Tariffs are taxes on trade

The claim in the title of this post might sound obvious. But I encounter lots of people that think import tariffs are taxes on imports, but not exports. In fact, taxes discourage both imports and exports, to a roughly equal extent.

Just to be clear, tariffs might reduce imports a bit more than they reduce exports if they led to a smaller budget deficit. I doubt there’s anyone who believes that has been the case for the tariffs imposed in the US by recent administrations.

Another misconception is that tariffs on imports reduce exports only in the case where other countries retaliate. That’s not true. Tariffs move the exchange rate to a position where exports are likely to fall roughly as much as imports decline, 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 will reduce both sides, just as a tax on gasoline reduces both the sale of gasoline and the purchase of gasoline.  It makes no difference whether the tax is imposed on buyers or sellers.

To be sure, the quantity of imports and exports of goods can differ if countries are also exchange financial assets in trade.  The trade balance (technically current account balance) is national saving minus national investment.  But unless tariffs reduce the budget deficit (which is negative saving), they are not likely to increase the trade surplus, or reduce the trade deficit.  

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

An aging rural population is the latest strike against a country that’s been losing its agricultural dominance for years. That standing has been a crucial source of political power, including crucially with China, the biggest agricultural importer. But US-China relations frayed during Donald Trump’s trade war, allowing Brazil to take the place of some US supplies. Already the top exporter of soybeans, Brazil may now be on pace to overtake the US in corn exports, too. As the US’s agricultural trade deficit widens to a record $32 billion in fiscal 2024, households will find themselves at increasing risk of supply-chain disruptions and price spikes when far-flung disasters hit.

A loss in agricultural export competitiveness is exactly what you’d expect when a country adopts 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, whereas in fact tariffs reduce both imports and exports, and by a roughly equal amount. 

PS.  The same applies to 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 is pretty close to a pure free trade regime, as the two policies roughly offset.  Thus countries like South Korea were far less “mercantilist” during their high growth phase than many people claim.

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