Logic of Trump's tariffs has a gaping hole

In his interview this week with John Micklethwait, editor-in-chief of Bloomberg News, former President Donald Trump offered a somewhat unusual argument in favour of tariffs, which he called "the most beautiful word in the dictionary." Tariffs, he suggested, are not mainly about protecting domestic industry. Rather, they may serve as a means of luring foreign direct investment to the US.

- TYLER COWEN

Yet this defence of tariffs also falls short. In fairness to Mr Trump, there have been times when that strategy has worked, at least partially. In the 1980s, the US took a tough protectionist line on Japanese automobile imports and demanded "voluntary" quotas. The major Japanese automakers, to ensure their longer-term access to the US market, set up auto production plants in the US, including in Kentucky and Tennessee. Japanese workers were worse off, and the auto restrictions may have cost American consumers $5 billion a year, but the US did attract more foreign investment.

As a more general strategy, however, this is a risky and ill-advised approach. In the debates over Brexit almost a decade ago, it was periodically suggested that Britain's higher trade barriers with the EU could lead to a beneficial upsurge in foreign direct investment, to serve the British market. So far Britain continues to languish in stagnation, and foreign direct investment into the country has fallen. To the extent a nation is not part of the world's free-trade system, it may be less desirable to invest there.