In our last post, we explored the differences between capitalism and mercantilism, touching briefly on how tariffs are one of mercantilism’s most enduring policy tools. Today, let’s dig deeper into these import taxes and why, despite their appeal to some, they ultimately undermine the prosperity that capitalism creates.

It’s not hard to understand why tariffs remain politically popular. When a domestic industry faces tough competition from overseas, the appeal to “protect jobs” by imposing tariffs can sound compelling and patriotic. The benefits of tariffs are visible and concentrated. When a steel mill stays open because foreign steel now costs more, those preserved jobs are easy to see. Politicians can visit those factories, shake hands with workers, and claim credit for “saving” the industry.

But tariffs come with costs that are spread so thinly across the entire population that most people don’t notice them. They’re the ultimate hidden tax.

Think about it this way: imagine your home is a country. Everything you use that you didn’t make yourself needs to be obtained by trading for something you can make yourself, like the chicken casseroles everyone seems to love so much. Chicken casseroles are what economists call your comparative advantage—the thing you’re better at making than others.

But you probably aren’t raising chickens and dairy cows, growing rice and vegetables, and manufacturing ovens yourself. Maybe you don’t have the land or the tools or the time and expertise to do it. That’s fine; you’ll just keep selling your finished-product casseroles to buy the tools and raw materials to continue making them.

But what if other casserole-makers get upset? You make better and less expensive casseroles than they do, but they convince local officials that it isn’t fair that your casseroles are more popular than their casseroles. Those officials put limits on the ingredients you can buy by adding surcharges to their prices. That’s essentially what a tariff does.

Now you have to figure out a way to raise chickens and cows, grow rice and vegetables, build ovens, and make casseroles. The end result? Fewer and more expensive casseroles because you’re needing to do things you aren’t really equipped to do (or aren’t as good at or just plain don’t want to do) before you can even get to the point of cooking.

When we shrink down the subject to that level, those trade restrictions and barriers obviously don’t make sense. But it’s no different on a national or global level.

Large swathes of South America can grow really great coffee, but only a tiny portion of the United States is capable of growing coffee at all—certainly not enough to satisfy every American’s morning fix. 

It’s not anyone’s fault. Coffee only grows in specific geographic and climate conditions. But when people decide that other things made in, say, Mexico should actually be made in America and place tariffs on all imports from Mexico to encourage that, other consequences reveal themselves.

Maybe a few more t-shirts or cars get made in the U.S. Maybe the number of manufacturing jobs goes up a tiny bit—which, considering the cost of American labor and the modern ability to automate, is a very big maybe. But at what cost? More expensive coffee, for one, and avocados, and a whole host of other things the U.S. simply doesn’t have the geography to produce at the same scale.

This is the concept of comparative advantage in action. Every country (or region, or individual) has things they’re relatively better at producing. When we allow people to specialize in what they do best and then trade freely, we all end up with more goods at better prices.

The related concept is the division of labor. When everyone focuses on doing just a few things well, overall productivity skyrockets. Adam Smith famously described how a pin factory with workers specializing in different parts of the pin-making process could produce thousands of times more pins than the same number of workers each trying to make complete pins individually.

The same applies internationally. When countries specialize according to their comparative advantages—whether those advantages come from climate, natural resources, skilled workforce, or established infrastructure—and then trade freely, the total economic output increases dramatically.

Tariffs interfere with this process. They force resources toward less efficient uses, reducing overall prosperity. When a government imposes tariffs on imported steel, it’s not just foreign steel producers who suffer. Domestic manufacturers who use steel (automobile makers, appliance manufacturers, construction companies) face higher costs. These manufacturers must either absorb these costs or pass them on to consumers through higher prices.

Higher prices mean fewer sales, which can lead to job losses in these downstream industries, often many more jobs than were “saved” in the protected industry. 

Of course, statistics about overall economic efficiency don’t mean much to the worker whose factory is closing because it can’t compete with cheaper imports. The human costs of economic transition are real and shouldn’t be dismissed.

But tariffs don’t actually solve these underlying challenges. They merely delay the inevitable by imposing costs on everyone else.

When we look at the logic behind tariffs, we can see the mercantilist thinking at work. Mercantilism views trade as a zero-sum game where one country’s gain must be another’s loss. But this fundamentally misunderstands how trade creates value. Voluntary trade happens because both parties benefit. When Americans buy products made overseas, they do so because they value those products more than the money they’re spending. And the sellers value the money more than the products they’re selling. Both sides come out ahead.

Capitalism, unlike mercantilism, recognizes that wealth isn’t just about accumulating money or running trade surpluses. True wealth comes from having access to more and better goods and services at lower prices. Tariffs directly interfere with this process.

The next time you hear someone advocate for tariffs to “protect industries,” remember what’s really happening: They’re advocating for a hidden tax on everyone to benefit a specific group. That’s not capitalism—it’s mercantilism in modern clothing.

Learn more about capitalism here.