Free Markets, Not Tariffs, Promote Industrial Success

Oren Cass argues in his Atlantic article advocating for tariffs that individuals making free market choices about consumption and production negatively impact the broader national interest by undervaluing the "industrial base." He suggests that decisions to import goods or relocate manufacturing overseas, while individually rational, collectively harm the economy, thus justifying government intervention in the form of tariffs. This argument rests on the assertion of a negative externality—a cost imposed on society not reflected in market prices.

However, Cass’s argument overlooks the crucial role of market signals in guiding resource allocation. Prices, wages, and other market indicators reflect the value of domestic production, including the "industrial base." Firms, driven by the profit motive, constantly seek to optimize their access to resources, including labor, capital, and raw materials. Decisions about where to locate production are based on a complex calculus involving input costs, infrastructure availability, worker skills, and regulatory environments. These decisions, aggregated across the economy, lead to a dynamic and efficient allocation of resources within the industrial base.

The market’s capacity for self-correction through financial mechanisms further undermines Cass’s argument. Financial markets, including stock prices and lending decisions, provide powerful feedback to firms about the efficacy of their investment choices. Positive performance is rewarded with access to capital, while poor performance leads to reduced investment. This system incentivizes efficiency and adaptation, ensuring that resources flow towards the most productive uses. Cass’s unsupported claim that financial markets are "too large" ignores their essential role in allocating capital, a crucial input for a healthy industrial base.

Cass mischaracterizes the industrial base as a monolithic entity, failing to recognize its inherent complexity and dynamic nature. The optimal industrial structure is not static; it evolves with technological advancements, shifting consumer preferences, and global economic conditions. Financial markets, far from being a detrimental force, facilitate this evolution by channeling resources towards promising new industries and away from declining ones. This process of "creative destruction" is essential for long-term economic growth. Shrinking financial markets, as Cass proposes, would starve the most productive sectors of capital, hindering rather than helping the industrial base.

Cass’s argument also reveals a flawed understanding of the relationship between different sectors of the economy. He seems to subscribe to a mercantilist view that prioritizes physical production over services, particularly finance. This overlooks the vital supporting role that services, including finance and transportation, play in a modern industrial economy. A robust financial sector is crucial for providing capital to manufacturing firms, while efficient transportation networks enable the movement of goods and inputs. Weakening these supporting sectors would ultimately harm the industrial base. Cass’s argument is akin to suggesting that reducing transportation services would benefit manufacturing, ignoring the crucial role of logistics in production and distribution.

Contrary to Cass’s assertion, the US industrial capacity is at a historical high, despite decades of increasing global trade. This empirical evidence contradicts the claim that free trade undermines domestic production. The industrial base has not only grown but has also become more efficient, driven by competitive pressures and technological advancements. This sustained growth demonstrates the market’s ability to adapt and thrive under open trade. While national security concerns related to specific industries may warrant targeted interventions, a broad-based protectionist policy based on Cass’s flawed economic reasoning would ultimately harm the American economy by misallocating resources and hindering innovation. Furthermore, conflating national security concerns with economic arguments for protectionism muddies the policy debate and risks creating loopholes for rent-seeking behavior.