How To Win a Tariff War
Tea Party Economist
by Gary North: Are
Capital Controls Coming to America?
I wrote an
article on Envy,
Asians, and Tariffs. Almost as soon as it was published, I received
I am a regular reader of your articles published on LewRockwell.com,
and most of the time I agree with you. I consider myself a "conservative"
Libertarian. That is, I believe in the capitalist and free market
system, small government, less regulation and less government
intrusion into our private lives the same as a classic
Libertarian. Where I part ways with your thinking is over the
issue of tariffs. Tariffs are anathema, of course, to classical
Libertarians, because tariffs violate their commitment to "free
trade." The problem with that position is that we don't have
free trade. Our manufacturers are required by government regulation
to pay a minimum wage, to provide medical coverage, to limit the
work day to 8 hours, to provide a myriad of other costly benefits
to workers, and to permit unions to extort even more costly benefits
out of the hapless factory owner, all of which drive prices up.
Then, if Libertarians have their way, these put upon factory owners
are required to try to sell their goods in the ostensible "free
market" in competition with, say, Chinese factory owners,
who pay their workers $10 per day, provide no benefits and require
their workers to work 12-hour shifts. That's not a "free
market!" The only way to rectify this and bring manufacturing
back to our shores is to impose a tariff so that it costs just
as much to make a product in China as in the United States.
But that would result in higher prices, you might say. Yes,
it would. But we've paid a terrible price for the "low prices"
we find at Walmart. We've ruined our own
Here is my answer.
"Common sense economics" is a phrase used to describe
the economic reasoning of the proverbial man in the street. In many
instances, this knowledge may rest on principles that are essentially
correct. For example, we have that old truism that there are no
free lunches. If some of our professional experts in the field of
governmental fiscal policy were to face the reality of this truth,
they might learn that even the skilled application of policies of
monetary inflation cannot alleviate the basic economic limitations
placed on mankind. Such policies can make things worse, of course,
but they are powerless to do more than redistribute the products
of industry, while simultaneously redistributing power in the direction
of the state's bureaucratic functionaries. On the other hand, not
all of the widely held economic beliefs are even remotely correct;
some of these convictions are held in inverse proportion to their
validity. The tariff question is one of these.
The heart of the contradictory thinking concerning tariffs is in
the statement, "I favor open competition, but. . . ."
Being human, men will often appeal to the State to protect their
monopolistic position on the market. They secretly favor security
over freedom. The State steps in to honor the requests of certain
special interest groups which invariably proclaim their cause
in the name of the general welfare clause of the Constitution
and establishes several kinds of restrictions on trade.
Fair trade laws are one example. They are remnants of the old medieval
conception of the so-called "just price," in that both
approaches are founded on the idea that there is some underlying
objective value in all articles offered for sale. Selling price
should not deviate from this "intrinsic" value. Monopolistic
trade union laws are analogous to the medieval guild system; they
are based in turn upon restrictions on the free entry of nonunion
laborers into the labor market.
Tariffs, trade union monopolies, and fair trade laws are all praised
as being safeguards against "cut-throat" competition,
i.e., competition that would enable consumers to purchase the goods
they want at a cheaper price a price which endangers the
less efficient producers who must charge more in order to remain
in business. The thing which most people tend to overlook in the
slogan of "cut-throat competition" is that the person
whose throat is slashed most deeply is the solitary consumer who
has no monopolistic organization to improve his position in relation
to those favored by Statist intervention.
People are remarkably schizophrenic in their attitudes toward competition.
Monopolies of the supply of labor are acceptable to most Americans;
business monopolies are somehow evil. In both cases, the monopolies
are the product of the State in the market, but the public will
not take a consistent position with regard to both. The fact that
both kinds operate in order to improve the economic position of
a limited special interest group at the expense of the consumers
is ignored. Business monopolies are damned no matter what they do.
If they raise prices, it is called gouging; if they cut prices,
it is cutthroat competition; if they stabilize prices, it is clearly
a case of collusion restraining free competition. All forms may
be prosecuted. No firm is safe.
The State's policies of inflation tend to centralize production
in the hands of those firms that are closest to the newly created
money defense industries, space-oriented industries, and
those in heavy debt to the fractional reserve banking system. It
is not surprising that we should witness a rising tide of corporate
mergers during a period of heavy inflationary pressures, as has
been the case during the 1960s in the United States. Yet, with regard
to business firms (but not labor unions), the courts are able to
take action against almost any firm which is successfully competing
on the market.
