Updated: 1/13/20
Christian Economics: Teacher's Edition
Then the Lord said to me, ‘You have been traveling around this mountain country long enough. Turn northward and command the people, “You are about to pass through the territory of your brothers, the people of Esau, who live in Seir; and they will be afraid of you. So be very careful. Do not contend with them, for I will not give you any of their land, no, not so much as for the sole of the foot to tread on, because I have given Mount Seir to Esau as a possession. You shall purchase food from them with money, that you may eat, and you shall also buy water from them with money, that you may drink" (Deuteronomy 2:2–6).
Here, Moses recounted the story of Israel’s 40 years in the wilderness. He told this to the generation that was about to conquer the land of Canaan. He was the last of the adults of the exodus generation. Moses said that God told the Israelites to buy meat and drink with money. They had been given money by the Egyptians. Israel had gained the inheritance of many of Egypt's firstborn sons, who had all perished on Passover night. Israel had been capitalized by the Egyptians, who had illegally held them in bondage (Exodus 12:35–36). Even after the capital losses imposed by Moses after the golden calf incident (Exodus 32:20), Israelites still had money. Money is the most marketable commodity. It has the widest market of all commodities. Wherever men go, there are other men who want to exchange more specialized goods and services for money, the less specialized good. Money is the most marketable asset. This means that it can be exchanged for other valuable assets rapidly without advertising costs and with no discount.
Money is an ideal form of wealth for men on the move. It is readily transportable, easily divisible, and has a high value in relation to its volume and weight. Money was what Israel needed for a 40-year march through the wilderness. Had there been no other nations to trade with, money would have done them far less good, since men cannot eat money. But men can surely eat the food that money can buy, and there were many cultures along Israel's journey with one thing in common: a desire for more money.
Israel began its post-Egyptian existence as a trading nation on the move. Moses told them to trade with neighboring nations. He wanted free trade. That was best for the nation. It was also best for individual Israelites. This is why he did not impose tariffs or quotas. Tariffs are sales taxes on imported goods. Quotas are restrictions against imported goods. They raise no revenue. Tariffs and quotas are laws in restraint of trade. They are laws limiting the use of private property. A tariff is a way to collect taxes without investigating people’s income. If tariffs are low, then they produce some revenue. Quotas are outright restrictions.
Tariffs and quotas are state subsidies to a few domestic producers. They reduce foreign competition. Some domestic companies can then raise their prices. But an important but rarely understood effect of tariffs and quotas is to reduce exports. If foreigners cannot gain ownership of a nation’s money by exporting goods to that nation, then they cannot import goods from that nation. They do not have the foreign nation’s money. Why not? No trade. Trade is a two-way street. Both sides benefit.
There is something else. If foreigners cannot gain access to a foreign nation’s money, they cannot invest in that nation. There are businessmen who would like more capital. They don’t care who provides it if the cost is low. They would like foreign investors, but there aren’t any. By the way, this also applies to national governments who want to sell bonds to foreigners. How can foreigners get the money to buy the bonds? By exporting more goods than they import.
Because the Israelites had money, they could trade with those foreigners along the way who had meat and drink for sale. In the wilderness, meat and drink were in short supply. The Israelites possessed money, but they could not eat their money. On the other hand, the nations they passed by had meat and drink. Pre-exodus Egypt had been the richest kingdom in the region around Sinai. Now the Israelites possessed much of the transportable wealth of Egypt. A series of mutually profitable exchanges became possible. The nations had what Israelites wanted, and vice versa.
The Israelites possessed an advantage: the nations were afraid of them (Deuteronomy 2:4). Israel had just defeated Egypt. They had crossed the Red Sea miraculously. This was a demonstration of supernatural power that threw fear into the hearts of the Edomites. But God warned Israel not to use force to extract wealth from Edom. He told them to be peaceable people, for other nations lawfully possessed their own inheritances. There were legal boundaries around their possessions.
This made foreign trade a major source of increased wealth for the Israelites. Israelites would give up money, which was of low value to them, in exchange for meat and drink. Giving up money for consumer goods meant the de-capitalization of Israel's distant future. But men live in the present; they must eat and drink in the present. God allowed them to make the decision: money as part of the inheritance for the next generation vs. meat and drink in the present.
