The Many Hidden Costs of Tariffs

Tariffs are not going anywhere in 2025. There is no indication that the protectionist rhetoric embraced by President-elect Donald Trump has changed; in fact, the evidence suggests that tariff policy will worsen. Given this climate, it is important for economists to make the case for free trade.

Of course, tariffs raise the price of tariffed goods and benefit domestic manufacturers at the expense of domestic consumers and foreign producers. These drawbacks are well known. However, there are also some less well known effects of trade restrictions.

For example, Gordon Tullock, in his 1967 paper “The Welfare Costs of Tariffs, Monopolies, and Theft,” lists a number of costs that are not typically considered.

Tullock states, “Collection of a tariff involves expenditure on customs inspectors, etc., who do the actual collection and coast guards who prevent smuggling.” Essentially, the government spends money on stopping tariff dodgers. If the government did not have a tariff policy, then this money could have remained in the hands of private actors.

If the government spends money on preventing tariff dodging, then it follows that people will try to get around these barriers. Tullock continues, “Further, customs brokers are normally hired by the shipper to expedite the movement of their goods through customs.” This could take a variety of forms. Importers may expend resources on smuggling, or they might hire a lawyer or a lobbyist to help get around these barriers legally.

Additionally, the revenue from tariffs may be wasted. Tullock states:

Suppose further that the revenues raised by this tax are completely wasted, building tunnels, for example, which go nowhere…The people buying the product pay more than the cost, but no one benefits from the expenditure. The funds are not transferred because no one benefits from the existence of the tax. The whole economy is poorer…by the whole amount of wasted resources.

In the above case, the tariff revenues have little benefit outside of the political factors that motivated the tariff. In this situation, the taxpayers do not receive any government-provided goods in return. In reality, not all of the tariff revenue is wasted. Some benefit is derived from government taxation via public spending despite the undesirability of taxes. Whatever the tariff revenue goes towards, however, will likely involve some level of waste. Perhaps a significant level. If the tariff revenue was not extracted in the first place, then the funds would have stayed in the private sector where they would have likely been utilized more efficiently.

There are also costs associated with lobbying, as Tullock points out. Domestic manufacturers gain monopolistic advantages associated with import tariffs, so they are willing to pay some price for that advantage. This price tends to come in the form of lobbying expenditures—a practice known as rent-seeking. Again, these expenditures would not exist if not for tariffs.

The domestic steel industry has historically supported tariffs on foreign steel through lobbying. As OpenSecrets reports, “During the first part of the 2000s, the industry strongly pushed—with some success—trade policies that were decried by critics as protectionist, including a tariff on imports.” In the absence of tariffs, lobbying spending would be much lower, and domestic manufacturers would spend on more productive enterprises rather than trying to obtain monopolistic advantages.

As demonstrated by Tullock, the costs of tariffs are greater than typically understood. In addition to compromising the global division of labor, they also lead to waste in a number of other ways, as outlined above. To create a strong and healthy economy, it is paramount that Trump cease imposing new tariffs, and if he is willing, revoke those that have already been enacted.

This piece originally was published by the Foundation for Economic Education.