Tariffs Are Bad, Especially during a Pandemic

I f you’re a lover of soda (or pop, depending on where you grew up), you might have noticed that your grocery-store options have become somewhat limited recently. That could soon get worse. Why? Because the president recently increased tariffs on Canadian aluminum — ostensibly to help the domestic aluminum market. It’s a case study in the tangled web of tariff policy.

Let’s leave aside the fact that the American aluminum giant Alcoa says that the tariffs will unnecessarily disrupt the market. Instead, consider what this means for industries that use aluminum. The simple, undisputable fact is that tariffs always and everywhere cause prices to rise. So, anyone who uses aluminum as an input is going to face increased costs.

Ordinarily, this would likely mean slightly higher prices for your favorite soda at the grocery store. Those price increases might be moderated by competition and eventually innovation. If aluminum became too expensive, soda makers would probably shift toward selling their products in bottles.

Yet we do not live in ordinary times. The pandemic has shifted our demand patterns. Because we can’t go to bars, we are drinking more beer at home. This has meant that the beer industry (God bless ’em) has shifted production so that more beer is shipped in cans to grocery and liquor stores and less in kegs to bars.

Now, why do tariffs cause price increases? Partly because of the additional cost of tariffs and partly because those tariffs reduce supply. So, when the beer industry needs more aluminum and the supply is reduced, there’s going to be a bidding war for aluminum cans. This pits the beer industry in even more direct competition with the soda industry for a resource that is now scarcer than normal.

As we know, beer is more expensive than soda, reflecting the higher value we place on it. The resources will follow the higher-valued use. So, ultimately, there will be fewer aluminum cans available to soda manufacturers.

Even within individual soda companies, there are competitive forces at work. Some sodas are in higher demand and are therefore of higher value than others. So companies facing the choice will direct their now-scarce resources at those higher-value products. What this means is that if you are a fan of Fresca, or Cheerwine (like my son is), you are going to find it hard to get those products. Once inventory is sold out, you may not see them again for a while.

Protectionism also distorts employment. Yes, there will be some jobs and profits saved in the aluminum industry, but in the end, there will be jobs and profits lost in industries that depend on less-expensive and more-available aluminum. That may turn out to be a wash, but the simple fact is that the jobs created and destroyed are not the ones that would have been created or destroyed in a freer market.

There is harm done to our political system as well. Any industry feeling pressure from foreign competition is incentivized not to improve its business practices but to lobby for tariffs, price controls, or some other government intervention. That empowers politicians to interfere even more, using the populist slogan of saving jobs to encourage crony capitalism. In short, protectionism reduces civic virtue. It also makes politicians think they can control the economy, putting them on the road to tractor quotas.

Finally, of course, there’s retaliation. As my colleague Ryan Young pointed out, the last time Canada imposed retaliatory tariffs, “This meant tariffs against $12.6 billion of American-made goods as diverse as toilet paper, coffee, and sleeping bags.” So, the coffee industry takes a hit because the president wanted to help an aluminum industry that doesn’t need help — and we still can’t get Fresca? Of course, Canadians will also suffer because they can’t get American coffee and will have to settle for Tim Hortons (with apologies to my Canadian cousins).

All of these changes are taking place at a time when global supply chains already have been disrupted, and demand patterns are shifting, making their effects even worse.

Sadly, there is rarely a constituency for free trade until the ramifications of protectionism are made clear. In early-19th-century Britain, working people opposed tariffs because they knew they were paying more for bread than they would under free trade. Every Fresca, Cheerwine, and Mello Yello drinker who asks why their favorite sodas aren’t on the shelves could be one more convert to the free-trade cause.