In the past week, a group of economists, myself included, publicly endorsed a statement advocating free trade while opposing tariffs. Although the statement is comprehensive, it cannot encapsulate every intricacy of the topic. Therefore, I wish to elaborate on the common fallacies associated with the argument for tariffs and also explore scenarios where tariffs may be justifiable.

Confusion Over Trade Deficits

Proponents of tariffs frequently assert that they are warranted due to the ongoing trade deficits the United States experiences with other nations. Many times, this argument narrows down to specific countries like China and Mexico, which are often highlighted for having significant trade deficits with the U.S. These advocates believe that imposing higher tariffs on these countries and others will effectively reduce the trade deficits we face.

To dissect this reasoning, lets break it down. First, is a trade deficit with a specific nation inherently negative? The short answer is no. A simple analogy can clarify this point: consider your household expenses. For instance, my family spends over $5,000 annually on groceries from a local supermarket, Safeway. Yet, Safeway does not purchase anything from my household. This dynamic illustrates that trade deficits can exist without them being problematic. If you are employed, your employer likely enjoys a trade surplus with you, as they pay more for your services than you spend on their products, which is not an issue.

This logic extends to international trade. In 2024, the United States recorded a trade deficit of approximately $36 billion with Canada, a figure significantly lower than the $100 billion stated by former President Trump. The notion that spending more on imports from Canada than what they spend on U.S. exports somehow equates to subsidizing Canadians is misguided, just as my spending at Safeway does not subsidize their business. There is no requirement for the U.S. to maintain a zero trade deficit with any particular country. In fact, in the same year, the U.S. boasted trade surpluses with several nations, including the Netherlands ($56 billion), Hong Kong ($22 billion), Australia ($18 billion), and the United Kingdom ($12 billion). These countries have not raised alarms over these surpluses, akin to how your employer might not worry about a surplus they enjoy in their financial dealings with you.

Now, lets address the overall trade deficit the United States has with the world. In 2024, our exports amounted to $3.19 trillion, while imports totaled $4.11 trillion, resulting in a total trade deficit of $0.92 trillion. Where does that $0.92 trillion go? Wouldnt it be ideal if those dollars remained in other countries? While it might seem favorable, the reality is that most of this money returns to the U.S. as investment. Foreigners purchase U.S. government bonds, land, and other assets, indicating their trust in the U.S. economy. Ironically, while Trump touts foreign investments as a positive, he simultaneously criticizes the large trade deficit. It is crucial to understand that the trade deficit and capital surplus are two sides of the same coin.

So, would increasing tariffs on countries with whom we have trade deficits genuinely reduce those deficits? There is no solid evidence to suggest that it would. Imposing tariffs would likely result in fewer imports, leading those nations to have less capital to spend on American exports. Furthermore, it is probable that these countries would retaliate with their tariffs on U.S. goods.

Understanding the Capital Surplus

Another primary reason for our capital surplus with the rest of the world is our substantial federal budget deficit, which attracts foreign buyers of U.S. government bonds. The most effective method of tackling the federal budget deficit is through reducing government spending. According to the Congressional Budget Office's report from March 2025, federal spending is projected to be 23.3 percent of GDP this year, surpassing the two-decade average of 21.1 percent by more than two percentage points.

Should we be concerned? The answer is a mixed one. We should be apprehensive about the massive federal budget deficits and the increasing federal debt as a proportion of GDP. Projections indicate that by 2055, the federal debt held by the public may skyrocket to 155 percent of GDP, a marked increase from the already alarming rate of 100 percent.

However, we should not be overly worried about the capital surplus itself. Some argue that persistent trade deficits could lead to increased foreign ownership of U.S. assets. Yet, historical data contradicts this fear. The U.S. has maintained annual trade deficits since 1976, yet during this time, the average net worth of American households has risen significantly from $364,893 in 1975 to $1,212,974 in the fourth quarter of 2024, adjusted for current inflation. This disparity suggests that the anxiety about foreigners owning American assets due to trade deficits has not come to fruition. If such concerns have persisted for nearly half a century without materializing, it may be wise to reconsider the validity of those fears.

Who Ultimately Bears the Burden of Tariffs?

