The Tariff Illusion
Trade myths, from protectionism to the China fallacy
Tariffs are one of those bad ideas that simply refuse to die. They promise protection, security, and fairness; they deliver higher prices, inefficiency, and political graft. Economists have understood this for two centuries, across schools that agree on almost nothing else, and yet the policy keeps returning — because its persistence has never depended on being right. That a tariff remains politically popular is a testament to how easily people can be persuaded to trade long-term prosperity for the illusion of short-term gain.
This chapter takes apart two trade myths. The first is protectionism itself: five rationales, each of which collapses on inspection, and a structural explanation of why the policy survives its own refutation. The second is the century’s biggest trade-policy equivocation — the claim that China’s rise vindicates communism, when the growth began at precisely the moment communism was abandoned.
Five Rationales, Five Collapses
Every tariff comes wrapped in a rationale. Strip away the rhetoric and look at what each one actually says.
1. Protecting domestic industries. The sales pitch: foreign competition will destroy our industries; tariffs keep them alive and protect jobs. The reality: a tariff is a polite way of saying “we will force you to pay more so an inefficient producer can avoid improving.” Every extra dollar you pay to protect one job in steel is a dollar taken from countless other jobs in the industries that use steel. The protected industry survives; downstream industries and consumers bleed. The jobs “saved” stand in front of the camera. The jobs destroyed — spread across every firm whose inputs just got more expensive — never existed to be photographed.
2. Preserving strategic capacity. The sales pitch: we need to keep certain industries alive for national security. The reality: this is the one argument with a sliver of legitimacy — there are a few genuinely strategic sectors worth safeguarding. But the “national security” excuse has been used to protect everything from sneakers to sugar. And once an industry is politically protected, the crutch is nearly impossible to remove, even when the security rationale has long since collapsed. A concession granted for defense becomes a subsidy defended forever.
3. Retaliation and leverage. The sales pitch: other countries cheat, so we must respond in kind. The reality: trade wars are economic trench warfare — costly, grinding, and strategically pointless. Tariffs rarely make the other country change its policy; they provoke retaliation. What starts as leverage ends as stalemate, with consumers in both countries footing the bill. Punishing a foreign government by taxing your own citizens is a strange kind of retaliation.
4. Government revenue. The sales pitch: tariffs fund the government without raising income taxes. The reality: this was true in the nineteenth century, when customs houses were the only tax apparatus a state could run. Today, tariffs are an absurdly inefficient way to raise revenue — they distort trade in the collection and, because they fall on ordinary goods, they hit the poorest consumers hardest. If revenue is the goal, there are cleaner and fairer taxes.
5. Political patronage and populism. The sales pitch: “I’m protecting your job from foreigners.” The reality: political theatre at its most cynical. This is not a fifth argument so much as the truth behind the other four, and it deserves its own section.
Why the Refuted Policy Persists
The economics of tariffs was settled before railroads. David Ricardo nailed it in 1817: when countries specialize according to comparative advantage, everyone gains — even a country that is worse at producing everything gains by producing what it is least worse at and trading for the rest. Tariffs break this by forcing resources into less productive uses. The result is always the same: less total wealth, fewer total jobs, slower growth. The theorem is not controversial among economists; it is one of the few results in the discipline with the standing of a law.
So why does a policy refuted in 1817 keep winning elections in the twenty-first century? Because the political ledger and the economic ledger are kept in different ink.
The beneficiaries of a tariff are concentrated, visible, and organized. A protected steel mill knows exactly what the tariff is worth to it. Its workers can be photographed, its executives can testify, its lobby can write checks, and every one of them knows whom to thank on election day. The victims are diffuse, invisible, and unorganized. Millions of consumers each pay a little more for cars and appliances; thousands of firms each lose a little competitiveness; some businesses that would have existed are never founded. No one of them loses enough to march about, and most never trace their loss to its cause. Nobody holds a rally for the factory that was never built.
This asymmetry — concentrated benefits, diffuse costs — is the oldest political scam in the book, and it explains far more than tariffs. It is the standing answer to the question “if this policy is so bad, why does it persist?” A policy does not survive by producing net benefits; it survives by producing traceable benefits for people positioned to defend it, while its larger costs dissolve into the general price level where no voter can see them. The politician who imposes the tariff gets a ribbon-cutting and a grateful union local. The politician who repeals it gets blamed for the visible closure and thanked by no one for the invisible gains. The incentives select for the illusion.
