What is the Trump administration trying to do with their tariff caper? Did they all flunk Econ 101?
Doesn’t everyone know that American tariffs are taxes on Americans? That they induce economic distortion by propping up inefficient American producers and industries? That they will cause the stock market to melt? That they are from top to bottom a bad idea?
The assumption underlying these familiar questions can be traced back to David Ricardo (1772-1823) and his theory of what John Stuart Mill later called “comparative advantage.” This theory or model, as some economists call it, stipulates that countries should specialize in what they can most efficiently produce.
After keeping some of the efficiently produced stuff, they can export the rest –the surplus. And as for things they don’t produce, that’s what imports are for.
Very simple, yes?
When countries try to produce everything they need in-house, so to speak, they do so inefficiently, which is not to their advantage. Economists call this mercantilism. Both Adam Smith (1723-1790,) the father of economics, and Ricardo, were very much against mercantilism.
Ricardo’s model proved that comparative advantage leads to trade and trade leads to prosperity all round. When governments intervene in trade, by tariffs for example or by subsidies, this results in inefficiencies and hurts everybody.
Ricardo introduced an example as an empirical confirmation of his theory. It is equally famous and is widely reproduced in undergraduate economics textbooks.
Portugal could produce port and cloth more efficiently than England. But since England couldn’t produce port at all, both countries would be better off if Portugal produced only port and England produced only cloth and then they traded their surpluses with one another.
What economists call relative productivity, and not absolute abstract efficiency, governs trade that is mutually beneficial. This is the magic of the model of comparative advantage in action.
Today Ricardians are called globalists and free traders. They pretty much dominate university economics departments and the op-ed pages of North American newspapers such as the Financial Post and the Wall Street Journal. Hence the large volume of legacy media criticism of the Trump administration’s tariffs.
Higher prices, disruption of international trade flows, a “trade war” are bound to follow. Nobody wins; everyone loses. Again, very simple.
Except it’s not.
There is an old joke about economists’ fondness for models and theories: “that’s all well and good in practice,” one of them says, “but how does it work in theory?”
Despite some technical economic objections, let us grant that Ricardo’s comparative advantage works perfectly in theory.
But as Cambridge economic historian, Joan Robinson, pointed out a generation ago, after Portugal and England agreed to a free trade deal, the result was to extinguish a promising textile industry in Portugal, leaving that country with a slow-growing wine export market.
Meanwhile in England, cotton exports (and not just exports to Portugal) led to accumulation of profits, mechanization, and the economic growth that since Karl Marx’s day we usually call the industrial revolution. Ricardo’s theory, she said, just did not apply to the real world, which is the world where most people, economists aside, live.
Ricardo’s theory was developed from the earlier theory of Adam Smith. Smith argued that free markets were also capable of magic. This time what he misnamed an “invisible hand” — misnamed since it was clearly visible to him — transformed greed and selfishness into public good and general or common prosperity.
Smith had cleaned up Bernard Mandeville’s (1670-1733) Fable of the Bees, which argued, much as Michael Douglas’ character, Gordon Gekko said: “greed is good.”
The chief problem with globalist free-trading economists today was indicated by their predecessors’ lack of clarity regarding the difference between market theory and the theory of comparative advantage on the one hand and the actual behaviour of human beings on the other. They obscured the difference by invoking magical formulas to turn vice into virtue.
Besides, Adam Smith in fact saw the case for protectionism and thus for tariffs when there were “restraints” on particular imports. He argued that “policy retaliation” could be justified if the other guy started it. Recovery of a foreign market will more than compensate for the disruptions of temporary tariffs.
Now look again at the real world from 1945 to 2025. After World War II the U.S. (and Canada as well) were in good economic shape so they could easily afford to give concessions to other countries. That was 80 years ago however, and we no longer live in the world where we are recent victors over Japan and Germany.
More to the point, nobody is playing by the rules of comparative advantage nor is the global marketplace gently caressed and guided by any invisible hand. Instead, as John Carney has argued for years in the pages of the Breitbart Business Digest, we are now living in a world of predatory mercantilism.
Subsidies, trade barriers, non-trade barriers, currency manipulation, state-owned enterprises and state-directed capital pools dominate so-called global markets. Today, outside the U.S., none of the major trading countries are into free trade — and the Americans, too, have extensive subsidies, as Canadians among others have pointed out. (So do we: hello, supply management! It “justifies” a 250% tariff on Wisconsin cheese. The cows of Quebec benefit; the rest of Canada pays for it.)
The point that critics of the Trump administration’s tariffs do not emphasize or even acknowledge, is that today tariffs do not lower economic efficiencies because the condition of free exchange of products among equal partners in a genuine global market does not exist.
Predatory mercantilism on the part of trading partners of the U.S. (and Canada) does not maximize efficiency, which effectively blows up the logic of free trade. Predatory mercantilism by China and the E.U., for example, has induced endless trading imbalances that led to the extraction of industrial strength from the U.S. and its relocation elsewhere.
The result is strategic political dependence, not the promised economic benefits of genuine free trade.
Canadians should applaud the innovative vision of President Trump and his economic advisers, not freak out. The global trading system today has nothing to do with the Econ 101 models, as President Trump pointed out in detail in his first inaugural.