About his new tariffs, President Donald Trump said (and repeated in different forms):
“So what they have to do is build their car plants frankly and other things in the United States, in which case they have no tariffs.”
This is seriously misleading.
Recall the standard economic result that a foreign exporter does not typically pay the tariff: it is the importer and ultimately (in our case) the U.S. buyer who pays it. The cost imposed on the foreign exporter lies in lower export sales because of a lower quantity demanded in the US. If, as is usually assumed, American buyers prefer the domestic substitute ceteris paribus, the foreign exporters’ sales will decrease; the value of their productive assets will also decrease and some capital will be reallocated to other economic sectors.
To avoid these costs, the owners of foreign exporting firms may indeed decide to move their plants to the US if the total cost of moving is lower than the cost of reduced sales to America. Moving and building a new plant, and quite certainly losing money on the sales of the old facilities (the owner does not literally move his plant across the border), is costly and takes time. Moreover, production costs will certainly be higher in the US, which is the reason why the firm did not previously decide to produce here—and the owners know more about this than any politician. The cost of moving to the US will be further increased if the American government imposes tariffs on inputs such as steel or aluminum. The uncertainty of ever-changing protectionist policies is another cost component. If the total cost of moving is worth incurring, it is because it is lower than the firm’s otherwise losing markets, but it is not necessarily much lower and it is anyway a cost increase compared to the starting situation. The moving firm has to pay a cost equivalent to a tariff, even if lower.
This cost is not called a “tariff” (or a tax) simply because it is not paid by the former exporter to the US Treasury. A tariff is, by definition, a special tax on imported goods. But from the point of view of the exporter who moves to the US, it amounts to the same as paying a tariff—which of course comes over and above what American buyers pay in higher prices.
Mr. Trump’s apparent ignorance of these considerations confirms what the Florida owner of a construction company with 35 employees (for now) said to the Wall Street Journal (Rachel Louise Ensign, Arian Campo-Flores, and Harriet Torry, “Tariff Whiplash Spooks U.S. Consumers,” March 5, 2025):
He has no idea about the economy.
Or, as The Economist puts it more diplomatically,
the president and reality seem to be drifting ever further apart. …
Because his approach lacks any coherent logic, there is no knowing how to avert his threats.
Pursuing the economic issue into its moral dimension leads to questioning the idea that the coercive imposition of a cost is not coercive if the victim can reduce his (or her) cost with avoidance measures, and suggests a few analogies. Consumers who don’t like a tax simply need to stop buying the taxed good, in which case they have no tax to pay. Kidnap victims who don’t like the ransom demanded simply need to not pay it, in which case there is no ransom. East Berliners who don’t want to be shot just have to avoid jumping the Berlin Wall, in which case there is no shooting.
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