Money was less valuable to the exodus generation than meat and wine. Meat and wine were less valuable to some Edomites than money. Because each participant in an exchange values what the other has more than what he has, both of them can increase their satisfaction by a voluntary exchange. God told Moses to instruct the nation that from now until the military conquest of Canaan, voluntary exchange would be the only lawful avenue of their wealth-generating activities with other societies. They had to learn to prosper through peaceful exchange. Violence should not become a means of increasing the nation's wealth.
This command established a pattern for post-conquest relations with the nations around Israel. Israel restrained itself when it possessed what appeared to be a military advantage. Israel would not have retained an advantage, had they violated the boundaries that God had placed around the nations, but the nations did not know this. Israelites had to rely on trade to get what they wanted. This must have made an impression on the nations in the region. If anyone wanted access to the wealth of Israel, he could gain it by offering an Israelite an advantage. The Israelites were ready to trade. They were not in the empire-building business. They were in the "let's make a deal" business.
This forced wealth-seeking Israelites to become skilled bargainers. They could not rely on military force to gain what they wanted. They had to learn self-restraint. Weak nations must do this of necessity. Strong nations are wise to do this.
After the conquest of Canaan, Israel allowed foreigners to live inside her borders. The rule of law did not discriminate against foreigners who lived inside non-Levitical walled cities. They could buy and sell homes and leave an inheritance to their children (Leviticus 25:29–30). Furthermore, one law governed all traders (Exodus 12:49). This was unheard of in the ancient Near East. In all other societies, the cities' gods were local. If you did not have legal access to the religious rites of these local gods, you had no legal standing. These rites excluded foreigners and women. But Israel's God was a cosmic God. His transcendent authority was not dependent on geography. So, Israel became a place where all people could seek freedom from arbitrary civil government and gain legal protection for their property.
This was supposed to set the pattern for Israel's future economic dealings with foreign nations. Without the threat of violence facing them, other nations would come to regard Israel as a place to do business. If they wanted to benefit from Israel's productivity, they could bargain with Israelites. Without fear of confiscation, they could bring something valuable into Israel in search of a trading partner. Their property would be protected by Israelite law and custom. This safe haven for private property irrespective of national origin would make Israel a cross-roads for profit-seeking foreign traders. Egyptians could seek out Israelites or Babylonians or Hittites to do business. Israel could become one of the neutral, independent, coastal nations that served the great empires as common centers of trade.
God would soon give Israel the geographical location that could make the nation a foreign trade center. But first, He imposed a law that favored foreign nations: the protection of their property. By honoring this law prior to the conquest of Canaan, Israel would mark itself as a nation where private property was safe. Israel would become known as a trading nation rather than an aggressor nation. This reputation would position Israel as a regional trade center, bringing income from foreign traders seeking opportunities. This was part of God's program of foreign missions through law: "Keep therefore and do them; for this is your wisdom and your understanding in the sight of the nations, which shall hear all these statutes, and say, Surely this great nation is a wise and understanding people. For what nation is there so great, who hath God so nigh unto them, as the LORD our God is in all things that we call upon him for? And what nation is there so great, that hath statutes and judgments so righteous as all this law, which I set before you this day?" (Deuteronomy 4:6–8).
A buyer in a free trade nation has a wide variety of goods and services. Anyone from around the world can export goods to that nation. Digital services are also possible to sell across borders. The more choices he has, the freer he is. The more choices he has, the richer he is. This is a crucial link between liberty and wealth. The link is judicial: free trade.
A buyer may choose to buy a product manufactured locally in the same town. He is more likely to purchase services produced locally. The local community probably does not produce the brand of car that a buyer wants, or the brands of appliances. The wider the range of choices he has, the more likely that he will be able to purchase a manufactured good that was produced far away. (Note: 3-D printing may change this some day.)
A tariff or a quota reduces his range of choice. A tariff may buy him some protection from violence if the government spends this tax money on law-enforcement. But it will spend most of it on other government services: politically popular programs. The buyer’s loss of choice is probably more valuable to him that the tiny portion of government benefits attributed to his tariff payment.
Then there is the buyer on the other side of the border. He would like to have sellers from the tariff-blocked nation make offers to him. If he could get his hands on the currency of the tariff-blocked nation, he might buy something. But because sellers in his nation could not sell exports across the border, they earned no foreign currency to sell to buyers. So, buyers on both sides of the border are poorer: fewer choices.
