Why Tariffs are Terrible

“Government does not have the power to encourage one branch of production except by curtailing other branches. It withdraws the factors of production from those branches in which the unhampered market would employ them and directs them into other branches.”

-Ludwig Von Mises, Human Action p. 737; p. 734 1

How supposed “pro free market” people are supportive of a tariff is beyond me. It seems to show how people that proclaim to have faith in capitalism and the free market only do so with lip service; for the act of supporting a tariff is just one of many actions that shows a profound lack of belief in voluntary exchange and free market economics. So for the sake of consistency, these people should refrain from saying they are advocates of the free market and tariffs at the same time… Unless they enjoy being thoroughly debunked like they are about to be right now in this article. The above quote by Austrian Economist Ludwig Von Mises, from his treatise on economics Human Action, perfectly explains the problem with a tariff (which is a government market regulation and tax enforced by threats of violence, that’s not “free” so it’s not “free market”). There are many undesirable implications of tariffs which I will outline on this article. But before that, I want to talk about it through this meme I created the other day which seems to have triggered some statists who don’t understand economics.

This did illicit many responses from people. Some moronic and some just innocently misinformed. The responses ranged from, “well, if they can raise the price from $5 to $6, then what stops a Mexican exporter from raising the price even higher without a tariff?” to, “Well, we have things called ‘economic substitutes’ which can take the place of Mexican goods here in the state.” The first response is without any merit, since such a person who says something like that has probably never seen a demand curve. A person who makes such a claim doesn’t seem to understand how marginal utility works or that value is imputed to goods and services by economic actors. “The value of an object is merely the importance that we ascribe to its possession for the purpose of gratifying our wants. This importance varies according to the extent of the range of those wants which, beginning with the most urgent, have already secured their gratification.” 2 This means that value is derived from the subjective valuations and utility people like you and I judge we can attain by consuming a particular good or service. So the reason a producer cannot sell at any arbitrary price is because his price is set up by a number of factors. The cost of production, competitors selling a similar product, and consumer demand. A Mexican exporter could only sell his avocados for say, $1 million a pound, if someone is willing to pay that price. And since people already complain about paying the current price of avocados 3, market pressures even in this hampered market keeps the prices at fairly reasonable level.

The second response, that of economic substitutes, does not answer the problem fully. Yes, economic substitutes are awesome, but in the case of avocados, Mexican avocados make up 60% of the avocados consumed in the US 4. They can grow avocados year round south of the border, which means that they are more efficient at avocado production than the US. And since a tariff raises the cost of avocados in the US, that means a tax on Mexican imports is a tax on US consumption (so the Americans end up paying the tax, not the Mexicans).

Henry Hazlitt debunked the concept of tariffs rather nicely in his book, “Economics in One Lesson“.

“What possible point can there be, he is likely to ask, in discussing refinements and advances in economic theory, when popular thought and the actual policies of governments, certainly in everything connected with international relations, have not yet caught up with Adam Smith? For present day tariff and trade policies are not only as bad as those in the seventeenth and eighteenth centuries, but incomparably worse. The real reasons for those tariffs and other trade barriers are the same, and the pretended reasons are also the same… ‘In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest.’ ‘The proposition is so very manifest,’ Smith continued, ‘that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question, had not the interested sophistry of merchants and manufacturers confounded the commonsense
of mankind.'” 5

Tariffs are a limitation on the division of labor. Plain and simple. And the division of labor is the major contributing factor to economic development and the increase in the standard of living we enjoy today. On the topic of the division of labor, Mises notes, “Within the framework of social cooperation every citizen depends on the services rendered by all his fellow citizens.” 6 Mises also notes that the division of labor started, originally, between immediate neighbors until it circled out into the grand world economy that we have today. 7 The reason the division of labor is so desirable is that it allows certain individuals to focus on one or a few production lines while relying on the expertise of someone else to provide a good or service they are not expert in. So for example, the baker can focus on baking bread while the shoemaker can focus on shoes. The shoemaker can trade the shoes for bread so that the baker is clothed and the shoemaker is fed. And the quality of both the shoes and the bread increases for both since the baker doesn’t have to worry about producing shoes and the shoemaker doesn’t have to worry about making his own bread.

Both are better off.

