Trade Builds Prosperity

Originally published on Substack.

I’m in Washington today at AIER’s conference on trade, national security, and American prosperity, and the timing could not be better.

​One year after the Trump administration’s “Liberation Day” tariffs, the case for protectionism looks weaker, not stronger.

These tariffs did not revive the economy, restore manufacturing, or solve the trade deficit. They expanded government power, distorted price signals, and raised taxes on Americans in the name of helping them.

The Supreme Court’s rejection of the administration’s sweeping emergency-tariff theory mattered legally, but the deeper point is economic: even when tariffs are legal, they are still bad policy. America does not need more executive-led central planning. It needs more free-market capitalism.

Bad Diagnosis

Too many politicians still tell a simple story about the Rust Belt: foreign countries cheated, bad trade deals hollowed out American industry, and tariffs can bring it all back. That story is politically useful, but economically incomplete.

A lot of the damage was homemade. For decades, too many state and local governments in the industrial Midwest piled on forced unionism, bloated spending, high taxes, rigid labor markets, slow permitting, and overregulation.

Businesses first moved from the Frost Belt to the Sun Belt because it was easier to build, hire, invest, and produce there. A BLS review of manufacturing employment in the Southeast found the South Atlantic division increased its share of U.S. manufacturing employment by 5.8 percentage points over the last 30 years.
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That matters because manufacturing did not simply “leave America.” In many cases, it first moved to places inside America that were freer, cheaper, and more competitive. Amity Shlaes provided a good reminder of these points.

That lines up with deeper research. An NBER study on the Rust Belt’s decline found the region’s share of U.S. manufacturing employment fell from more than half in 1950 to about one-third by 2000, with weaker competition, wage premia, and slower productivity growth playing major roles.

Many places priced themselves out of competitiveness before globalization finished the job. That is an uncomfortable truth, but it is the truth.

Competitive Strength

The best way to deal with adversaries is not to make America less free and more expensive. It is to make America more competitive domestically.

That means lower taxes, restrained spending, lighter regulation, reliable energy, flexible labor markets, secure property rights, and faster permitting. It means making the United States the best place in the world to build, invest, invent, and expand.

If we are worried about China or any other rival, the answer is not to copy the logic of state-directed economics here at home. The answer is to outperform them with openness, productivity, entrepreneurship, and capital formation. That is how free societies win. That is also how they stay peaceful and prosperous.
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This is the core insight behind much of my own free-trade writing: the stronger America becomes at home, the less it needs clumsy protectionism abroad. This was brought up several times during the discussion with Dominic Pino, Don Boudreaux, and Erik Gartzke.

Trade Reality
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Protectionists love to point to the trade deficit as if it is a scoreboard for national success or failure. It is not.

The 2025 U.S. international trade data from BEA show total exports rose 6.2 percent to $3.43 trillion, while imports rose 4.8 percent to $4.33 trillion. The overall goods-and-services deficit was $901.5 billion, basically unchanged from 2024. The goods deficit increased to $1.24 trillion, but the services surplus rose 8.9 percent to $339.5 billion.

That is the point: the American economy is more complicated than a bumper sticker. We run a large goods deficit, yes, but we also run a substantial services surplus because the United States remains highly competitive in finance, technology, business services, and other high-value sectors.

The broader balance-of-payments data from BEA make the same point more clearly. In 2025, the U.S. current-account deficit narrowed to $1.12 trillion, or 3.6 percent of GDP, down from 4.0 percent in 2024.

By the fourth quarter, it had fallen to $190.7 billion, or 2.4 percent of GDP, the lowest share since 2021. Meanwhile, the capital account remained tiny, and the United States continued to attract enormous foreign investment flows.

Trade balances reflect saving, investment, and capital flows, not just tariff schedules. You cannot bully those fundamentals with import taxes and patriotic slogans.

Productivity Wins

There is another myth here that needs to die. Many people still talk as if falling manufacturing employment proves America no longer makes things. That is wrong.

Manufacturing output is still near historically high levels, even though manufacturing employment is far below its old peak. The Federal Reserve’s industrial production data show manufacturing output continues to run at a high level, while BLS data on manufacturing employment show factory jobs peaked decades ago and have trended down over time.

That is not mainly because Mexico or China suddenly appeared in the 1990s and 2000s. A large part of the employment decline reflects rising productivity, automation, better technology, improved logistics, and doing more with fewer workers—a trend that was already underway well before the big China shock debates.

That is a good thing, not a bad thing. Prosperity comes from producing more value with less labor tied up in any one sector so workers and capital can shift into other valuable uses.

This is what happened in agriculture, too. America did not become weaker because fewer people worked on farms. America became richer because productivity rose and people were freed up to do other things. Manufacturing follows the same logic.

