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Mises Wire
Vincent Cook
04/15/2025
On March 16, members of the Trump administration appeared on the Sunday morning network talk shows arguing that retaliatory tariffs are necessary for revitalizing American industries by promoting a “fair” international trade regime. On CBS’s Face the Nation broadcast, Secretary of State Marco Rubio offered this justification for retaliatory tariffs:
As Mises Institute President Thomas DiLorenzo pointed out in a recent Mises Wire article, the Trumpian demand for “fairness” in international trade boils down to an intensification of the tax harms inflicted on both American consumers and American producers, forcing them to pay higher prices. On NBC’s Meet the Press, after host Kristen Welker pressed Secretary of Commerce Scott Bessent several times about tariffs driving up prices; he finally responded:
In sharp contrast to this, Ludwig von Mises reached a very different conclusion about the causal relationship between economic malaise and tariffs in his analysis of restrictionist privileges in Human Action:
Mises pointed out that reductions in domestic productivity are caused by various forms of government intervention. While tariffs imposed by foreign governments do compel uneconomic shifts of domestic labor, natural resources, and capital away from their most productive uses in export industries, piling on with additional tariffs imposed by the domestic government only further impairs factor productivity at home. Mises also pointed out that higher wages enjoyed by American workers relative to workers elsewhere is primarily a consequence of more savings being invested per capita in America. It is always voluntary restraint of present consumption—thrift—and the redirection of the productive inputs liberated by such thrift towards investment in more capital-intensive lines of production that differentiates nations with respect to their wage levels.
The standard Trumpian response to this Misesian analysis (which admittedly does assume the existence of barriers to cross-border migration and capital movements) is that foreign tariff barriers incentivize American savers to invest in manufacturing overseas (i.e., Wall Street’s alleged “off-shoring of American jobs”), while America’s open borders incentivize foreign workers from low-wage countries to move to America, both of which would tend to reduce the per capita investment in America relative to tariff- and migration-protected manufacturing nations like China.
On the other hand, America’s huge current account deficits mean that foreigners have, in fact, been furnishing far more savings to America than America has been furnishing to the rest of the world. Inflows of funds saved by foreigners—almost entirely in the form of borrowing by Americans—is what balances the outflows associated with expenditures on foreign goods and services. America’s purchases of foreign goods, to the extent they have not been paid for by American exports, have been financed by foreign extensions of credit to Americans.
Figure one shows how both exports and imports have been rising relative to America’s national income over the past six decades, covering the period over which deindustrialization has become manifest:
Figure 1: Exports and imports as a fraction of national income
Source: FRED
The Trumpian premise that foreign trade barriers cause massive trade deficits by thwarting American exports is utterly false. Exports have in fact become more important as a source of income for Americans in spite of deindustrialization and in spite of the rise of new foreign competitors. Moreover, massive inflows of foreign savings relative to national income (represented in figure one as the excess of the import curve over the export curve) should have increased per capita investment in America. So what went wrong? Why did overall investment in America go down despite the influx of foreign credit?
To understand the worsening investment shortfall, we need to examine what happened to domestic thrift. Figure two shows the share of America’s national income devoted to net savings by Americans:
Figure 2: Net savings as a fraction of national income
Source: FRED
This graph reveals that Americans have become less and less willing to fund economic growth. The increases in available savings from overseas simply haven’t been enough to offset losses of savings from Americans. When examining the various components of net savings, one discovers that personal saving rates have steadily eroded while government deficits have exploded, consuming a large portion of the available pool of private savings since the 1980s. Meanwhile, businesses are struggling to acquire enough investment funds (mostly through their own retained earnings) to maintain their existing stock of productive capital goods even as the population keeps growing.
The virtual disappearance of thrift from America is now a genuine crisis. Trump deserves kudos for contradicting elite propaganda in calling attention to existence of a deindustrialization problem in America and its dire consequences for American workers, but he is doing the country a tremendous disservice by trying to pin the blame for this on foreigners instead of trying to mend America’s spendthrift ways. Indeed, many of America’s protectionist trading partners now being targeted with tariffs (notably Japan and the European Union) have similar issues with capital consumption-induced deindustrialization just like America, but unlike America enjoy positive current account balances with the rest of the world. Protectionism and positive trade balances haven’t been a solution to their problems; they and America alike need to heed the wisdom of Mises in reversing interventionism instead of trying to cover up the symptoms of industrial decline with tariffs.