Recent commentary from Nicholas Gilbert, a dairy farmer from upstate New York, illustrates the frustrations many experience regarding tariffs. Gilbert expressed frustration after incurring a $2,200 tariff on feed imported from Canada. Surprisingly, he directed his anger not towards Trump, who instituted the tariff, but rather at the Canadian sellers for raising prices. A staunch Trump supporter, Gilberts reaction underscores a common misperception.

As quoted in an article from Atlantic, Gilbert stated, Im not even sure its legal! We contracted for the price on delivery. If your price of fuel goes up or your truck breaks down, thats not my problem! Thats what the contracts for. However, it seems that the Canadian exporter fulfilled their contractual obligations. What Gilbert learned, albeit the hard way, is that tariffs function as taxes on imports rather than penalties on exports, and these costs invariably fall on the importer.

Importers dont always shoulder the entire burden of tariffs alone. If a significant percentage of a countrys exports are imported by another, tariffs can lead to a decrease in the export prices from that country. Notably, research has shown that importers bore nearly all of the costs associated with the tariffs imposed during Trumps initial term.

Addressing Global Tariffs

On April 2, President Trump delivered a speech in the Rose Garden unveiling his plan to implement reciprocal tariffs on imports from various countries. However, his presentation did not reflect the actual tariffs levied by those nations. Instead, it was based on a calculation that did not take into account the tariff rates of other governments. While Trump listed numerous countries targeted for increased tariffs, he overlooked that forty-four countries imposed tariff rates lower than the average U.S. rate before his increases, including notable partners like Canada, France, Germany, Italy, and Japan. This omission raises questions about his commitment to fair trade.

But, lets entertain a hypothetical scenario where every nation imposes higher tariffs on U.S. exports than the U.S. does on imports. What would be the optimal strategy for our government?

This might be a surprising conclusion, but based on extensive economic reasoning and historical evidence, the best course of action would be to eliminate all tariffs entirely. While foreign tariffs on U.S. exports can adversely affect American producers, they also harm consumers in those countries. Should the U.S. respond with its own tariffs, it benefits domestic producers at the expense of consumers, including those producers who rely on imported goods as materials. Analyzing supply and demand curves illustrates that consumer losses generally outweigh producer gains.

The essence of the argument is that, regardless of other nations actions, the most beneficial approach for the U.S. governmentif it values consumer welfare equally with producer interestsis to adopt a policy of zero tariffs.

Two prominent figures from the last century used metaphors to eloquently express this principle. The first was President Reagan, who argued in the early 1980s that if you find yourself in a lifeboat and someone shoots a hole in it, retaliating by shooting another hole is not advisable. While you may harm the shooter, you also jeopardize your safety. The second was the renowned British economist Joan Robinson, who posited that if another country obstructs your shipping lanes, it would be illogical for you to do the same.

Exploring Plausible Arguments for Tariffs

While Ive focused on the flawed arguments for tariffs, there are indeed valid reasons for their imposition. The first revolves around national security concerns. There are instances where we may need to procure essential inputs from nations that could potentially become adversaries. In such cases, tariffs may serve as a mechanism to stimulate domestic production, albeit more costly, to replace these cheaper imports. A contemporary example often cited is China. However, tariffs arent always the optimal solution to national security dilemmas; stockpiling critical materials could be a more effective approach, although this solution also relies on the governments competence.

Moreover, its important to recognize that a robust economy fortifies national security. Generally speaking, lower tariffs contribute to a more resilient economy.

The final argument I wish to explore regarding tariffs relates to their role within an ideal tax framework. The federal government imposes various taxes, including on individual and corporate income, capital gains, and commodities. The question arises: how can we ascertain that a tax on imports does not fit within an optimal tax strategy? The truth is we cant definitively know. However, its understood that the deadweight lossrepresenting the comprehensive loss from a tax minus the governments gaingrows proportionally with the square of the tax rate. This suggests that lowering the top marginal income tax rate, for instance, and offsetting it with a modest tax on imports could potentially reduce overall deadweight loss.

Remarkably, I have yet to see any of Trump's economists articulate this perspective. Perhaps this stems from a reluctance to acknowledge that tariffs are, in fact, taxes, which impose real costs on those who are taxed. Is it possible that Trump seeks to keep his supporters unaware of the financial consequences of tariffs, much like the dairy farmer in upstate New York?