How Protectionism Hurts Consumers and the Economy
How Protectionism Hurts Consumers and the Economy
Although tariffs may sound appealing, their economic benefits do not outweigh the costs.
With the White House restoring Section 232 tariffs on steel and aluminum, the debate over protectionism is back in the spotlight. While tariffs are often framed as a way to safeguard domestic jobs, history suggests they do far more harm than good.
Rather than strengthening the economy, tariffs raise prices, distort markets, and create artificial industries that collapse when government protections are removed. Though they may benefit specific sectors in the short term, the broader economic consequences are often severe, with consumers, workers, and businesses bearing the burden.
A tariff is a tax placed on imported goods, increasing their cost and making domestically produced alternatives more attractive. Today, governments primarily use tariffs to protect domestic industries by making foreign goods artificially expensive, retaliate in trade disputes when other countries impose trade barriers, and advance national security by ensuring the domestic production of critical goods.
Although these justifications may sound reasonable, tariffs come with hidden costs that disrupt economic efficiency and harm consumers.
The most immediate effect of tariffs is that they raise prices. If an imported t-shirt originally costs $5 but a tariff raises its price to $6, domestic producers — who previously had to compete at $5 — may now charge up to $6 as well. However, businesses do not simply match price increases one-to-one. Many goods, such as clothing and electronics, have elastic demand, meaning that if prices rise too much, consumers buy less or switch to alternatives.
Retailers may not be able to pass on the full tariff cost to consumers. Businesses absorb some of the cost, reducing profit margins and cutting jobs. Demand falls, meaning even protected industries often fail to benefit as expected.
A common argument for tariffs is that they protect and create jobs by shielding local businesses from foreign competition. While some industries may expand under tariff protections, this growth is artificial, similar to a government subsidy.
When tariffs raise prices, previously uncompetitive businesses enter the market, build factories, and hire workers. But this expansion is not sustainable. When tariffs are eventually removed — due to trade deals, political shifts, or economic necessity — these industries collapse.
This is a classic example of Frédéric Bastiat’s economic principle. What is seen by the public are the jobs created and factories opened under tariff protection. Left unseen are the inefficiencies, misallocated investments, and inevitable collapse when tariffs are lifted.
No government planner can accurately predict which industries will remain viable long-term. By steering investment toward politically favored sectors, tariffs lead to malinvestment, fostering industries that should never have existed.
Tariffs not only increase prices, but also create deadweight loss, where the economy produces fewer goods than it otherwise would. When a tariff raises the price of a good, consumers buy less due to the higher cost, foreign producers sell less — reducing overall trade — and domestic producers increase supply, but at an inefficiently high cost.
This results in an overall loss of economic efficiency. The benefit to domestic producers is smaller than the total loss to consumers and the economy.
Tariffs do not operate in isolation. When one country imposes trade barriers, others retaliate, leading to trade wars that damage all parties involved. Exports decline as foreign markets impose their own tariffs. Supply chains are disrupted, raising costs for domestic manufacturers. Investment uncertainty rises, slowing economic growth.
One of the most famous examples is the Smoot-Hawley Tariff Act of 1930, which raised U.S. tariffs to record levels. Instead of protecting American jobs, it triggered retaliatory tariffs worldwide, collapsing global trade and worsening the Great Depression.
Recent trade conflicts have followed similar patterns. For example, U.S. tariffs on China have prompted counter-tariffs that harmed American farmers and manufacturers.
If tariffs distort markets and harm long-term prosperity, what is the alternative? The answer is free trade and market-driven competition. Open trade allows goods to be produced where it is most efficient, reducing costs for consumers. Without artificial protections, businesses must innovate to remain competitive, resulting in stronger industries. Additionally, free markets prevent the boom-and-bust cycles caused by trade barriers.
Regions that embrace open markets — such as Hong Kong and Singapore — have experienced rapid economic growth and rising living standards, while those that rely on protectionism often stagnate.
While the economic argument against tariffs is clear, it is important to recognize that foreign policy considerations require a different approach.
The discussion here focuses purely on economic efficiency and national prosperity. However, if tariffs are used as a foreign policy tool — to pressure rival nations, ensure access to critical resources, or pursue diplomatic goals — the economic consequences become a secondary concern.
This means that any serious discussion of tariffs must distinguish between economic policy and strategic foreign policy objectives. While tariffs always impose economic costs, whether those costs are justified for geopolitical reasons is a separate debate.
Tariffs are a costly illusion — politically popular but economically destructive. If history is any guide, protectionist policies do little to create lasting prosperity and much to hinder it. Instead of imposing trade barriers, policymakers should remove obstacles to competition, reduce market distortions, and allow voluntary exchange to drive economic growth —strengthening their economies while fostering global prosperity.