As Dr. Richard Bernhard has pointed out, "What is becoming
illegal under federal law in the United States is monopolizing
as the law now defines monopolizing; and, since this is now considered
a crime, it is possible that perfectly legitimate business actions
by one firm may, if they 'inadvertently' lead to monopoly power,
put a firm in jeopardy of the law." Thus, we see a rational
economic response on the part of business firms consolidation
for the sake of efficiency on an increasingly inflationary market
prosecuted by the State which has created those very inflationary
pressures. There is an inconsistency somewhere.
TARIFFS ARE TAXES
A tariff is a special kind of tax. It is a tax paid directly by
importers for the right to offer foreign products for sale on a
domestic market. Indirectly, however, the tax is borne by a whole
host of people, and these people are seldom even aware that they
are paying the tax.
First, let us consider those in the United States. One group affected
adversely by a tariff is that made up of consumers who actually
purchase some foreign product. They pay a higher price than would
have been the case had no duty been imposed on the importer. Another
consumer group is the one which buys an American product at a high
price which is protected by the tariff. Were there no tariff, the
domestic firms would either be forced to lower their prices or shift
to some line of production in which they could compete successfully.
Then there is the nonconsumer group which would have entered the
market had the lower prices been in effect; their form of the "tax"
is simply the inability to enjoy the use of products which might
have been available to them had the State not intervened in international
Others besides the consumers pay. The importer who might have been
able to offer cheaper products, or more of the products, if there
had been no tariff, is also hurt. His business is restricted, and
he reaps fewer profits. All those connected with imports are harmed.
Yet, so are exporters. They find that foreign governments tend to
impose retaliatory tariffs on our products going abroad. Even if
those governments do not, foreigners have fewer dollars to spend
on our products, because we have purchased fewer of theirs.
Two groups are obviously aided. The inefficient domestic producer
is the recipient of an indirect government subsidy, so he reaps
at least short-run benefits. The other group is the State itself;
it has increased its power, and it has increased its revenues. (It
is conceivable to imagine a case where higher revenues might in
the long run result from lower tariffs, since more volume would
be involved, so we might better speak of short-run increases of
revenue.) We could also speak of a psychological benefit provided
for all those who erroneously believe that protective tariffs actually
protect them, but this is a benefit based on ignorance, and I hesitate
to count it as a positive effect.
A second consideration should be those who are hurt abroad, although
we seldom look at those aspects of tariffs. Both foreign importers
and exporters are hurt, for the same reasons. The fewer foreign
goods we Americans buy, the fewer dollars they have to spend on
American goods and services. This, in turn, damages the position
of foreign consumers, who must restrict purchases of goods which
they otherwise might afford. This leaves them at the mercy of their
own less efficient producers, who will not face so much competition
from the Americans, since the availability of foreign exchange (U.S.
dollars) is more restricted.
The tariff, in short, penalizes the efficient on both sides of
the border, and it subsidizes the inefficient. If we were to find
a better way of providing "foreign aid" to other countries,
we might provide them with our goods (which they want) by purchasing
their goods (which we want). That would be a noninflationary type
of aid which would benefit both sides, rather than our present system
which encourages bullies in our government and creates resentment
PROTECTING VITAL INDUSTRIES
about our vital industries, especially our wartime industries? If
they are driven out of business by cheaper foreign goods, what will
we do if we go to war and find our trading patterns disrupt-ed?
Where will we find the skilled craftsmen?
There is some validity to this question, but it is difficult to
measure the validity in a direct fashion. It is true that certain
skills, such as watch making, might be unavailable in the initial
stages of a war. There are few apprentice programs available in
the United States in some fields. Nevertheless, if there really
is a need for such services, would it not be better to subsidize
these talents directly? If we must impose some form of tax subsidy,
is it not always preferable to have the costs fully visible, so
that benefits might be calculated more efficiently?
A tariff is a tax, but few people ever grasp this fact. Thus, they
are less willing to challenge the tax, re-examine it periodically,
or at least see what it is costing. Indirect taxes are psychologically
less painful, but the price paid for the anesthetic of invisibility
is the inability of men to see how the State is growing at their
expense. What Tocqueville referred to as the "Bland Leviathan"
a steadily, imperceptibly expanding State thrives
on invisible and indirect taxes like inflation, tariffs, and monthly
withdrawals from paychecks. It ought to be a basic libertarian position
to discover alternative kinds of tax pro-grams, in an effort to
reduce the economic burden of the State by making the full extent
of taxation more obvious.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2012 Gary North
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