The Menace of Tariffs

Donald Trump is a strong believer in protective tariffs, and this is very bad news for those of us who support the free market. In Trump’s opinion, tariffs are a great idea. Here is what he said about them in an interview last month: “Trump has proposed a 10 percent across-the-board tariff on all imports and 60 percent on goods from China. During Tuesday’s remarks, he singled out imported cars for higher trade duties, saying he would slap a100, 200 or 300 percent tariff on cars made in Mexico. He also floated imposing 50 percent tariffs on goods to force companies to relocate operations to the U.S. to avoid the penalty.

‘First of all, 10 percent when you collect it is hundreds of billions of dollars … all reducing our deficit,’ he said. ‘But really, so there’s two ways of looking at a tariff. You can do it as a money-making instrument, or you can do it as something to get the companies. Now, if you want the companies to come in, the tariff has to be a lot higher than 10 percent because 10 percent is not enough. Guys, they’re not going to do it for 10, but you make a 50 percent tariff, they’re going to come in.’”

Trump discusses tariffs as if they were a way of improving the free market. In fact, though, as the great economist Murray Rothbard points out in Power and Market, tariffs directly attack the essence of the free market, namely that people gain through mutually advantageous trade. Rothbard proves this by a brilliant reductio ad absurdum argument: “The absurdity of the pro-tariff arguments can be seen when we carry the idea of a tariff to its logical conclusion—let us say, the case of two individuals, Jones and Smith.”

You might think that Rothbard has gone too far— aren’t individuals very different from nations? Isn’t a discussion of two-person trade irrelevant? But Rothbard has a convincing response. Often a very simple example. reveals the principle that underlies a much more complicated case. As he explains:

“This is a valid use of the reductio ad absurdum because the same qualitative effects take place when a tariff is levied on a whole nation as when it is levied on one or two people; the difference is merely one of degree. Suppose that Jones has a farm, ‘Jones’ Acres,’ and Smith works for him. Having become steeped in pro-tariff ideas, Jones exhorts Smith to ‘buy Jones’ Acres.’ ‘Keep the money in Jones’ Acres,’ ‘don’t be exploited by the flood of products from the cheap labor of foreigners outside Jones’ Acres,’ and similar maxims become the watchword of the two men. To make sure that their aim is accomplished, Jones levies a 1,000-percent tariff on the imports of all goods and services from ‘abroad,’ i.e., from outside the farm. As a result, Jones and Smith see their leisure, or ‘problems of unemployment,’ disappear as they work from dawn to dusk trying to eke out the production of all the goods they desire. Many they cannot raise at all; others they can, given centuries of effort. It is true that they reap the promise of the protectionists: ‘self-sufficiency,’ although the ‘sufficiency’ is bare subsistence instead of a comfortable standard of living.”

Rothbard next addresses a central point of pro-tariffs defenders like Trump, the alleged need to keep money at home.

“Money is ‘kept at home,’ and they can pay each other very high nominal wages and prices, but the men find that the real value of their wages, in terms of goods, plummets drastically. Truly we are now back in the situation of the isolated or barter economies of Crusoe and Friday. And that is effectively what the tariff principle amounts to. This principle is an attack on the market, and its logical goal is the self-sufficiency of individual producers; it is a goal that, if realized, would spell poverty for all, and death for most, of the present world population. It would be a regression from civilization to barbarism. A mild tariff over a wider area is perhaps only a push in that direction, but it is a push, and the arguments used to justify the tariff apply equally well to a return to the ‘self-sufficiency’ of the jungle.”

Trump said in his interview that high tariffs will encourage foreign firms to relocate to the United States, so that they can avoid paying the tariffs. What this argument ignores is that there is no benefit to American consumers in having firms located here rather than in foreign countries. What matters to consumers is getting the lowest price for the goods and services they want; and if the firm that offers the lowest price is in China rather than America, so what? Trump might counter this by claiming that locating in America opens up jobs for Americans, but this contention presupposes that a substantial number of American workers are unable to find jobs. What is the basis for this assumption? None is offered. Further, any gains that workers could get from new jobs are likely to be erased by the higher prices the tariffs will bring about. As the great economic journalist Henry Hazlitt said: “And this brings us to the real effect of a tariff wall. It is not merely that all its visible gains are offset by less obvious but no less real losses. It results, in fact, in a net loss to the country. For contrary to centuries of interested propaganda and disinterested confusion, the tariff reduces the American level of wages. Let us observe more clearly how it does this. We have seen that the added amount which consumers pay for a tariff-protected article leaves them just that much less with which to buy all other articles.

There is here no net gain to industry as a whole. But as a result of the artificial barrier erected against foreign goods, American labor, capital and land are deflected from what they can do more efficiently to what they do less efficiently. Therefore, as a result of the tariff wall, the average productivity of American labor and capital is reduced. If we look at it now from the consumer’s point of view, we find that he can buy less with his money. Because he has to pay more for sweaters and other protected goods, he can buy less of everything else. The general purchasing power of his income has therefore been reduced. Whether the net effect of the tariff is to lower money wages or to raise money prices will depend upon the monetary policies that are followed. But what is clear is that the tariff—though it may increase wages above what they would have been in the protected industries— must on net balance, when all occupations are considered, reduce real wages.

Only minds corrupted by generations of misleading propaganda can regard this conclusion as paradoxical. What other result could we expect from a policy of deliberately using our resources of capital and manpower in less efficient ways than we know how to use them? What other result could we expect from deliberately erecting artificial obstacles to trade and transportation?

For the erection of tariff walls has the same effect as the erection of real walls. It is significant that the protectionists habitually use the language of warfare. They talk of ‘repelling an invasion’ of foreign products. And the means they suggest in the fiscal field are like those of the battlefield. The tariff barriers that are put up to repel this invasion are like the tank traps, trenches, and barbed-wire entanglements created to repel or slow down attempted invasion by a foreign army.”

Let’s do everything we can to oppose tariffs. They make us all poorer.

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