Introduction: I’m your host this week, Iona Italia. You might have noticed that, unusually, I’m hosting two podcasts in a row. That’s because I felt it was important to air this particular episode right away, given how topical the subject matter is. (Those of you who are fans of Jon Kay and I know a lot of you are and rightly so, don’t worry—he’ll be hosting our next two consecutive podcasts.)

Meanwhile, my guest this week is John H. Cochrane. John is an economist, specialising in financial economics and macroeconomics. He is the Rose-Marie and Jack Anderson Senior Fellow at the Hoover Institution and the author of the blog, The Grumpy Economist. John explains to me what tariffs are, how they work, what the implications of Trump’s tariff policies are and what the current and potential future effects of his to-and-fro manoeuvres on this topic have been and are likely to be. We also talk more generally about DOGE and government efficiency and about stock markets, labour markets and regulation and John outlines his vision of a free-trade world. As a layperson, I benefitted a lot from John’s expertise. I very much hope you enjoy my conversation with John H. Cochrane. As always, you’ll find a full transcript and shownotes on the quillette.com website.

John H. Cochrane

John H. CochraneMacro | Money | Fiscal Theory

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News, views, and commentary from a free market point of view. I moved from Blogger to Substack in December 2023. For previous posts back to 2011 see my Blogger page at https://johnhcochrane.blogspot.com. Click to read The Grumpy Economist, by John H. Cochrane, a Substack publication with tens of thousands of subscribers.

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Iona Italia: I’m going to start with a very silly question, which is, what are tariffs? Is that the same thing as import duties or are those two separate things? What are tariffs first of all and why are they usually imposed? What’s the usual purposes of them and what are the usual effects of them? If that’s not too big a question to begin with.

John H. Cochrane: Okay, the bigger questions you ask, the longer answers you’ll get. Yes, tariffs and import duties are, as far as I know, the same thing. It’s a tax paid when you import something to a country. They’re usually collected right at the port. It’s very simple. You bring in some stuff, you pay some money to the government. Purposes is a deep and interesting question, in part because the current American tariffs seem to me so clearly an answer in search of a question. And so much of our public policy is answers out in search of questions. The desire for tariffs seemingly came first, and then why are we doing it? Are we doing it to reduce trade deficits? Are we doing it for national security? Are we doing it to bring back manufacturing? All of those supposed questions come after the answer, as far as I can tell. That’s why one of the problems is that it is not right now as being practised, something where there’s a clear-eyed, here’s a problem, here’s the best solution to it, that is a tariff.

So what are the effects of tariffs? Well, what are the purposes and what are the effects? Many purposes are alleged for tariffs, usually to encourage domestic production of something, to protect domestic producers so that they will live as opposed to foreign producers. That’s the most common. And when you actually look at tariffs, the biggest reason is that domestic producers don’t like foreign competition. They don’t like domestic competition. Nobody likes competition except free-market economists like me. And maybe not even in our own business.

But it’s easier to get the government to gang up on the foreigners and reduce competition, raise your prices at the expense, of course, of consumers and of other producers who import the goods. So, steel, we put a tariff in. That helps US steel producers, protects them from competition, hurts anybody who uses steel, consumers or people who want to make stuff out of steel. That’s one of the primary effects.

II: And presumably including American manufacturers who using steel in their products. It affects them as well.

JC: Exactly. Yes. The other purposes alleged are reduced trade deficits. It doesn’t work for that. Mostly tariffs are an economic fallacy. And so the analysis consists of what about x? What about y? And it’s my job to tell you why none of those make any sense. The position of most economists since Adam Smith explained this has been that tariffs are a bad idea for the same reason that you don’t want tariffs between states and between cities. If tariffs were a good idea between countries, they would be a good idea between California and Nevada or—I’ll get two Australian states wrong if I try but you know what I mean or between cities. We learned hundreds of years ago that internal taxes are a bad idea.

They are a tax, they raise some revenue, but they’re not considered a particularly good tax. Good taxes raise lots of revenue without hurting the economy. Tariffs seem to hurt the economy a lot for a small amount of revenue that they raise. So there’s not much of a good word to say here for tariffs, sorry.

II: Yeah, so there seems to be, as far as the protectionism versus the raising revenue is concerned, those seem to be contradictory aims. Is that correct? Because on the one hand, if the tariff comes in and if you’re encouraging people to send goods to your country so that you can make money on the tariffs that they’re paying, then you want lots of people sending their goods. But if you’re trying to prevent too many goods from entering so that local people will buy local then … Are those two things at odds or am I confusing two different [things]?

JC: You’re very wise. You’re doing great on economics. Yes, if it stops people from sending stuff, then you don’t make any revenue on it. If you make revenue on it, then people are still sending stuff. So if people still send stuff to the US and pay the tariff, the price will go up by the amount of that tariff. So that raises the price of those goods in the US to the benefit of domestic producers, even if people are still bringing a lot of stuff in.

