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Why do tariffs remain politically popular when many economists across the spectrum warn against them? In this week’s Grumpy Economist Weekly rant, John Cochrane unpacks how trade actually works beneath the surface. He explains why the first stop in a trade transaction is never the last, why money sent abroad doesn’t simply disappear, and how open markets quietly generate benefits most people never see.
Cochrane walks through the real flow of goods, services, and investment in the global economy, showing how attempts to “fix” trade with tariffs often end up limiting our own prosperity. And while there’s a narrow, legitimate space for national security concerns, he warns that the label is too often stretched to justify broad protectionism.
Transcript
John Cochrane: Hi, I’m John Cochrane, senior fellow here at the Hoover Institution. Welcome to The Grumpy Economist Weekly Rant.
Today I’m going to rant about tariffs.
Why is it that economists so uniformly dislike tariffs, where so many other people seem to think that they make sense? Well, here’s an economic trick. Follow the money, follow it and follow it and follow it and see where it ends up.
Most people stop with the first stop.
For example, let’s say China sells us something. Chinese company makes a bicycle, sends it to me in California (I need a new bike). And I send money to the Chinese company.
What happens to that money? Let’s keep following it.
Now, it might be nice if Chinese people would simply put money in their mattresses or wallpaper their bathrooms with it. We can print money a lot cheaper than China can make bicycles, but perhaps, alas, that’s not what they do with it.
The only thing a dollar is good for is buying something from the US, either now or later. The Chinese might buy something back from the US, maybe software or intellectual property. We sell a lot of that to China.
Or maybe the Chinese use it to buy coal from Australia. China burns a lot of coal and Australia sells them a lot of coal. The Australian might then buy something from the US or even come take a vacation in the US that counts as an export too. The only thing the dollar is good for is buying things back from the US.
Trade eventually balances.
Now the Chinese person, or the world as a whole might not want to buy something today.So, what they do is they take the dollars to buy American securities.
Think how great that is.
We print money, they send us goods, they turn around and they use the money to invest in America. If we use that to build new factories, build new houses, we’d be better off still. They both send us stuff and they invest in our country.
Of course, some day that comes due. Eventually trade balances. Eventually the Chinese with all those stocks they want, they have saved for many years, they say, well, I’d like to consume now for a while, and then Americans will have to work 10 to 12 hours a day to put things on boats in return for pieces of paper and run a trade surplus. Let’s see how we like it when that turns around.
But when that day comes or not, remember, there’s no point to the tariffs. The right policy as far as the economy is concerned is unilateral free trade.
Let us, as they say, not put rocks in our ports. Something that impedes trade.
And it doesn’t matter if trade is fair or balanced or if the other side does the same thing. If China puts in a tariff, i.e. puts rocks in their ports, why are we better off by putting rocks in our ports in exchange? The only thing that matters for trade is that it be mutually advantageous. We want to buy and they want to sell. That’s better for all of us.
There are some exceptions. A narrow exception for national security. Tariffs are a whole lot better than missiles, but we tend to wrap way too much protectionism in the flag.
The basic principle is mutually advantageous trade is great for both of us.
Thanks for listening. I’m the grumpy economist, and if you like this, don’t forget to subscribe on the button below.
John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow of the Hoover Institution at Stanford University. An economist specializing in financial economics and macroeconomics, he is the author of The Fiscal Theory of the Price Level. He also authors a popular Substack called The Grumpy Economist.