Why are Tariffs bad according to Milton Friedman?
Milton Friedman, one of the most influential economists of the 20th century and a staunch advocate of free markets, argued against tariffs primarily because they distort economic efficiency, harm consumers, and ultimately reduce overall prosperity. His opposition to tariffs was rooted in classical economic theory, particularly the principles of free trade advocated by Adam Smith and David Ricardo. Below are some of the key reasons why Friedman considered tariffs to be harmful:
1. Tariffs Distort Free Market Efficiency
Friedman believed that markets function best when left to operate without government intervention. Tariffs, by imposing artificial restrictions on trade, interfere with the natural supply-and-demand mechanisms that allocate resources most efficiently.
- In a free market, goods are produced where they can be made most efficiently (i.e., at the lowest opportunity cost).
- Tariffs force consumers and businesses to purchase domestically produced goods that may be more expensive or lower quality than foreign alternatives.
- This leads to resource misallocation, where industries that would not naturally be competitive are artificially propped up by government intervention.
By restricting trade, tariffs prevent economies from benefiting from comparative advantage—a fundamental concept in economics that suggests countries should specialize in producing goods they can make efficiently and trade for goods they cannot.
2. Tariffs Harm Consumers
A primary concern of Friedman’s was that tariffs act as a hidden tax on consumers. When a government imposes tariffs on imported goods, those goods become more expensive.
- This forces consumers to either pay higher prices for imported goods or purchase domestic alternatives that may also be more expensive or of lower quality.
- Tariffs reduce the variety of goods available to consumers, making the market less competitive.
- Ultimately, this leads to a lower standard of living, as people are forced to spend more for the same products.
Friedman often pointed out that businesses may benefit from tariffs, but only at the direct expense of consumers.
3. Tariffs Benefit a Few at the Expense of the Many
One of Friedman’s key criticisms of tariffs was that they serve special interest groups rather than the general population.
- When the government imposes tariffs, domestic producers who compete with foreign goods gain an artificial advantage because their competitors’ prices are increased.
- However, this benefits only a small number of producers at the cost of all consumers, who now have to pay more for goods.
- Friedman frequently referred to this as an example of concentrated benefits and dispersed costs—where a small group (domestic producers) lobbies for protectionist policies, while the broader population (consumers) bears the cost.
This aligns with public choice theory, which suggests that small, organized interest groups have a disproportionate influence on government policy, even when their policies harm the majority.
4. Tariffs Lead to Retaliation and Trade Wars
Another reason Friedman opposed tariffs was their tendency to escalate into trade wars. When one country imposes tariffs on imports, other countries often retaliate by imposing their own tariffs on that country’s exports.
- This results in a downward spiral where global trade shrinks, harming all economies involved.
- Historical examples include the Smoot-Hawley Tariff Act of 1930, which led to retaliatory tariffs from U.S. trade partners and exacerbated the Great Depression.
- Tariffs can create diplomatic tensions and reduce international cooperation.
Friedman saw free trade as a path to peace and mutual prosperity, whereas protectionism led to economic inefficiency and conflict.
5. Tariffs Reduce Innovation and Competitiveness
By shielding domestic industries from international competition, tariffs reduce incentives for innovation.
- In a free market, businesses must continually improve to stay competitive.
- With tariffs, domestic industries become complacent because they are protected from competition.
- This lack of competitive pressure leads to higher production costs, outdated technology, and lower-quality goods over time.
- Friedman argued that protectionism weakens an economy rather than strengthening it, because it fosters inefficiency.
A real-world example is the U.S. auto industry, which, when protected by tariffs in the 1980s, failed to innovate at the same pace as Japanese and European car manufacturers, leading to a long-term decline.
6. Tariffs Reduce Overall Wealth
One of Friedman’s strongest arguments against tariffs was their negative impact on overall economic growth.
- Trade increases overall wealth by allowing countries to specialize and produce what they do best.
- Tariffs reduce trade, which in turn reduces economic efficiency and productivity.
- Studies show that countries with fewer trade barriers experience higher GDP growth compared to those with protectionist policies.
Friedman often cited Hong Kong as an example: With minimal tariffs and free trade policies, Hong Kong experienced rapid economic growth and prosperity, whereas protectionist countries tended to struggle.
7. Tariffs Lead to Government Intervention and Corruption
Friedman was highly critical of government intervention in the economy, and he viewed tariffs as an example of excessive government interference.
- Tariffs often lead to increased bureaucracy, as governments must enforce trade restrictions, monitor imports, and collect duties.
- They also create opportunities for corruption and lobbying, as businesses seek political favors to protect their industries.
- Rather than letting the market determine winners and losers, tariffs allow politicians and bureaucrats to pick winners, often based on political connections rather than economic efficiency.
This, Friedman argued, distorts incentives and results in an economy that is less dynamic and more prone to crony capitalism.
Conclusion: The Case for Free Trade
Milton Friedman’s opposition to tariffs was based on his broader belief in the power of free markets to maximize prosperity. He saw free trade as a mechanism for:
- Lowering prices for consumers.
- Encouraging competition and innovation.
- Ensuring that resources are allocated efficiently.
- Fostering international cooperation and reducing conflict.
- Promoting long-term economic growth.
While some argue that tariffs protect domestic industries and jobs in the short run, Friedman maintained that they cause more harm than good in the long run. His perspective remains influential in debates over trade policy today, as countries weigh the benefits of protectionism against the economic gains of free trade.
Would you like me to provide examples of how these arguments have played out in specific countries or historical contexts?