Sellers of goods that can be produced less expensively abroad do not face as much competition as a direct result of a tariff or quota. They are subsidized by these restrictions on trade. So are their employees, who are not paid much. The investors/owners are the main beneficiaries.
But there are other sellers who are harmed: exporters. Exporters need to have buyers on the other side of the border. These buyers have to own the currency of the exporters’ nation. Where will these buyers get access to this currency? Simple: by purchasing excess currency owned by exporters in their nation. But when tariffs and quotas block foreign exporters from making mutually agreeable trades with buyers in the exporters’ nation, the exporters face a restricted foreign market. This is rarely discussed in media accounts of trade restrictions. The domestic sellers talk about all the jobs that are being saved by tariffs and quotas. They never mention the jobs that are being lost in the export sector of their nation’s economy.
Domestic sellers of goods and services other than the tariff-protected goods also are harmed. If buyers could purchase what they want less expensively from importers, they would have more money to spend on other items for sale. But because they had to pay high prices for the protected goods, they cannot spend this money. Employees of the protected firms have extra money, but investors/owners got the lion’s share. They buy luxury goods and services. The companies that would have sold to middle-class buyers do not make these sales.
My point is this: there are winners and losers in a tariff-protected nation. The protected producers are visible to the public. The victims of the trade restrictions are unknown to the public. The public cannot follow detailed chains of logic, such as what you have just read.
One of the oldest companies in the United States is Dixon Ticonderoga, which sells pencils. It was founded in 1795. In the 1980s, Chinese companies began exporting pencils to the United States. They gained 16% of the market. Dixon protested. It asked for higher tariffs. The government raised tariffs by 53%. But this failed. The Chinese kept selling cheaper pencils. By 1999, foreign producers controlled over half the U.S. market. So, Dixon set up a plant in Mexico, where labor costs were lower. In 2000, it also created a subsidiary in China, and began importing its own pencils.
The consumers are in charge. They determine what they are willing to pay for. They do not care much about who produces pencils or where the plants are located. They care about price and quality. Imports were by far the better deal after 1990, so consumers bought imports. Dixon did not blame the consumers. It blamed Chinese exporters. This is typical of all companies seeking protection from imports. They never blame consumers for pressuring sellers to improve their products and keep prices low. Instead, they blame foreign exporters who are somehow unfair. They never blame consumers for being unfair.
Tariffs have not been effective in putting a halt to pencils imported from China. It is more efficient for Chinese factories to produce pencils, despite the cost of shipping them across the Pacific Ocean. American consumers have validated the decisions of Chinese pencil manufacturers. They have bought pencils made in China.
Tariffs and quotas are restraints on trade. They limit liberty. They reduce per capita wealth by restricting buyers’ choices. Yet millions of voters who are also buyers favor tariffs. This includes voters who claim to believe in the free market. They refuse to call tariffs what they are: sales taxes on imported goods. The voters claim to believe in lower taxes. But in fact they are in favor of high taxes in this one area: sales taxes on imports. The believe that higher taxes on imports will strengthen the economy. They say they repudiate Keynesian economics, with its call for higher deficits to stimulate the economy. Yet they hold to the same view. So did Keynes. When he became a Keynesian in the Great Depression, he switched from being a free trader to being a protectionist. This was what we call today managed trade. He abandoned his earlier belief that a free market could allocate trade across borders. But he was consistent. He also argued that the free market could not allocate trade domestically. The government had to step in and manage capital.
Tariffs are unfair taxes. They violate the rule of law. If there were a fixed tax rate on all goods and services, then it would be fair. It would harm all sellers equally. But no nation imposes such a tax system. The politicians seek to get different rates on different goods. They respond to pressures from big business donors. If every importer paid the same percentage, there would be greater political resistance to high tariffs. But because there are different rates for different goods, political resistance is dispersed, while lobbying is intense. The result is an economically incoherent tax system. It is a concealed tax system. Voters are never told by pro-tariff lobbyists that a tariff is a sales tax. The voters cannot follow the logic of economics. They respond to slogans: “Tariffs protect American workers.” They never ask: “Which American workers? How many are protected? For how long? At whose expense?” At the customers’ expense. That is the famous bottom line.
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