The Transition Costs of Tariffs

The conversation around tariffs tends to focus primarily on gains and losses.  Domestic protected producers are said to gain because of higher prices and returns.  Domestic consumers are said to lose because of said higher prices; the consumers now need to expend more effort to acquire the same or a fewer number of goods.

But the standard “welfare analysis” story of tariffs is, while correct, incomplete.  We live in a world of transaction costs and people do not instantly and costlessly move from one state of being to the other; that is, people face “transition costs.”  These costs include: searching for new suppliers and all the transaction costs therefrom (if they’re buying the imported product), tax compliance (if they are the importers), enforcement costs (for customs agents), lobbying costs (if they are lobbying for/against protection), etc etc.  These costs are not directly captured in the textbook model of tariffs but are costs nonetheless.

The implication of including transition costs of tariffs into the analysis is it makes the argument for tariffs even weaker; the true costs of the tariffs are likely considerably higher than typically anticipated.  As resources are devoted to compliance (or avoidance) of the tariff, to finding new suppliers or paying higher bills, that means fewer resources devoted to “building a better mousetrap.”  It means fewer resources dedicated to expanding and hiring and innovating.  It means fewer resources being devoted to satisfying desires.  It means we should be extremely skeptical of anyone who claims tariffs will “make America great again.”

Along the same lines as this post, check out David Henderson’s recent EconLog post on the costs of the TSA.

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