Chapter 11: Who's "Protected" by Tariffs?
And the LORD spake unto me, saying, Ye have compassed this mountain long enough: turn you northward. And command thou the people, saying, Ye are to pass through the coast of your brethren the children of Esau, which dwell in Seir; and they shall be afraid of you: take ye good heed unto yourselves therefore: Meddle not with them; for I will not give you of their land, no, not so much as a foot breadth; because I have given mount Seir unto Esau for a possession. Ye shall buy meat of them for money, that ye may eat; and ye shall also buy water of them for money, that ye may drink (Deuteronomy 2:25)
God made it clear to Moses, who in turn made it clear to the Israelites, that there was to be free trade between the people of Israel and the people of Esau. There was to be no coercion. The people of Esau had goods that the Israelites wanted: meat and water. The people of Israel had what the people of Esau wanted: money. There were possibilities for voluntary exchange. The people of Israel were not in need of "protection" against the meat and water of Esau, meaning tariffs.
There is no mention of any tariff in the history of Israel in the Old Testament. There is none in the New Testament, either. The Roman Empire was a huge free trade zone. Its wealth rested on this fact. The Mediterranean had been cleared of pirates in 66 B.C. by Pompey. This increased trade. All roads led to Rome. This also increased trade.
In this incident, the owners were on both sides of the national border of Esau. There were the people of Esau, who possessed water and meat. There were the people of Israel, who possessed money. Because they had legal title to their property, they could pursue the best options available to them because of their property.
Because they owned their property, they possessed the legal right to disown it. Every piece of property was accompanied by a bundle of rights. This is the meaning of ownership: the right to use property in particular ways. One of these ways is exchange. The owners of these rights sought ways to increase their possession of more desirable goods through exchange. Who decided which goods were more desirable? Their owners.
Today, there are owners who are affected by tariffs. Buyers (customers) on both sides of a national border are owners of money. Sellers (producers) on both sides are owners of goods. They are beneficiaries of a moral and legal order that allows them to do what they want with whatever they own, including the surrender of ownership.
There are also producers of goods on both sides of the border who face competition from sellers on the other side. They own resources. They seek to maximize their income from these resources. They have an incentive to restrict competition.
The window was the legal system governing each of these nations. In the area of exchange, each civil order allowed the exchange of goods across the national border. Neither system of laws imposed restrictions on exchange. This is what free trade means.
"Free trade" usually has a more narrow focus than "free market." But they are the same. The free market is a product of a legal system that allows free trade: across the street, across the county line, across the state line, and across the national line. The institutional arrangement places owners as judicially sovereign over whatever they own. The invisible judicial lines known as borders have no economic impact on the legal rights of people on opposite sides of these borders to exchange goods.
The bundle of rights associated with the ownership of specific pieces of property is conveyed across all borders: street, county, state, and national. There are no discriminatory taxes placed on the person who is selling one form of property across a border: goods. There is equality under the law. This conforms to the most fundamental civil law of Moses: equality before the law. "One law shall be to him that is homeborn, and unto the stranger that sojourneth among you" (Exodus 12:49).
On both sides of the border, free men possess the legal right to make bids to sell goods (producers), as well as the legal right to buy goods (customers). This legal order enables them to exercise the rights of ownership. Because they possess the right to trade, they can specialize in whatever activities they do best in the marketplace -- "best" being determined by paying customers.
Tariffs are sales taxes on imported goods. These sales taxes are collected by the national civil government. They are, in the language of the criminal syndicates, protection money. But instead of protecting customers from imported goods, tariffs are imposed on importers. This reduces demand for imported goods, according to this fundamental economic: "When prices rise, less is demanded." So, the "protection money" is collected from importers. Then who is being protected? Domestic producers of the taxed items. They can more readily undercut the prices of the imported goods, plus tariffs.
The politicians of the national state come before the voters and propose sales taxes on goods that cross into the nation from abroad. The politicians are careful not to describe these sales taxes as sales taxes. Too many voters are tired of paying the existing level of taxes, let alone a new tax. So, the politicians call these sales taxes by a new name: tariffs.
Politicians not only play word games. They play logical games. They tell the voters that these sales taxes -- never called sales taxes -- will make the nation richer. Voters who would normally hoot in derision line up to support these sales taxes. After all, these taxes will make the nation richer. How? By protecting the domestic population against unscrupulous cut-throat foreigners. The phrase "cut-throat" is a code phrase for "discount."
Voters who are always in search of discounts recoil in horror at the accusation of "cut-throat competition." Politicians then add the adjective "unfair." The voters demand that the politicians take action to protect them. They demand the imposition of tariffs. Tariffs will make them all richer, they conclude. It is as if a nation of vegetarians demanded that politicians legalize cannibalism, but only after politicians re-name cannibalism as "dietary protein supplements."
The initial loss comes from having to pay a sales tax on an item that would have been be tax-free, had it been produced on this side of the border. The state gets richer at the expense of the import buyers. This pleases employees of the state, who are in a position to spend more money in their family budgets. The budgets of state bureaucrats is thereby protected from the unconscionable spending of those members of the public who bought items from abroad.
Yet this was not the argument of the politicians who persuaded the voters to accept a program of domestic protection. The voters were not thinking about protecting the incomes of bureaucrats. That is the first thing not seen by the voters.
Next, there are the losses sustained by the voters who were ready to purchase an imported good, but who did not do so after the sales tax increased the sales price. Their range of choice is diminished by higher prices. This is the second thing not seen by the voters.
