The Trump Administration recently published its plan to replace its tariffs that the Supreme Court struck down just a month ago. In justifying their tariff investigation on March 17, the administration ignored the free-market principles championed by our founders and that created the greatest economy in the world. The administration ignores these lessons at the nation’s peril.
Initiating the investigation, a necessary step to impose tariffs under Section 301 of the Trade Act of 1974, the United States Trade Representative (USTR) characterized the United States as “the global consumer market of last resort.” According to the USTR, when other countries have surpluses that far outpace their domestic demand, they sell their excess goods into the United States market.
Following the USTR’s logic, if a carrot farmer sells the extra carrots that his family cannot eat, he would be committing unfair trade practices against other domestic food producers. The USTR makes no comment on how American consumers benefit from lower prices or by having more options.
Instead, the USTR speaks of other nations as if they have miraculous central planning powers. According to the USTR, our “key trading partners” have “developed production capacity untethered from the incentives of global supply and demand.” Further, the USTR said the resulting “excess capacity” wreaks havoc on U.S. manufacturing.
Under Section 301, the USTR must consult with trade representatives from the foreign countries subject to the investigation. If the Trump Administration’s claims are correct, the USTR should ask these representatives how their countries managed to defy the laws of economics. Specifically, the USTR should ask how they managed to find answers for Friederich Hayek’s knowledge and incentive problems that have eluded central planners throughout all of history. Our robust economic history demonstrates that without markets, planners are unable to collect the knowledge sufficient to make even one product, as school children learned from Leonard Read’s “I, Pencil.”
When the Soviet Union untethered supply and demand in their economy, their people waited in bread lines and shopped among empty shoe racks. If the USTR is correct that foreign countries have truly untethered production from the incentives of supply and demand, the countries would look more like the Soviet Union than manufacturing superpowers. According to the laws of economics which have yet to be disproven in practice, countries that restrict signals from supply and demand do not become so profitable that they can undermine the manufacturing of the largest economy in the world.
Further, the administration’s framing of trade as win-lose bears a striking resemblance to the mercantilist view dismantled by Adam Smith 250 years ago. The mercantilists argued that wealth consists of trade surpluses and coffers filled with gold instead of the capacity and productivity of the citizens.
The win-lose framework of the USTR is too narrow. It ignores what Henry Hazlitt reminds us is the one lesson economics: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” If analyzing global market share alone, perhaps foreign manufacturing is “winning,” at the expense of U.S. manufacturing. But this is not the whole story.
In fact, the absolute size of America’s manufacturing output, industrial capacity, and manufactured imports have all increased since the post-war golden age of American manufacturing. Surveying FRED data before the IEEPA tariffs, former Senator Phil Gramm noted in his most recent book that “U.S. manufacturing output in 2024 was 12.3 percent higher than when China joined the WTO, 55.6% higher than when NAFTA began, and 173 percent above its level when America last ran an annual trade surplus.”
When countries engage in free trade with each other, some industries diminish, more productive industries rise, wages rise, and both countries benefit.
Economic value itself is determined by the price a good can fetch in the market, which is determined by a combination of utility and scarcity. This idea has been in print at least since St. Bernadino of Siena penned it in 1591. He rightly reasoned that in a desert or on a mountain, “it may well happen that water is more highly esteemed than gold because gold is more abundant in this place than water.”
Foreign countries cannot profitably escape these market forces in the long run. If they could, every country would enjoy prosperity and wealth under the direction of central planners or, perhaps, under the banner of one, global planning board.
Free market principles are not important merely because our founders championed them. They are important because they are true. These ideas have prevailed time and again against criticism and have outlived many nations. We cannot afford to let them outlive one more.
