Tullock’s model of social welfare loss and allocative inefficiency due to tariffs is being exemplified by the United States’ ongoing trade war with China—especially in the context of goods that American producers depend on. We all know China is an economic powerhouse in terms of production. Thus, maintaining a relationship with them is in the interest of the United States from a commercial perspective. After all, trade creates value (Rotunda Principle #1). Imposing tariffs upon them, however, limits said value by preventing the markets for certain goods from clearing at their optimal (free-market) price and quantity.
A January 2021 study commissioned by the U.S.C.B.C. (US-China Business Council) found that the tax on goods imported from China is restricting American economic growth. Further, a current decrease in exemptions from this policy is leading more and more firms that rely on China for key inputs to be thrown to the wolves of non-optimality. The Washington Post reports 87% of nearly 53,000 tariff exclusion requests have been denied by the Office of the U.S. Trade Representative as of mid-August. Consequently, there has been a reduction in quantity demanded in many markets amid these heightened input costs, which are being passed on to American consumers via retail price increases. That’s not the only issue. The aforementioned U.S.C.B.C. study found that the trade war with China has contributed to an estimated peak loss of 245,000 American jobs and limited real GDP potential by many tens of billions of dollars.
Based on these findings, it is clear that the social marginal costs outweigh the social marginal benefits of this policy, so why does it remain in place? That answer isn’t as clear to me. What I am certain of, however, is that homoeconomicus would not be pleased with this market condition.
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