Trump's Trade War Rests Heavily on the Sunk Cost Fallacy

The trade war of the past year, and the rumblings of it on the campaign trail in 2016, are in support of a singular message from the President: “Make America Great Again!” By imposing tariffs on friend and foe alike, the idea is to force manufacturing jobs from other countries back to the United States. This scheme will supposedly bring back the halcyon days.

However, this argument rests on a logical fallacy: the sunk cost fallacy. The sunk cost fallacy is when one considers unrecoverable costs in their decision making. For example, someone goes to the movies and pays $10 for a ticket. The movie is terrible and they are trying to decide whether to stay or leave. Some will say “well, I paid the $10 so I might as well stay.” But that is fallacious reasoning. The choice being faced is whether to stay or go, not whether to pay $10 and stay or go. The $10 is already gone. The person will not get that money back; it’s property of someone else now.

The situation is similar with trade. Even if we take the short-run findings of Autor, Dorn, and Hanson at face value, even if we take the assumptions of Trump et al, that trade has made America weak, it does not logically follow that tariffs are a preferable option or that bringing back those jobs is desirable. The situation has changed. The effects of international trade are sunk costs; they do not factor into future decision making. The question is not whether or not tariffs can bring jobs back or return us to some virtuous past. The question is whether or not, given current conditions and margins along which people adjust, are tariffs the best trade-off?

Economic activity is dynamic. It evolves, just like any ecosystem. It is shaped by the people within it as much as it shapes their behavior. Just as returning Earth to a super-hot primordial period (or an ice age) in order to achieve some goal may benefit certain elements but destroy most others, so would tariffs mess with the economic ecosystem.

Merely closing off trade is not the answer, even if we are to (erroneously) assume trade is harmful. People have adjusted around it, and the cure may very well be worse than the disease.