t bring about prosperity; it’s analogous to paying someone to damage your property—it simply doesn’t create wealth. Protectionism more often leads to stagnation and increased costs.