Next, there are those voters who bought instead from a domestic supplier. But the domestic supplier was able to ask and receive a price higher than the price that would have prevailed, had the imported good been available without the sales tax. The difference in prices was transferred to the domestic producer out of the budgets of the buyers. This is the third thing not seen by the voters.
Next, there are the suppliers of goods and services to those voters who would have spent the money they would have saved, had they been able to buy at a lower price as a result of the lower prices. They will not make the sales. Their prospective customers are now poorer. This is the fourth thing not seen by the voters.
Next, there are the sellers on the other side of the border who did not sell to the importer. Of course the voters don't care about him, the foul cut-throat. But that ruthless cut-throat now has no domestic currency available from buyers on the domestic side of the border. Since he had no way to spend that money on his side of the border -- it all looks like play money to people on his side of the border -- he had intended to buy things on the domestic side of the border. So, those exporters on the domestic side of the border will not make a sale abroad. This is the fifth thing not seen by voters.
Then there are all the businesses that would have sold goods to the exporters. No sales for them. This is the sixth thing not seen by the voters.
Let's say that a majority of politicians come up with this sports strategy for the nation. From this point on, all foreigners choosing to compete against the nation's athletes inside the nation's borders will be forced to wear ankle braces weighing anywhere from two pounds to five pounds, depending on the skills of the domestic contenders. Will the nation's athletes win more medals at these domestic events? No doubt about it. This will increase their self-esteem, say the politicians. "We do not want to send our young people into world competition when they have no self esteem."
But, you say, this strategy will lead to fewer gold medals at the Olympics. Our athletes will not be able to compete with world-class athletes. Clearly, you do not understand the idea of fair competition in domestic sports. Those foreign athletes are nothing less than cut-throat competitors. The public prefers slower race times and lower high jumping, but more victories by nationals. It is better to forget about the Olympics. It is best to boycott the Olympics. Who needs them?
Now apply this logic to foreign economic competition.
Let us return to domestic economic competition. Because imports are restricted, domestic industries do not have to face competition from abroad. Domestic manufacturers do not keep up with the latest innovations. There is no need to.
Meanwhile, because sales taxes on imports lead to reduced exports, the export sector of the domestic economy does not grow as rapidly as it would otherwise have grown. Domestic industries are increasingly isolated from the international markets. This hands over international markets to foreign producers. This is the seventh thing not seen by the voters.
At last, we come to the winners: successful sellers of high-priced goods on this side of the border. They, their employees, and their suppliers are flush with cash. They have been protected, as promised by the politicians. But they have not been protected at zero price to the majority of the domestic population. The public has paid its protection money to the state and the minority of the special-interest groups favored by the state. These winners are visible. There are always visible winners when the state tosses a stone through a window.
We now have an answer to the chapter's title, "Who's protected by tariffs?" It is not the vast majority of voters who are protected. It is a fallacy to imagine that benefits are available, net, to the population as a result of sales taxes on imports. Haziltt was correct.
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.
Tariff politics is the politics of special interests. It is the politics of back-room deals. It is the politics of political action committees and donations to the committee to re-elect Jones.
Inherently, the vast majority of voters are uninterested in specific pieces of legislation. This is where the 1,000-page bills that no politician reads turn into 2,000-page bills that no politician reads. The voters do not follow the economic logic of all of the special-interest legislation that winds up in these bills. But the special interests are intensely interested. There is a great deal of money on the line.
Tariffs are never discussed as sales taxes. More of the voters would be alerted to the economics of tariffs if tariffs were properly labeled. There are no government laws mandating truth in labeling when it comes to Congress.
Nevertheless, there have been consistent reductions in tariffs since 1947, and especially after 1960. The General Agreement of Tariffs and Trade was set up in 1947. The percentage of the GDP of the United States generated by imports and exports has risen to about a quarter. In 1946, it was around six percent. The GATT was an international organization. It promoted managed trade, as does its successor, the World Trade Organization. But tariffs were reduced, and trade did increase.
Most economists favor free trade. Here is one area of the economy in which proponents of high tariffs cannot get support from academic economists. Also, multinational American-based corporations make far larger contributions to political action committees than small special interest groups do.
Hazlitt's concerns in 1946 had to do with tariffs, not managed trade, which had not yet come into existence. He was responding to widely held public opinion. But, in this instance, widely held public opinion has had a declining influence in governments. Large-scale special interest groups that favor increased international trade have been dominant.
Hazlitt identified the economic issue: the broken window fallacy.
Thus all the chief tariff fallacies stem from the central fallacy with which this book is concerned. They are the result of looking only at the immediate effects of a single tariff rate on one group of producers, and forgetting the long-run effects both on consumers as a whole and on all other producers.
Here is a case where the national government has decided to reduce the number of stones. I do not think Hazlitt persuaded them. This was crucial. The dominance of the U.S. economy after World War II was so great that the export sector boomed. Post-War Europe and Japan could not compete. American firms invested abroad. They became multinational. Then they shipped goods back into the United States. This raised imports, as rising exports always do. The special economic interests that were dominant politically in 1970, when international competition from Japan and Western Europe finally became competitive in the United States, favored low tariffs. So did GATT. Congress went along. One result was the destruction of the trade union movement in the private sector. Manufacturing employment declined as a percentage of the American economy. So did union membership after 1953.
The voters, paying little attention, did not fight this.
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