Trump is also doing America a great disservice by pretending that the burdens of tariffs will all be shifted to foreigners. Secretary Bessent neglected to mention that only about 15 percent of China’s exports are to America, and that less than 19 percent of China’s GDP depends on exports—that is, less than 3 percent of China’s GDP currently depends on American customers. Chinese manufacturers who are at risk will undoubtedly find non-American customers for their products at slightly lower prices or find other slightly less remunerative uses for the labor and natural resources they currently devote to producing exports for Americans. Some Chinese incomes will be diminished in real terms and some Chinese capital goods may have to be written off at a loss to Chinese capitalists as a consequence of such changes in response to American tariffs, but that is very far from the Chinese having to “eat the tariff” imposed by Trump in its entirety.
Tariffs necessarily cause both the quantity of goods imported into America to decline and the price paid by American consumers for those goods to increase; it is consumers who are inevitably harmed by the reduced quantity of foreign goods available to satisfy their needs even in those cases where long-run price increases happen to be exceedingly modest. One way or another, consumers inevitably “eat the tariff” too.
Secretary Bessent also neglected to mention that tariffs also reduce the ability of foreigners to earn dollars needed for buying American exports and for extending credit to Americans. The very currency adjustment mechanism he alluded to, where dollars suddenly become harder for foreigners to earn and thus American goods, services, and investments priced in terms of dollars become more expensive in terms of foreign currencies, poses a major threat to American export incomes and to the ability of American producers to access foreign savings. Given America’s lack of thrift, inhibiting access to foreign savings, could paralyze capital goods formation and make the Treasury even more desperately dependent on inflationary dollar creation and bank credit expansions for funding federal deficits. In short, we also need to heed Mises’s wisdom that tariffs can only further seriously impair our well-being.
mises.org
Vincent Cook
04/15/2025
On March 16, members of the Trump administration appeared on the Sunday morning network talk shows arguing that retaliatory tariffs are necessary for revitalizing American industries by promoting a “fair” international trade regime. On CBS’s Face the Nation broadcast, Secretary of State Marco Rubio offered this justification for retaliatory tariffs:
As Mises Institute President Thomas DiLorenzo pointed out in a recent Mises Wire article, the Trumpian demand for “fairness” in international trade boils down to an intensification of the tax harms inflicted on both American consumers and American producers, forcing them to pay higher prices. On NBC’s Meet the Press, after host Kristen Welker pressed Secretary of Commerce Scott Bessent several times about tariffs driving up prices; he finally responded:
In sharp contrast to this, Ludwig von Mises reached a very different conclusion about the causal relationship between economic malaise and tariffs in his analysis of restrictionist privileges in Human Action:
Mises pointed out that reductions in domestic productivity are caused by various forms of government intervention. While tariffs imposed by foreign governments do compel uneconomic shifts of domestic labor, natural resources, and capital away from their most productive uses in export industries, piling on with additional tariffs imposed by the domestic government only further impairs factor productivity at home. Mises also pointed out that higher wages enjoyed by American workers relative to workers elsewhere is primarily a consequence of more savings being invested per capita in America. It is always voluntary restraint of present consumption—thrift—and the redirection of the productive inputs liberated by such thrift towards investment in more capital-intensive lines of production that differentiates nations with respect to their wage levels.
The standard Trumpian response to this Misesian analysis (which admittedly does assume the existence of barriers to cross-border migration and capital movements) is that foreign tariff barriers incentivize American savers to invest in manufacturing overseas (i.e., Wall Street’s alleged “off-shoring of American jobs”), while America’s open borders incentivize foreign workers from low-wage countries to move to America, both of which would tend to reduce the per capita investment in America relative to tariff- and migration-protected manufacturing nations like China.
On the other hand, America’s huge current account deficits mean that foreigners have, in fact, been furnishing far more savings to America than America has been furnishing to the rest of the world. Inflows of funds saved by foreigners—almost entirely in the form of borrowing by Americans—is what balances the outflows associated with expenditures on foreign goods and services. America’s purchases of foreign goods, to the extent they have not been paid for by American exports, have been financed by foreign extensions of credit to Americans.
