Trade Tariffs Won't Crash The World Economy, Monetary Policy Will

Moreover, even if tariffs were applied to every good and service, there would be no systematic, inter-temporal distortion of the structure of production. A stalling of productive activity and a rise in production costs is likely to occur, as capital goods—e.g. steel or aluminum—will now be more expensive. But capital is now underutilized, not squandered. There may be less investment, but no malinvestment.

Understanding this, it is easier to see then that trade tariffs, as bad as they are, cannot produce an economic bust in the same sense as occurs in the business cycle (just as simple domestic taxation, albeit reducing welfare, does not cause an economic crisis). As Rothbard (1963) explained,

“declines in specific industries can never ignite a general depression. Shifts in data will cause increases in activity in one field, declines in another. [...]

The problem of the business cycle is one of general boom and depression; it is not a problem of exploring specific industries and wondering what factors make each one of them relatively prosperous or depressed. […]

In considering general movements in business, then, it is immediately evident that such movements must be transmitted through the general medium of exchange — money. Money forges the connecting link between all economic activities. If one price goes up and another down, we may conclude that demand has shifted from one industry to another; but if all prices move up or down together, some change must have occurred in the monetary sphere.”

It would be remarkably futile, then, to endeavor to cushion the blow of trade tariffs with loose monetary policy.

The worst thing, by far, for a world economy of interconnected financial and capital markets, is monetary inflation and credit expansion. It is never a cure, and always a curse. Trade tariffs are, however, the second worst threat to a global market—often likely to make the bust much worse and the recovery slower, and to diminish our hopes for peace.

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