Who’s “Protected” By Tariffs? and the Drive For Exports

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Who’s “Protected” By Tariffs? And the Drive For Exports

Even supporters of low taxes, few regulations and the free-enterprise system in general often do a complete 180 degree turn when it comes to protective tariffs, claiming “we have to put America first.”

In 1946, Hazlitt said “for present-day tariff and trade policies are not only as bad as those in the seventeenth and eighteenth centuries, but incomparably worse.” Not surprisingly, the same fallacies still haunt us today.

The core benefit of trade is an expansion of the division of labor. Wealth creation is maximized when individuals are able to specialize in what they do best and trade for the other products and services created by others that they may need. For example, the farmer does not attempt to grow food, make clothes, computers and automobiles. The farmer takes his unique knowledge and skill set, produces extra food and trades for everything else he needs. Same for the computer engineer, the watchmaker or the tailor. The more participants worldwide that take part in the international division of labor, the more productive the world will become.

Economist Walter Block has an interesting way to explain the issue. His logic goes, if the protectionists were correct in saying that free-trade “outsources jobs and hurts the American economy,” then it must also be true that Virginia would be better off barring imports from other states in order to “buy Virginia.” Why buy baseball equipment from Kentucky or oranges from Florida when Virginian workers could be producing these items?

As a “bonus,” Virginia’s construction companies could build the greenhouses necessary to make the oranges! But there is no need to stop at the state level, wouldn’t individual cities have more production opportunities if we bought solely from them? If this is true, then why would an individual pass up the opportunities to produce baseball equipment, oranges or computers for themselves? Surely buying these products from others would be a missed opportunity and must be avoided. Since the protectionist logic necessary ends up in absurdity — complete self-sufficiency — it is a flawed argument and must be completely abandoned.

Hazlitt points out that this fallacy is yet another example of looking at the seen effects of a policy — in this case improvements for a few special interest groups — while failing to remember the long-run effects on society as a whole.

The seen and unseen effects of the tariff issue depend on the prevailing state of affairs in a given area at the time of the policy change. If a new tariff is put in place, we see one thing; if a tariff is removed we see another. Either way, tariffs act as a barrier to trade and result in inefficiency, decreased production and lowered standards of living.

If a tariff is removed where one previously existed, a factory may go out of business and all the workers are now unemployed (assuming this factory was inefficient and needed the tariff). If only this one special interest group was considered, the policy would appear to be a failure.

However, we must consider the effects of this policy on all groups. When consumers who previously paid $10,000 for an American made car can now purchase a Japanese car of the same quality for only $7,000, they now have an extra $3,000 to spend at any number of American stores or industries.

On the flip side of things, suppose a protective tariff is imposed where one did not exist. A new factory may sprout up and new workers will be employed. The unsophisticated observer will then conclude that this tariff has helped Americans, but they would be dead wrong.

What actually would occur is that Americans who enjoyed purchasing automobiles for $7,000 would now be forced to spend $10,000 to get a car of the same quality. They now have $3,000 less to spend on other goods, possibly products made in America. Jobs would eventually be lost in other industries, but the reason as to why is not entirely obvious to all. In effect, then, the real world outcome is that  “American consumers would be forced to subsidize this industry” to their own detriment and watch as their standards of living go down the drain.

The only result is “to change the structure of American production. It changes the number of occupations, the kinds of occupations, and the relative size of one industry as compared with another… Its net effect, therefore, is to reduce American efficiency, as well as to reduce efficiency in the countries with which we would otherwise have traded more largely.”

Now that the fear of imports has been cast aside, it is time to clear up the story in regards to exports. It is widely assumed that if we export goods abroad and import money, we have made our country richer. After all, we are trading for money, so of course we are getting richer!

Hazlitt replies that, “In the long run imports and exports must equal each other…It is exports that pay for imports, and vice versa. The greater exports we have, the greater imports we must have, if we ever expect to get paid.

To understand this process, think about your own life as a consumer and producer. I run a major trade deficit with my grocery store. They purchase no services from me at all while I purchase hundreds of dollars per week from them. On the flip side, I run a major trade surplus with my employer; they give me money for my labor services while I purchase nothing from them.

If I worked and worked and worked and with no intention of consuming, that would be the equivalent of a country striving only for exports with no balance of trade. The purpose of production, however, is ultimately consumption and why trade will balance on net over time.

Not realizing this process — or to cozy up with special interests — politicians often proclaim that it is in our own benefit to extend loans to foreign nations, if for no other reason than to expand our exports. Ideally, according to this fallacy, we would get our loan principal back — but that is not necessary for these loans to be beneficial because our exporters will benefit.

Hazlitt is not having any of this argument. “It should be immediately obvious that if the loans we make to foreign countries to enable them to buy our goods are not repaid, then we are giving goods away. A nation cannot grow rich by giving goods away. It can only make itself poorer.”

To remember the central lesson, the effects in the long-run and on all groups, forces us to remember that every dollar given in loan to foreign corporations to “boost exports” is one less dollar remaining in the domestic economy.

Trade should not be protected, managed, encouraged or restricted by the government. Only economic freedom will allow the division of labor and specialization to enrich every country that engrains itself within the world capital structure.