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Treasury Secretary Scott Bessent recently gave a speech to the New York Economics Club that outlined the Trump administration’s approach to economic policy on several issues, including bank regulation, tax policy, spending cuts and international trade.
One of the most quoted lines from the speech refers to trade policy, in which the secretary said, “Access to cheap goods is not the essence of the American Dream. The American Dream is rooted in the concept that any citizen can achieve prosperity, upward mobility, and economic security.”
We think the secretary is wrong. The government does not add to prosperity, upward mobility and economic security by forcing citizens to buy high-cost domestic goods instead of low-cost foreign goods. Adam Smith said, “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.”
Specializing and producing what you produce at a lower relative cost and exchanging that for what someone else can make at a lower relative cost is mutually beneficial. The way anyone achieves prosperity, upward mobility and economic security is through “cheap goods.”
Traditionally, tariffs aimed to raise government tax revenue, restrict imports and protect domestic producers from foreign competition. Two arguments to restrict imports and protect domestic producers are the infant industry argument and the national defense argument.
Alexander Hamilton wrote in the 1790 “Report on Manufactures” that new industries needed to be sheltered until they achieved economies of scale. The national defense argument, according to Smith, is that it is “advantageous to lay some burden upon foreign for the encouragement of domestic industry … when some particular sort of industry is necessary for the defence of the country.”
The weakness of the infant industry argument is that industries that have become adults continue to argue that they should be treated as children and keep receiving subsidies. The weakness of the national defense argument is that many industries that have little to do with national defense are protected, which reduces prosperity and security.
The Trump administration is adding one more argument for protection: Use the threat of tariffs to cajole other countries to do what the United States wants. Our question: Is this the most effective way to achieve our objectives? We are skeptical, and the potential damage of an extended trade war seems too high.•
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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to [email protected].
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