In
reality, so-called “protective” tariffs
protect no one. They actually harm the
domestic industries that they are
intended to help. Indeed, in the long
run, everybody loses when the free
market is restricted and when
individuals and companies are not
permitted the liberty to exchange goods
and services throughout the world.
Let us
consider a hypothetical tariff leveled
on, say, steel. The steel industry in
the United States might lobby for such a
tariff and has done so in the past using
the argument that the tariff will
protect it from foreign (often
state-subsidized) competitors that will
“dump” steel on the American market at
prices that domestic steel producers
can’t possibly match. The tariff, the
steel industry representatives might
argue, will tax the foreign imports
sufficiently to raise their price to a
comparable level to the price charged by
domestic firms.
Of course,
just implementing and enforcing the
tariff and arranging the administrative
machinery for it can be sufficiently
costly to taxpayers – including the very
owners and employees of the firms that
lobbied for the tariff – as to outweigh
any possible benefits. But let us assume
that the tariff has been successfully
put into place and has raised the price
that Americans pay for imported steel.
What happens then? And who are some of
the American consumers that must now pay
higher prices?
It turns
out that the steel tariff would raise
costs for
American domestic firms –
particularly those that use steel as an
input. Manufacturers of automobiles,
industrial equipment, tools, building
materials, and many other products would
be faced with far smaller profits – just
because the tariff has raised their
input costs. Thus, these firms become
less competitive relative to other firms
abroad that might not have to deal with
the same artificially high steel prices.
The government-imposed steel tariff
actually
hampers
the profitability and
competitiveness of many more domestic
industries than it helps.
Consider
how these firms might respond to an
opportunity to move their operations
abroad where steel tariffs are lower or
don’t exist. Surely, such an action
would lower their input costs and enable
them to function more effectively.
Tariffs imposed to “protect” domestic
firms actually give many domestic firms
a strong incentive to move outside the
country!
But even
the steel industry would lose in the
long run due to steel tariffs. On face,
it might seem that the steel industry
has been benefited by the “protection”
from competition that the tariffs
afford. But consider what it takes to
produce steel in mass. A steel
manufacturer would need to own a lot of
specialized machines that include
components made of… you guessed it –
steel! By hurting the domestic
industries that use steel as an input,
steel tariffs make it less likely for
those firms to develop new products that
make it easier and less costly to
manufacture steel! Thus, the domestic
steel industry is deprived of the
ability to benefit from innovations that
would have occurred in the
absence of the tariff.
Furthermore, the tariff gives the
domestic steel industry an effective
guarantee of certain levels of revenue –
at least in the short run. The steel
industry will receive this revenue
irrespective of what it does
and of whether it innovates or
stagnates, cuts costs or decides to
leave them as they are. With the
artificially high barriers to entry
created by the steel tariffs, there
exist tremendous incentives for what
economists call X-inefficiency – the
tendency of firm managers to slack off
in their efforts to maximize profit and
instead try to lead an easier life by
relying on the guarantees of protection
offered by the government’s tariff. The
result of X-inefficiency will be that
the domestic steel firms’ cost
structures will actually drift
upward
over time, leading them to
lose
any productive edge they
might have had. Indeed, all historical
evidence shows that industries can
seldom, if ever, be “weaned off” of
government protection once it starts.
Rather, inefficiencies take hold that
permanently cripple the “protected”
industry’s ability to compete with
foreign producers or domestic producers
whom the government does not aid.
Now let us
assume the worst-case scenario offered
by advocates of “protective” tariffs.
That is, let us say that a domestic
industry is
entirely driven out of business
by competition abroad. On net, even
this
change would be beneficial to
domestic industries in general, and
even, in the long run, to the specific
workers displaced by the decline of one
particular industry.
If it is
truly the case that a certain firm or
industry has been displaced by free,
open competition, then this means that
another firm or industry has a
comparative advantage over
the displaced competitor. If the firm
with a comparative advantage in
producing product A focuses on producing
just A while the displaced competitor –
who might have a comparative advantage
in producing B instead – focuses on
producing just B, a mathematical
analysis can show that both firms can be
made better off than if this
specialization did not take place.
Furthermore, this can still be the case
when one competitor has an
absolute advantage over the
other in
all
areas. So even if a foreign
firm F can produce
both
goods A and B at lower cost
than a domestic firm D, it would still
be advantageous for F to specialize in
producing A and D to specialize in
producing B, so long as F can produce A
more effectively than it can produce B.
So a
displaced domestic industry needs only
to shift its focus on producing
something else. Once the shift is in
place and the workers and managers have
been re-trained, everyone is better off
than they would have been if the tariff
had remained in place. There is no need
to fear for the fate of the displaced
workers during the transition, as it is
possible to give such workers aid
in
place of the tariff. Many
economic analyses have shown that an
outright cash grant of several
hundred
thousand dollars to each
displaced worker would generate less
overall economic waste than maintaining
any given protective tariff.
So instead
of supporting measures that achieve the
opposite of their intended effects, why
not abolish all “protective” tariffs,
give temporary aid to any workers who
lose their jobs as a result, and let
domestic industries restructure
themselves to become as productive and
efficient as they possibly can be in
free and open competition? Everybody –
both in the United States and abroad –
will be better off as a result.
Why
Tariffs Hurt Domestic Industries