Figure one shows how both exports and imports have been rising relative to America’s national income over the past six decades, covering the period over which deindustrialization has become manifest:
Figure 1: Exports and imports as a fraction of national income
Loading…
transbay.net
Source: FRED
The Trumpian premise that foreign trade barriers cause massive trade deficits by thwarting American exports is utterly false. Exports have in fact become more important as a source of income for Americans in spite of deindustrialization and in spite of the rise of new foreign competitors. Moreover, massive inflows of foreign savings relative to national income (represented in figure one as the excess of the import curve over the export curve) should have increased per capita investment in America. So what went wrong? Why did overall investment in America go down despite the influx of foreign credit?
To understand the worsening investment shortfall, we need to examine what happened to domestic thrift. Figure two shows the share of America’s national income devoted to net savings by Americans:
Figure 2: Net savings as a fraction of national income
Loading…
transbay.net
Source: FRED
This graph reveals that Americans have become less and less willing to fund economic growth. The increases in available savings from overseas simply haven’t been enough to offset losses of savings from Americans. When examining the various components of net savings, one discovers that personal saving rates have steadily eroded while government deficits have exploded, consuming a large portion of the available pool of private savings since the 1980s. Meanwhile, businesses are struggling to acquire enough investment funds (mostly through their own retained earnings) to maintain their existing stock of productive capital goods even as the population keeps growing.
The virtual disappearance of thrift from America is now a genuine crisis. Trump deserves kudos for contradicting elite propaganda in calling attention to existence of a deindustrialization problem in America and its dire consequences for American workers, but he is doing the country a tremendous disservice by trying to pin the blame for this on foreigners instead of trying to mend America’s spendthrift ways. Indeed, many of America’s protectionist trading partners now being targeted with tariffs (notably Japan and the European Union) have similar issues with capital consumption-induced deindustrialization just like America, but unlike America enjoy positive current account balances with the rest of the world. Protectionism and positive trade balances haven’t been a solution to their problems; they and America alike need to heed the wisdom of Mises in reversing interventionism instead of trying to cover up the symptoms of industrial decline with tariffs.
Trump is also doing America a great disservice by pretending that the burdens of tariffs will all be shifted to foreigners. Secretary Bessent neglected to mention that only about 15 percent of China’s exports are to America, and that less than 19 percent of China’s GDP depends on exports—that is, less than 3 percent of China’s GDP currently depends on American customers. Chinese manufacturers who are at risk will undoubtedly find non-American customers for their products at slightly lower prices or find other slightly less remunerative uses for the labor and natural resources they currently devote to producing exports for Americans. Some Chinese incomes will be diminished in real terms and some Chinese capital goods may have to be written off at a loss to Chinese capitalists as a consequence of such changes in response to American tariffs, but that is very far from the Chinese having to “eat the tariff” imposed by Trump in its entirety.
Tariffs necessarily cause both the quantity of goods imported into America to decline and the price paid by American consumers for those goods to increase; it is consumers who are inevitably harmed by the reduced quantity of foreign goods available to satisfy their needs even in those cases where long-run price increases happen to be exceedingly modest. One way or another, consumers inevitably “eat the tariff” too.
Secretary Bessent also neglected to mention that tariffs also reduce the ability of foreigners to earn dollars needed for buying American exports and for extending credit to Americans. The very currency adjustment mechanism he alluded to, where dollars suddenly become harder for foreigners to earn and thus American goods, services, and investments priced in terms of dollars become more expensive in terms of foreign currencies, poses a major threat to American export incomes and to the ability of American producers to access foreign savings. Given America’s lack of thrift, inhibiting access to foreign savings, could paralyze capital goods formation and make the Treasury even more desperately dependent on inflationary dollar creation and bank credit expansions for funding federal deficits. In short, we also need to heed Mises’s wisdom that tariffs can only further seriously impair our well-being.
Tariffs Won’t Reindustrialize America | Mises Institute
One of the arguments given in favor of tariffs is that they will enable domestic manufacturers to better compete with producers abroad. While people may believe
