Back to Basics: Whom Does a Protectionist Measure Hit?
By Pierre Lemieux
When he announced broad tariffs against Chinese imports, President Donald Trump said about the trade deficit, “It’s out of control” (“U.S. To Apply Tariffs on About $60 Billion of Chinese Imports,” Wall Street Journal, March 22, 2018). What this means is that American consumers and businesses who import goods from China are out of control, and the federal government will control them.
With threats of retaliation and trade war, indeed with just the standard talk of “concessions” in ordinary trade negotiations, we tend to forget one simple and basic fact: a state’s protectionist measures are imposed on its own citizens or subjects.
Protectionist measures include taxes called tariffs or duties, import quotas, or straight import bans. Straight bans are rarer, but they exist: an example I mentioned in a recent Econlog post is the prohibition of hiring foreign ships to transport goods between American ports (mandated by the Jones Act of 1920). But a tariff set at a prohibitive level is equivalent to a ban: there were many examples in 19th-century America. Contemporary examples include the 50% tariff duty on alcohol and the 100% duty on tobacco in the United Arab Emirates. A tariff is always a sort of ban because it forbids importing without the state taking a cut (and thus increasing the price of the imported good).
One key to understanding this is to grasp an elementary but important point: a tariff (or its equivalent) generally ends up being paid by domestic purchasers, since they translate into a higher domestic price. Foreign producers pay the tax, but get reimbursed by the higher price they can charge in the protected market. It is precisely to increase the domestic price they get that domestic producers lobby for the tariff.
Most protectionist measures hurt foreign exporters too, for their market is thereby limited and they may have to compensate by producing less profitable goods. But this is an indirect effect of the direct action of a state forbidding something to its own citizens.
The fundamental problem with protectionist measures is that they interfere with the benefits of exchange: they prevent the realization of the mutual benefits of a voluntary exchange between two parties, one of whom is a citizen or subject of the state that imposes the measures. If an American imports a solar panel or a bed from a Chinese producer, both believe they benefit from the exchange; otherwise, one would have walked away from the deal. The argument is not changed by the presence of intermediaries such as Walmart or the car company that imports steel in order to manufacture the car that a consumer wants.
Reciprocity cannot be an argument against free trade. Any voluntary trade is reciprocal by its very nature: one party pays for something he (or it) thinks is worth more than the asking price; the other party gets a payment that he thinks is worth more than what he sells. Only collectivist reciprocity can be an argument, when the state decides what individuals will exchange at which conditions.
It is true that a voluntary exchange harms third parties–if we adopt a very general and neutral concept of “harm.” Suppose you buy a lawn-mowing service from a gardener. Some of the latter’s competitors have lost the sale (although the more customers in market, the less noticeable this harm will be). Also, other potential buyers have been overbid by you, one of the successful buyers. The typical free-market price is the result of an invisible auction: it is the price at which the winning bidders have outbid others. These harms are ignored because they are merely transfers in the sense that one wins what the other loses. On the contrary, coercive restrictions on exchange create harms that are not compensated by larger gains. This is the standard economic argument for free markets.
An indication that harms to disappointed competitors and losing bidders should not count is that otherwise the argument against free international trade would also apply to free domestic trade. In both cases, as we know, trade enriches most people. But can’t foreigners be discriminated against? Even if you answer yes, you must remember that a tariff first hits the residents of the country whose state imposes it.
Even as tariffs favor domestic producers, the harm they cause to consumers is larger. I give an example with the case of washing machines in an article in the Spring issue of Regulation. Generally, moreover, the favored producers are located in different regions than the harmed consumers (or purchasers). Protectionist measures harm some fellow citizens in order to respond to the rent-seeking of other fellow citizens. In 1872, Congressman Samuel Cox (D-NY) understood that. As he put it, protectionism steals from consumers somewhere in the country in order to give to producers elsewhere. He sarcastically declared (I borrow the quote from Douglas Irwin’s extraordinary history of foreign-trade policy in America):
Let us be to each other instruments of reciprocal rapine. Michigan steals on copper; Maine on lumber; Pennsylvania on iron; North Carolina on peanuts; Massachusetts on cotton goods; Connecticut on hair pins; New Jersey on spool thread; Louisiana on sugar, and so on. Why not let the gentleman from Maryland steal coal from them? True, but a comparative few get the benefit, and it comes out of the body of the people.
Some argue that retaliation can be productive if it succeeds bringing a foreign government to repeal its own protectionist measures (that is, to stop harming its own subjects). One problem with this argument is that retaliation can also have no effect on foreign protectionism or even start a trade war, making everybody worse off. In this perspective, Adam Smith prudently wrote, but he gives a well-deserved jab to politicians at the same time:
There may be good policy in retaliations of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. … To judge whether such retaliations are likely to produce such an effect, does not, perhaps, belong so much to the science of a legislator, whose deliberations ought to be governed by general principles which are always the same, as to the skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs. When there is no probability that any such repeal can be procured, it seems a bad method of compensating the injury done to certain classes of our people, to do another injury ourselves, not only to those classes, but to almost all the other classes of them.
Another protectionist argument is that it is legitimate to restrict trading with foreigners who live under a tyrannical government or who man its state corporations. But this also amounts to coercing a state’s own citizens into not participating in exchanges that each individually believes is beneficial to him. And there is something fishy in the argument that trade with individuals dominated by foreign tyrants, or even trade with foreign tyrants themselves, should be forbidden. Except perhaps in extreme cases, the argument amounts to the following: The government of a free country should prevent its citizens from trading with the subjects of a non-free country. Find the error.