The Trump administration’s tariffs, it would appear, are predicated on a great folly: the notion that you can increase the price of just one thing at a time. Frédéric Bastiat, the great French economist and satirist, wrote frequently about the fact that every economic measure has effects that are seen and effects that are not seen. Take President Trump’s steel and aluminum tariffs, for instance. Applying a 25 percent tax on imported metals has at least two effects. The first is to increase the cost of foreign supply, which is what you see, but the second is to increase the cost of domestic supply, which is what you don’t see — at least not immediately. To understand this indirect effect, imagine you’re an American aluminum smelter and that you’ve been selling your products at $1,100 per ton while your foreign competition sells the same tonne for $1,000. Bring in a 25 percent tariff and your competition’s price suddenly increases to $1,250. In this scenario, would you keep selling for $1,100 per ton, or would you increase your price to match (or just slightly undercut) your competition’s new price? Let’s be frank, you’d most likely pocket the extra profit. That may sound great for you, but it isn’t quite as wonderful for your customers, a lot of whom are other American manufacturing businesses; think automakers and aircraft parts manufacturers, for example. The effect of this singular cost increase in the price of one metal gets passed down the line, making a whole cascade of goods more expensive. For instance, as the price of American-made aircraft parts increases, so does the cost of American-made aircraft. The result is that it becomes more expensive for Boeing to manufacture in the U.S. It’s estimated that aluminum tariffs alone will hit the American aerospace industry with extra costs of roughly $500 million per year. Meanwhile, Boeing’s main competitor, Airbus, doesn’t suffer the same increase in costs and can use that price advantage to sell more aircraft to its customers worldwide. The result of this solitary tariff on aluminum is slower growth and layoffs in American manufacturing firms that transform the metal into other higher value-added products. This is a well-documented effect. During Trump’s first term, his administration increased tariffs on foreign steel and aluminum to 10 percent. Calculations show that for every job created by the U.S. tariffs on steel, 80 jobs were lost in manufacturing firms further down the supply chain. Another pernicious way that these tariffs harm manufacturing stems from the fact that they can be charged more than once in the production process of a finished product. This was recently highlighted by Canadian auto parts maker Linamar as it explained what goes into producing a single transmission. The company starts by selling scrap metal from its Canadian site to a smelter in Pennsylvania. That steel then gets sent to an Ohio firm to make a part called a hub, which is then sent back to Canada to be assembled into a clutch plate. More parts get sent from a subcontractor in Illinois and from another Linamar site in Mexico. These all get put into a module, which is then sent to a plant in the Midwest to be assembled into a transmission. The completed transmission then gets sent back to Canada to be assembled into a vehicle which is then sold in the U.S. In case you weren’t counting, that’s seven border crossings over the assembly of a single part being put in a single vehicle. Three of them are crossings into the U.S. and so would be subject to Trump’s threatened 25 percent tariffs on Canadian products. What all this means is that the threatened import tax of 25 percent compounds into a much larger tax on consumers who buy that vehicle. While this is just one example, this is the way supply chains are set up for most complex American manufacturing processes, whether they are carmakers, airplane manufacturers or even the defense industry. And then, there’s the more long-term way that the tariffs will hurt American manufacturing: reduced competition. Though it might seem counterintuitive at first, competition is good for businesses. When you protect a business from competition, it loses its main incentive to innovate, to get better. The result is a reduction in domestic spending on research and development, while the rest of the world continues to progress. In the long run, domestic firms lose their competitive edge and subsist solely on what they sell in the U.S. market, leaving foreign markets to foreign competitors. If that doesn’t sound to you like the path to creating a new golden age, that’s because it isn’t. After all, tariffs are just a form of tax. And no nation has ever taxed itself into prosperity. Daniel Dufort is president and CEO of the Montreal Economic Institute, a Canadian think-tank with offices in Montreal, Ottawa and Calgary. ...read more read less