The goal is not to maximize the number of workers standing in factories. The goal is to maximize output, wages, innovation, and living standards across the economy.

Seen Unseen

This is where Frédéric Bastiat’s lesson on the seen and the unseen still matters. The seen is the politician standing in front of a factory claiming tariffs saved jobs. The unseen is everything else: higher input costs for manufacturers, less business investment, weaker productivity, retaliation against exporters, fewer opportunities for workers, and higher prices for families.

That unseen damage is not theoretical. The Trump administration’s trade policies have been a real drag on economic activity. Real GDP increased at just a 0.7 percent annual rate in the fourth quarter of 2025, according to BEA’s second estimate.

Broad tariffs inject uncertainty, raise costs, scramble supply chains, and reduce the room businesses need to plan and invest. And the burden does not fall mainly on foreign governments.

A Reuters report on new ECB analysis found that U.S. consumers and importers bore most of the tariff burden. So when Washington calls tariffs “revenue,” let’s be honest about what that means: Americans are paying the bill.

Mercantilist Myth

To be fair, the other side is not entirely crazy. They argue that tariffs can protect strategic industries, reduce dependence on rivals, and give domestic production breathing room. In a narrow and temporary national-security context, that argument deserves to be heard.

But that is not how broad tariff regimes work in practice. They do not stay narrow. They do not stay temporary. And they do not stay focused on genuine defense needs. They become an excuse for politicians to pick winners, punish disfavored countries, and manage commerce by decree.

That is why this is really a fight over political philosophy as much as economics.

President Trump, Peter Navarro, and other modern mercantilists treat trade less as voluntary exchange and more as a tool of political control. They see imports as weakness, trade deficits as surrender, and tariffs as strength. But they do not seriously reckon with the tradeoffs.

They focus on the factory they can see and the talking point they want to sell. They ignore the rest of the economy. Mercantilism is just bigger government dressed up in patriotic language. It means more control over prices, supply chains, capital flows, and private exchange. It means less freedom, less peace, and less prosperity.

Old Revenue Model

Historically, America did rely more heavily on tariffs to fund a far smaller federal government. Even then, tariffs were still inferior tax policy because they were narrow and distortionary. But at least there was a clearer revenue rationale in a country without today’s massive income-tax state, payroll-tax state, and sprawling administrative apparatus.

That world is gone. Today, the federal government is already enormous and financed through multiple major tax streams. Adding broad tariffs on top of that is not some return to constitutional simplicity. It is just another tax increase on Americans.

Worse, it is a narrow tax with carveouts, exemptions, favoritism, and political manipulation built into the design. Good tax policy should have a broad base, lower rates, and few if any exemptions so growth is not constantly choked by distortion.

Tariffs do the opposite.

They punish specific transactions, specific industries, and specific households. That is anti-prosperity by design.

Congress Matters

The constitutional issue matters, too. Congress has the power of the purse for a reason. Taxing trade should not become a backdoor way for presidents of either party to legislate by executive order.

The Supreme Court struck down the Trump administration’s sweeping tariffs under emergency authority, and the administration quickly pivoted to Section 122 workarounds reported by Reuters.

Even if every workaround were legal, that would not make them wise. Presidents should have far less unilateral power to tax trade on their own. If Congress wants tariffs, Congress should vote on them and own the consequences.

Better Path

The better answer is not complicated. End the tariffs. Reduce the size and scope of government at the federal, state, and local levels. Lower taxes. Restrain spending. Cut overregulation. End policies that punish work, investment, entrepreneurship, and production.

Let prices work. Let capital move. Let businesses respond to real demand instead of campaign slogans.

That has been my point in Econ 101: Free Trade = More Freedom, Protectionists Are Wrong: Free Trade Is the Path to Prosperity, and my broader trade and free-market work.

If policymakers really want to rebuild industrial strength, they should stop making America expensive, rigid, and hostile to production in the first place.

Trade is not the enemy of American prosperity. Trade is one of its engines. Free people trading freely will outperform politicians trying to manage commerce from Washington every single time.

For Policymakers

1. Stop treating trade deficits like a scoreboard. The current account and financial flows tell a much bigger story than a goods deficit alone.

2. Admit what helped hollow out the Rust Belt. Bad state and local policy drove firms away long before tariffs became the fashionable excuse. Competitiveness still matters.

3. Reject tariff central planning. Even when legal, tariffs are still taxes that distort investment, production, and prices. The economic tradeoffs are real.

4. Focus on productivity, not nostalgia. High manufacturing output with lower employment is often a sign of progress, not decline.

5. Keep Congress in charge of taxing trade. The president should have far less unilateral room to raise taxes through tariff workarounds. That is both a constitutional issue and an economic one.