Tariffs are taxes on trade

The statement in the title of this post may sound obvious. But I encounter many people who think that import tariffs are taxes on imports, but not on exports. In fact, taxes discourage both imports and exports, in roughly equal measure.

To be clear, tariffs could reduce imports slightly more than exports if they led to a smaller budget deficit. I doubt anyone believes this has been the case for the tariffs imposed by recent US administrations.

Another misconception is that tariffs on imports only reduce exports when other countries retaliate. That is not true. Tariffs move the exchange rate to a position where exports are likely to fall at about the same rate as imports. even if there is absolutely no explicit ‘retaliation’ from other countries.

The intuition here is that exports are the way we pay for imports. If you tax one side of a transaction, you reduce both sides, just as a tax on gasoline reduces both the sale of gasoline and the purchase of gasoline. It does not matter whether the tax is levied on buyers or sellers.

Certainly, the amount of import and export of goods may differ if countries also exchange financial assets in trade. The trade balance (technically the current account balance) consists of national savings minus national investments. But unless tariffs reduce the budget deficit (which is a negative savings), they are not likely to increase the trade surplus or reduce the trade deficit.

Bloomberg has an article discussing how American farmers are losing market share to Brazilian farmers:

An aging rural population is the latest attack on a country that has been losing its agricultural dominance for years. That position has been a crucial source of political power, especially with China, the largest importer of agricultural products. But US-China relations faltered during Donald Trump’s trade war, allowing Brazil to take the place of some US supplies. Brazil is already the largest exporter of soybeans and may now also be on track to overtake the US in corn exports. With the US agricultural trade deficit rising to a record $32 billion in fiscal 2024, households will be increasingly at risk of supply chain disruptions and price spikes if large-scale disasters occur.

A loss of competitiveness in agricultural exports is exactly what you would expect if a country implements higher tariffs. It has nothing to do with ‘US-China relations’ and everything to do with the real exchange rate.

None of this means that tariffs are necessarily a bad idea. Rather, this analysis suggests that it would be a mistake to move toward protectionism under the assumption that tariffs only reduce imports, when in fact tariffs reduce both imports and exports by approximately an equal amount.

P.S. The same goes for an export tax, which also reduces imports. For the same general reason, a policy regime that combines a uniform import tariff with an equal export subsidy comes quite close to a pure free trade regime, as the two policies roughly offset each other. Countries like South Korea were therefore much less ‘mercantilistic’ during their high growth phase than many people claim.