Tariffs Protectionism Doesn’t Work
Tariffs Protectionism Doesn’t Work
Many arguments are commonly used in support of tariffs:
Infant industry – theoretically this argument has a considerable degree of validity. However, practically, the argument is carried too far. How do you determine which particular potential industries would develop a comparative advantage and be able to withstand foreign competition? When protection is a mistake, it is difficult to remove the protection. Unless there is a definite timetable, the incentive to develop increasing efficiency is weakened. This argument for tariffs has validity if it is used very carefully and controlled closely.
Protection of the home market – this argument asserts that low costs of production in other countries pauperizes American labor, and foreign goods would flood the American markets. For example, American producers would be forced to lower wage rates approximating foreign wage rates. This argument is invalid because low money wages do not necessarily mean low wage costs per unit of output. The latter is a function of two elements–money wage rates and the productivity of labor. Therefore, since free trade raised productivity rather than lower it, the above argument is invalid.
Keep money at home – this fallacious reasoning is based on the mercantilist identity of money and wealth. A higher volume of money makes no direct contribution to the real income and wealth of a country. If a country is experiencing monetary problems, central bank and fiscal policies are much more potent weapons of monetary control than is manipulation of trade balance. Therefore, this argument is invalid.
Capital accumulation – a country indeed does increase capital accumulation by imposing tariffs, but this gain is at the expense of other countries and retaliation soon follows which in the end leaves everybody losing, including the original tariff imposer. Therefore, this argument is invalid.
Standard of living and real wage – this argument is parallel to number (4), except that the imposition of tariffs eventually leads to a lower national income and wage level due to retaliation. This argument is self-defeating and invalid.
Conservation of natural resources – tariffs tend to cause extreme dependence on national resources and, therefore, our economy actually depletes its resources more quickly than if free trade existed and other countries bought our resources. Instead of conservation, there is depletion of natural resources; therefore, this argument is invalid.
Industrialization of low wage nation – quite pertinent to underdeveloped countries. However, many times the foreign competition isn’t the problem, but the paucity of capital and technical knowledge are problems. The danger of tariffs for this argument lies in the fact that the wrong kind of industries will be created. The types of industries which the underdeveloped areas can economically create and maintain are generally those which don’t require protection on any large scale because they are based on natural advantages. Again, this argument is valid if it is used very carefully and closely controlled.
Maintain employment and reduce unemployment – this argument becomes useless upon retaliation of other countries. The problem compounds itself. Also, if countries don’t retaliate, there is still a gross inefficient allocation of resources in the tariff-setting country. Alternative policies are available which would relieve unemployment at home while encouraging greater employment abroad and a larger volume of international trade. Therefore, this argument is invalid.
National defense – in particular instances there may be merit to this argument, but it becomes invalid if applied indiscriminately. We must trade to get the proper resources and conserve ours. (See #6). If the economy weakens, the military strength weakens. “National Security depends upon many factors, not the least of which is a community of economically healthy nations devoted to living in harmony and tied together by mutually beneficial trade.”[1]
Increase business size – with fully employed resources, aggregate domestic production can’t be expanded by protective tariffs; expansion in one area of the economy must be at the expense of reduced output in other fields. Tariffs tend to draw resources away from previous employments into protected industries; hence, an inefficient allocation of resources. Also, some of these reallocated resources are likely to be drawn away from production of export goods. Domestic expansion would be at the expense of the export market. Therefore, this argument is invalid.
Retaliation and bargaining – retaliation doesn’t recover the losses that are suffered due to foreign tariffs. Retaliation further reduces the volume of trade. Bargaining as a reciprocal tool; i.e., tariffs are raised and then offered to be lowered if the other countries will lower theirs. If the reciprocal agreement isn’t reached, then the tariffs usually remain. These arguments are sometimes a front for other reasons for erecting tariffs. Therefore, most of the time, this argument is invalid.
[1] U.S. Senate, “Foreign Economic Police: Report No. 2629 (84th Cong. 2nd session), 1956, p.28
