Gary North – November 20, 2013
Probably the most successful conceptual error that is promoted by defenders of tariffs is this one: “Tariffs are good for the nation.”
Tariffs, being sales taxes, are good for the national government, but they are not good for the nation. At best, they are less bad for the nation than a graduated income tax. But since both are collected, tariffs are not a benefit for the nation.
If sales tax defenders came out and said the following, people probably would not believe them: “An extra sales tax is good for the nation.” Certainly, people who regard themselves as Tea Party members do not want to see an increase of taxes. They do not see taxes as a benefit to the nation.
The people who believe that tariffs are good for the nation are literally incapable of deductive economic reasoning. This argument has been used by mercantilists ever since the late 17th century. Adam Smith’s Wealth of Nations is a refutation of the mercantilist position. Nevertheless, people who are incapable of following a line of economic argumentation, and who get patriotic when they hear the word “nation,” rush to promote tariffs. Thus, the combination of an ignorant patriotism and an ignorant economic analysis produces the statement: “Protectionism is good for the nation.”
PROTECTING THE INEFFICIENT
Tariffs are good for domestic manufacturers who are not capable of competing with foreign manufacturers. They deeply resent competition of all kinds. But they find it difficult to get the Congress to tax their domestic competitors. So they get what they can: a sales tax on imported goods.
The insidious thing about tariffs is that the average man does not understand that tariffs are selective sales taxes. He also does not understand that tariffs cost him. The main beneficiary is going to be a domestic company that can now keep its prices high, because it does not allow price competition from abroad. It is a sweetheart deal for the protected domestic industry, but the protected industry employs relatively few people, compared with the overall number of people who have to pay extra money in order to buy the imported goods, to which a sales tax is applied, or who pay more for domestically produced goods.
Defenders of tariffs believe that a man with a badge and a gun who sticks his gun in your belly as a consumer is a benefit to the nation. He is a benefit to is the state. He is a benefit to the bureaucrats who collect the tax. He is a benefit to the crony capitalists who elect the politicians who pass the tariff bills. The average American pays more for whatever he buys, and he is the loser.
MANY LOSERS, FEW WINNERS
The problem is an ancient one. The cost of the tax is spread over a large number of people, but the benefit is concentrated on a small number of people. Therefore, this small number of people find that it is in their self-interest to direct the politicians to pass beneficial legislation for them, on the assumption that the general population will not understand what is being done to them. The price of organizing politically against a specific tax is high, because anyone doing the mobilization has to explain economic cause-and-effect to the average citizen, and the average citizen does not understand economic cause-and-effect.
The cost of educating the voters is high. The cost of bribing Congress is low. “Bribe” = money paid in advance for political services rendered.
This is a tremendous advantage for companies in the protected industries, because they do understand economic cause-and-effect. They understand that a sales tax on a competing company that exports goods from abroad is going to benefit them, because they can keep retail prices high. So, there is an asymmetric distribution of information. The people getting the benefits by means of state coercion understand the relationship between tariffs and their profits. The people who pay the freight for the special-interest legislation that promotes tariffs do not understand the nature of economic cause-and-effect. The cost is distributed widely across the general population. The general population does not feel the tax, and therefore does not oppose the tax.
Price competition is basic to liberty. If two people agree on a particular price, which each of them expects to be mutually beneficial, the excluded sellers who would like to get in on the deal, but whose prices are too high, find that they can stop the deal if they persuade the national government to pass a law in favor of tariffs or import quotas.
The import quota does the government no good. It doesn’t collect any money. A tariff benefits the government, and it also benefits those industries that would have faced foreign competition.
The losers are those people who pay more for their goods, which they would have preferred to pay less for. But somebody with a badge and gun has stuck a gun in the belly of an importer, so the importer pays the tax. He may try to pass on the higher price on to consumers. Domestic producers hope he will do. This will mean that they can hike their prices, line their pockets, and never get blamed for the fact that somebody with a badge and a gun has used coercion to stop a voluntary exchange. But consumers may decide not to pay the higher price. The person selling the imported good suffers losses. That also pleases domestic producers.
THE NOT SO SOLID SOUTH
In the American South prior to the Civil War, Southern politicians understood what tariffs did to the agricultural sector, which most of the South was. Anyway, they understood after the War of 1812. Before the War of 1812, the major politician and political theorist of the South, John C. Calhoun, was a big tariff advocate — a “nationalist.” But Southern exporters of cotton did not like tariffs, because they had to import goods from Britain. They had to pay an extra price to do so. Calhoun was a great defender of the South after 1812. He was a great opponent of tariffs. He opposed the “tariff of abomination” in 1828.
In the North, the Whigs and then the Republicans were great advocates of tariffs. They were great advocates of protecting infant industries, such as the steel industry, wrapped in political swaddling clothes. They made certain the tariffs were high, because they understood that Southern farmers would be paying to fill up the federal government’s coffers.
What is absolutely astounding is that there are people who regard themselves as defenders of the Southern tradition, who are also great advocates of tariffs. They are advocates of the system designed by Alexander Hamilton, Henry Clay, William “Pig Iron” Kelly, and Abraham Lincoln to skim off the South’s wealth. As Lincoln said in his first inaugural address, “The power confided to me will be used to hold, occupy, and possess the property and places belonging to the Government and to collect the duties and imposts; but beyond what may be necessary for these objects, there will be no invasion, no using of force against or among the people anywhere.” But the South said no — no tariffs. Lincoln invaded. Guns and badges prevailed. This was the praise song of the invaders: “Father Abraham has many guns. Many guns has Father Abraham. I have one of them, and so do you. So, let’s march to the sea!”
Politics makes strange bedfellows. So does protectionism.
Consider these political slogans.
1. There is no such thing as a free lunch.2. Follow the money.
3. Who pays?
4. Who wins? Who loses?
5. Who? Whom?
Tariffs are selective sales taxes on imports. They make the customer pay more for imported goods and competing domestic goods. They reward producers of domestic goods who cannot offer good deals comparable to the deals offered by importers.
The losers get Congress to send out a person with a badge and a gun. He sticks the gun into the belly of an importer. “I’m here in the name of the nation. Fork over your money.”
(For answers to other equally ludicrous defenses of protectionism, click here: http://www.garynorth.com/public/department162.cfm)