One of the most common retorts to President Donald Trump’s very tariff-happy agenda in second term is that “well, other countries do it!”
It’s a reasonable response, but some economists argue it doesn’t hold up to scrutiny.
Other countries, and especially developing countries, often turn to tariffs for bad reasons that reflect deeper systemic issues. Here are four reasons why.
Bad Tax Systems
Many developing countries have limited state capacity which hinders their ability collect income or corporate taxes from their citizens. Tariffs makeup for their lack of tax infrastructure and serves as a significant source of government revenue. By taxing imports at points of entry, taxes are passed on to every consumer and it’s harder to go unnoticed or skirt the law.
Enables Corruption
Tariffs create a fertile playground for corruption, as government officials can hand out favorites via tariff exemptions and can implement the policy in a totally arbitrary way. There’s often strings attached, and corrupt countries typically stay poor or turn poor if they aren’t already.
Cronyism
Similar to the point above, tariffs enable cronyism. Smaller businesses lack the flexibility that larger companies often enjoy when facing new tariffs. Since they typically rely on just one factory or a limited number of suppliers, moving production to countries with lower tariffs can be particularly challenging.
Why Richer Countries have Low Tariffs
Studies show that rich countries have low tariff rates (2-5%) to facilitate trade. Japan, for example, has a mean tariff rate of 1.99%.
Poor countries, on the other hand, typically have tariff rates of 10% or more.
Now? America, has a tariff rate of 10% for most countries, and, at one point, as high as 145% for China.
Free trade breeds prosperity, while protectionism makes everyone poorer. Keep an eye on what the Trump Administration does next, as recession odds continue to spike while the stock market struggles.
According to prediction market Kalshi, the U.S. has a 45% chance of making a new trade deal with India, 35% with the U.K., and 28% with South Korea.