Which yields the honest taxonomy of tariff support. People back tariffs for one of two reasons: they don’t understand comparative advantage, or they work in a sector that benefits from making everyone else subsidize it. That’s it. Everything else is spin. The winners are few and visible; the losers are many and invisible; and politicians, ever attuned to optics, will keep selling protectionist snake oil for as long as people are willing to buy it. This is not a failure of markets — it is a failure of politics overriding markets, a pattern that recurs throughout the standard indictments I answer in capitalism on trial.
The China Equivocation
The second trade myth is grander. It comes as a rhetorical question, endlessly recirculated beneath videos of the Shanghai skyline: “If communism doesn’t work, then why is China so advanced?”
The question is rhetorically clever and conceptually incoherent. It equates China’s modern skyline with the success of communism, when those towers were built atop its ashes.
Start with what China actually is. China is ruled by the Communist Party but operates a capitalist economy in every practical sense. Since Deng Xiaoping’s reforms beginning in 1978, China has permitted private ownership, foreign investment, competitive markets, and profit incentives; roughly two-thirds of its GDP now comes from the private sector. Communism in the Marxist sense abolishes private property, markets, and profit. China has none of those prohibitions. The state retains political control, but the economic model is authoritarian capitalism, not socialism. Its leaders retained the label and discarded the ideology. The flag stayed red; the economy turned green.
The timeline makes the case by itself, because history ran the controlled experiment. Under Mao (1949–1976), China practiced actual communism: a command economy, collectivized agriculture, industrial central planning. The results were catastrophic — tens of millions dead in the Great Famine, and near-total economic stagnation for a generation. Then, beginning in 1978, Deng introduced market mechanisms under the euphemism of “socialism with Chinese characteristics” — a polite phrase for capitalism under one-party rule — and the curve bent upward and never looked back. Same country, same people, same party, same resources. The only variable that changed was the economic system. China’s economic miracle began not when it implemented communism but at the exact moment it abandoned it. Hundreds of millions of people moved from subsistence farming into the market economy, the largest and fastest exit from poverty in human history — a data point that belongs to the larger pattern I trace in the poverty myth: poverty is the default condition of mankind, and it is markets that end it.
The viral argument survives on a classic equivocation: it uses the word “communism” to mean two different things — a political system and an economic system — and slides between them mid-sentence. China is communist in its governance and capitalist in its production. To say its advancement vindicates communism is like saying Britain proves monarchy works because it still has a king.
Name the actual drivers of Chinese growth and the point becomes unavoidable: mass labor migration from farms to factories; export-led growth through integration into global trade, capped by WTO accession in 2001; foreign direct investment carrying Western capital and technology; massive state-backed infrastructure; and central coordination of industrial policy — strategy, not egalitarian redistribution. These are not communist successes. Every one of them is a capitalist mechanism, administered by an autocratic state. What survives in China is not Marxism but authoritarian pragmatism — a technocratic will to power, willing to adopt any tool that works. Communism cannot claim credit for China’s skyscrapers any more than feudalism can claim credit for the internet.
So the verdict inverts the meme. China’s advancement is evidence of how little communism remains, not of how well it works. Communism failed so completely that even China stopped pretending to believe in it — the Party kept the name and reversed the principles. The skyline of Shanghai is a monument not to communism’s triumph but to its quiet burial. The correct inference runs exactly opposite to the rhetorical question: China became advanced to the extent that it abandoned communism.
The Common Illusion
The two myths are one myth. Both work by pointing at something visible — the protected factory, the glittering skyline — and crediting it to the intervention rather than to the exchange happening underneath. The tariff’s defenders count the jobs they can see and ignore the larger number they cannot; communism’s defenders count the towers they can see and ignore the abandoned doctrine that had to die before one brick was laid. In both cases the cure for the illusion is the same discipline: trace the causation, not the optics. Trade creates the wealth. The politics only decides who gets to take credit for it — and who gets stuck, invisibly, with the bill.