II: Right but presumably they won’t bring it in unless people are buying it.

JC: Yeah, so a lot of stuff that comes from China, even if the price is fifty percent higher, China is such a low-cost producer that we will still continue importing a good deal of stuff at those prices. So you’re going to get a little bit of both. You’re going to get a little bit less imports. You’re going to pay a lot more for the imports you do get. And domestic prices will go up because they’re not facing that competition anymore.

II: Is it at all analogous to, for example, government policy on smoking? So I’ve heard some economists argue that governments should actually be encouraging smoking on a purely economic basis because smokers tend to die a bit younger, so they put less pressure on the healthcare system, and they also die from relatively quick things like lung cancer. And at the same time, you can tax them a lot on their cigarettes, so you get a lot of revenue from that. So there’s a double-edged sword thing of taxing cigarettes, which is you want to on the one hand discourage people from smoking, but on the other hand, you want enough people to be smoking so that you can take their taxes.

JC: Yeah, I guess take that one to its logical end and the government should subsidise heroin so we’ll all go away quickly. I wouldn’t be that cynical. Now there is an analogy to taxing smoking that people have said that imports are somehow a terrible thing for the economy so you want to tax the imports. So in the same way, you tax cigarettes to discourage consumption.

Now, why is cheap stuff terrible for the economy? There’s a big difference between good quality cheap manufactured goods and cigarettes. It’s not obvious that sending you stuff is bad for you. The major argument for tariffs … there’s two arguments that I think are worth dealing with. One is that by protecting your industry, you will bring back the wonders of manufacturing. You’ll encourage things to be made domestically and that will grow this industry, which will then turn into a world-beater and you’ll be ahead.

The problem is that’s never worked. Industries that are heavily protected and subsidised tend to be very good at getting protections and subsidies, but without facing the discipline of competition. It’s very hard to think of any example where heavily protected industries have become efficient and world-beaters, and many, many examples of protected industries wallowing in inefficiency forever.

US steel has been protected for decades and they failed to invest in new technology. So now they’re inefficient compared to foreign steel makers. In the US, we protected shipbuilding in the 1920s. The result is now it costs five times as much to build a ship in the US as it does in China and zero ships are produced. That protection argument doesn’t work.

The other theoretical argument is that a big country can charge a tariff and thereby screw its competitors and force foreigners to give us stuff a little bit cheaper. And that’s possible, the same way a monopolist can raise a price and transfer some wealth at the loss of efficiency. Even if that were possible, is that America’s place in the world to transfer wealth from everybody else to us? I don’t think that’s a great idea.

II: Well, that does seem like a more coherent argument if it’s just the case that America is such a large market. So if I’m over here making my whatever-thing-it-is and most of my buyers are in America, then even if I have to pay a high tariff, I’m going to continue to send things to America because the Cambodians might not be charging me any tariffs but they’re also not going to be buying my goods, there’s not going to be much audience for my stuff.

JC: Yeah, but we dislike monopoly everywhere else. So it’s the function of government to try to organise our businesses into monopolies in order to try to exploit foreigners. Again, it’s an argument that then it gets, as monopolists tend to get, inefficient and flabby. Really, the thing that has made us all remarkably wealthier in the era of globalisation is that discipline of competition and innovation. And I think that’s what we all forget. It’s not just about buying and selling an existing bunch of stuff. Competition, innovation, that’s what makes us all better off. And that needs the economies of scale of a world market. This retreat from a large trading world market is really sad for all of our economic growth going forward.

II: Do you think there’s any parallel between … So, I’m a dual citizen of Argentina, for my sins. I lived in Argentina for many years under Peronist governments where I assume it was tariffs that was the mechanism behind this. So foreign imports to Argentina had enormous markup compared to their price in the countries of origin.

And so, for example, it was cheaper if you wanted to buy a new computer—because Argentina doesn’t produce any computers, as far as I know—if you wanted to buy a MacBook, it was cheaper to get in a flight to New York—people actually did this—and then buy your MacBook there, spend a few days in New York and then fly back, than to buy it in Argentina because of the enormous markup we had.

And the tangible results of that as far as being a consumer were concerned were that Argentine products were incredibly shoddy and some things just couldn’t be obtained because we also didn’t have a functioning international postal system. So you couldn’t just have things sent through Amazon or eBay or anything like that. And when you went to the supermarket, you felt as though you were going back behind the Iron Curtain and had that feeling of early 1980s Prague I don’t know how much how much it was tariffs that were the result [cause] of that and how much tariffs were implicated in the general state of the Argentine economy or what the thinking was behind the imposition of those high import taxes, whether without them domestic industry would have collapsed altogether because we also had very ferocious labour protectionist laws and...

Plus, domestic goods were just really bad. So anybody who had the option of not buying Argentine goods would have not bought Argentine goods—with a very few exceptions like wine, beef and tango shoes.