President Trump likes to say, “The word tariff is the most beautiful word in the dictionary”; tariffs “make our country rich” and “cost Americans nothing.” Yet, nothing could be further from the truth. Protective tariffs restrict the range of alternatives open to people by limiting mutually beneficial exchanges; they misallocate scarce resources; and weaken the dynamic gains from trade. Most important, they expand the power of the state, erode the rule of law, and attenuate individual freedom.
Free Trade as a General Principle
Unlike President Trump, James Madison, the chief architect of the Constitution, accepted free trade as a general principle. In April 1789, he declared:
I own myself the friend to a very free system of commerce, and hold it as a truth, that commercial shackles are generally unjust, oppressive and impolitic—it is also a truth, that if industry and labour are left to take their own course, they will generally be directed to those objects which are the most productive, and this in a more certain and direct manner than the wisdom of the most enlightened legislature could point out.… Thus all are benefitted by exchange, and the less this exchange is cramped by government, the greater are the proportions of benefit to each. The same argument holds good between nation and nation, and between parts of the same nation [Madison 1789].
Much later, in his letter to Thomas Cooper (March 22, 1824), Madison reiterated his adherence to free trade as a general principle:
I have always concurred in the general principle that the industrious pursuits of individuals ought to be left to individuals, as most capable of chusing [sic] and managing them. And this policy is certainly most congenial with the spirit of a free people [Padover 1953: 273].
Madison did consider exceptions to the general principle of free trade, such as during war. But he was always alert to the dangers of special interests capturing the state for their own advantages and perpetuating protectionist measures. On March 23, 1824, in another letter to Cooper, he stated:
In every doubtful case, the Government should forbear to intermeddle.… In Governments, where the will of the people prevails, the danger of injustice arises from the interest, real or supposed, which a majority may have in trespassing on that of the minority [Padover, p. 274].
Protectionism Is the Enemy of Freedom
Tariffs expand the scope of government, politicize economic life, increase uncertainty, and reduce individual freedom. Government officials gain arbitrary power while market participants face fewer opportunities for mutually beneficial exchanges and greater uncertainty as the rules of the game change. Tariffs are levied on US importers as goods—both final and intermediate—subject to the tariff enter the country. Importers and consumers typically end up paying the tariffs, as they cut into profit margins and drive consumer prices up.
With free international trade, countries gain by being able to consume more goods than they could produce domestically. Specialization and the division of labor, according to differences in opportunity costs among countries, are limited by the extent of the market, as every beginning economics student knows. Imposing tariffs not only distorts relative prices and leads to a misallocation of resources, it reduces the so-called dynamic gains from trade—that is, the gains due to broadening market exchange, spreading new ideas that improve people’s lives, giving individuals a wider range of opportunities and choices, and thus fostering a competitive environment conducive to innovation and entrepreneurship (see Yeager and Tuerck 1966: 58–59, 62–63). It is not surprising that free trade and free people tend to go together.
Peter Bauer, a pioneer in development economics, emphasized that “the principal objective and criterion of economic development” is “the extension of the range of choice—that is, an increase in the range of effective alternatives open to people” (Bauer 1957: 113). His adherence to the principles of free trade and free people reflected his deep respect for the dignity, rationality, and capabilities of poor people around the world (Dorn 2002: 356).
Misguided Trade Policy
The purpose of trade is not to create jobs but to create net benefits for those involved in the exchange. Of course, the exchange must be voluntary. The role of government is to protect private property rights, including the right to exchange, under a just rule of law. Protectionist policies enlarge the power of the state and undermine the principle of freedom. That is why one should be skeptical of political rhetoric, such as that used by President Trump and his advisers, that promotes tariffs as “beautiful” vehicles to “make our country rich” and that “cost Americans nothing.”
The gains from trade are evident in the massive literature on that subject (see, e.g., Lincicome and Packard 2024). It should also be evident that, although the parties to the voluntary exchange gain and others can also gain from the dynamic benefits of free trade, some people will lose their jobs and businesses will close as consumers exercise their free choice in a market system. Countries that try to stop the competitive market process will lose both freedom and wealth.
Weaponizing trade with tariffs and other protectionist measures for political gain is not the way to riches and a harmonious society. Rather, those objectives can better be achieved via a “simple system of natural liberty.” As Adam Smith argued in 1776:
[Without trade restrictions] the obvious and simple system of natural liberty establishes itself of its own accord. Every man … is left perfectly free to pursue his own interest in his own way.… The sovereign is completely discharged from a duty [for which] no human wisdom or knowledge could ever be sufficient—the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society.
If President Trump really wants to “Make America Great Again,” he will need to make freedom, not protectionism and tariffs, the center of his policy agenda.