Imagine if the government instituted a regulation where the baker had to trade 20% more bread in exchange for shoes from this particular shoemaker. This arbitrary law distorts the market and invariably means the standard of living for both the baker and the shoe maker decrease. Hazlitt refutes tariffs and protectionism better than I ever could with sweaters:

“An American manufacturer of woolen sweaters goes to Congress or to the State Department and tells the committee or officials concerned that it would be a national disaster for them to remove or reduce the tariff on British sweaters. He now sells his sweaters for $15 each, but English manufacturers could sell there sweaters of the same quality for $10. A duty of $5, therefore, is needed to keep him in business. He is not thinking of himself, of course, but of the thousand men and women he employs, and of the people to whom their spending in turn gives employment. Throw them out of work, and you create unemployment and a fall in purchasing power, which would spread in ever-widening circles. And if he can prove that he really would be forced out of business if the tariff were removed or reduced, his argument against that action is regarded by Congress as conclusive.

But the fallacy comes from looking merely at this manufacturer and his employees, or merely at the American sweater industry. It comes from noticing only the results that are immediately seen, and neglecting the results that are not seen because they are prevented from coming into existence.

The lobbyists for tariff protection are continually putting forward arguments that are not factually correct. But let us assume that the facts in this case are precisely as the sweater manufacturer has stated them. Let us assume that a tariff of $5 a sweater is necessary for him to stay in business and provide employment at sweater making for his workers.

We have deliberately chosen the most unfavorable example of any for the removal of a tariff. We have not taken an argument for the imposition of a new tariff in order to bring a new industry into existence, but an argument for the retention of a tariff that has already brought an industry into existence, and cannot be repealed without hurting somebody.

The tariff is repealed; the manufacturer goes out of business; a thousand workers are laid off; the particular tradesmen whom they patronized are hurt. This is the immediate result that is seen. But there are also results which, while much more difficult to trace, are no less immediate and no less real. For now sweaters that formerly cost $15 apiece can be bought for $10. Consumers can now buy the same quality of sweater for less money, or a much better one for the same money. If they buy the same quality of sweater, they not only get the sweater, but they have $5 left over, which they would not have had under the previous conditions, to buy something else. With the $10 that they pay for the imported sweater they help employment—as the American manufacturer no doubt predicted—in the sweater industry in England. With the $5 left over they help employment in any number of other industries in the United States.

But the results do not end there. By buying English sweaters they furnish the English with dollars to buy American goods here. This, in fact (if I may here disregard such complications as multilateral exchange, loans, credits, gold movements, etc. which do not alter the end result) is the only way in which the British can eventually make use of these dollars. Because we have permitted the British to sell more to us, they are now able to buy more from us. They are, in fact, eventually forced to buy more from us if their dollar balances are not to remain perpetually unused. So, as a result of letting in more British goods, we must export more American goods. And though fewer people are now employed in the American sweater industry, more people are employed—and much more efficiently employed—in, say, the American automobile or washing-machine business. American employment on net balance has not gone down, but American and British production on net balance has gone up. Labor in each country is more fully employed in doing just those things that it does best, instead of being forced to do things that it does inefficiently or badly. Consumers in both countries are better off. They are able to buy what they want where they can get it cheapest. American consumers are better provided with sweaters, and British consumers are better provided with motor cars and washing machines.” 8

What Hazlitt is highlighting here is the division of labor. The US specializes in one area while someone else specializes in another. This is no different than you specializing in growing vegetables in your backyard and your neighbor specializing in raising chickens. An exchange can occur between the two of you and both benefit. So both Trump (and Sanders) are wrong in their economic understanding of the problem. They see MORE government bureaucracy as the solution when the REAL solution is quite the opposite. We need less government involvement in the economy, not more. And tariffs are indeed, quite a bit more. A tariff on Mexican goods, as an example, will affect the areas noted here:

“In 2015, some of the top manufactured goods included:

  • Vehicles ($74 billion)
  • Electrical machinery ($63 billion)
  • Machinery ($49 billion)
  • Optical and medical instruments ($12 billion)

America also imported a great deal of agricultural, food and beverage goods including:

  • Fresh vegetables ($4.8 billion)
  • Fresh fruit ($4.3 billion)
  • Wine and beer ($2.7 billion)
  • Snack foods ($1.7 billion)
  • Processed fruit & vegetables ($1.4 billion)” 9

So this should not come as a surprise. Trump is a politician in a lot of ways and a tariff on Mexico, or anyone else, is an attempt at obfuscating the fact that Americans are the one’s getting a tax increase. Anyone who thinks otherwise simply does not understand the points I’ve raised and cited here and therefore, should be ignored as an economic illiterate. To bring it back around to that first Mises quote at the beginning of this article: When the government attempts to diminish production in a certain area that is in demand, it can only do so through force (which is not a “free market”) and by encouraging inefficiencies at the expense of the division of labor. This hurts everyone and most assuredly will not “make America great again.”

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