Chapter 19: Protectionism
Hiram sent word to Solomon, saying, “I have heard the message that you have sent to me. I will provide all the wood of cedar and cypress that you desire. My servants will bring the trees down from Lebanon to the sea, and I will make them into rafts to go by sea to the place that you direct me. I will have them broken up there, and you will take them away. You will do what I desire by giving food for my household.” So Hiram gave Solomon all the timber of cedar and fir that he desired. Solomon gave Hiram twenty thousand measures of wheat for food to his household and twenty measures of pure oil. Solomon gave this to Hiram year by year. The Lord gave Solomon wisdom, as he promised him. There was peace between Hiram and Solomon, and the two of them made a covenant (I Kings 5:8–12).
Solomon began to build God’s temple. He wanted the craftsmanship to be superior. He could not locate such craftsmen inside the geographical boundaries of the nation of Israel. So, he approached Hiram, the king of Lebanon. He made Hiram an offer: “Now therefore command that they cut cedars from Lebanon for me. My servants will join your servants, and I will pay you for your servants so that you are paid fairly for everything you agreed to do. For you know there is no one among us who knows how to cut timber like the Sidonians” (I Kings 5:6). The two kings entered into a mutually agreeable voluntary exchange. “So Solomon's builders and Hiram's builders and the Gebalites did the cutting and prepared the timber and the stones to build the temple” (v. 18).
In order to maximize the benefits to the respective nations, which meant the benefits to the people of the respective nations, the two kings exchanged assets. The king of Lebanon provided skilled craftsmen and timber, and King Solomon provided the king of Lebanon with large quantities of food. Each king did so as a representative agent of his people.
Each of the kings understood that he could achieve his goals on behalf of his people by cooperating with the other. Each of them had different goals. In order to attain these goals, each of them needed the cooperation of the other. This is because each of them needed the cooperation of the workmen and the products of the land of each nation. Solomon could not build as fine a temple with the timbers and craftsmen of Israel as he could with the timbers and craftsmen of Lebanon. Lebanon had a great reputation for timber. We still have this phrase in English: the cedars of Lebanon. Lebanon’s reputation has carried down through time for 3,000 years.
In order to attain his goals for God’s temple and also for the people of Israel, Solomon knew that he would have to gain the cooperation of a pagan king. That king’s theology was irrelevant to the question of the legitimacy of Lebanon’s cooperation in the construction of the temple. So was the theology of the workers who would be supplied by the king. Solomon sent 10,000 men to work in Lebanon every third month (v. 14). The fact that foreigners supplied both the craftsmanship services and the wood had no bearing whatsoever on its lawfulness in the construction of the temple. The wood was in no way tainted by the fact that it had been produced in a foreign land and crafted by people holding a different faith. The fact that Solomon purchased the timber and the craftsmen legitimized the use of Lebanon’s timber and craftsmanship.
There was no restraint of trade theologically. There was no restraint of trade liturgically. The theological confession and future ritual participation in Israel were in no way compromised by the fact that foreigners had been vital in the construction of Israel’s central manifestation of the presence of God in the land. “The word of the Lord came to Solomon, saying, ‘Concerning this temple which you are building, if you walk in my statutes and do justice, keep all my commandments and walk in them, then I will confirm my promise with you that I had made to David your father. I will live among the people of Israel and will not forsake them’” (I Kings 6:11–13).
There were no judicial barriers to trade. There were no import quotas established by either king to restrain the quantity of goods and labor services imported from other side of the border. There were no tariffs, meaning sales taxes, on imported goods. There was open trade, meaning open exchange. Each king recognized that he would be better off, and his people would be better off, if there were no restraints on trade. Each king recognized that he could achieve his goals less expensively by refusing to establish any restraints on exchange.
There was specialization in the construction of the temple. The craftsmen of Lebanon were legendary for their skills. These skills were not available from craftsmen in any other nearby nation. The quality of the wood was not available from any other nearby nation. It was clear to Solomon that the aesthetic value of the temple as a place of worship would be increased by means of imported goods and services.
Here we see the principles of free trade in action. One of these principles is the specialization of production. Specialists can produce higher quality goods and services than can be attained at the same price when produced by nonspecialists. The Lebanese timber workers were specialists. On the other hand, the king of Lebanon saw that it would be wiser to import food from Israel than to attempt to produce the same quantity of food inside the borders of Lebanon. It was to his benefit, and to his people’s benefit, that the Israelites exported food. The Israelites were producing food on behalf of the Lebanese. The Lebanese were producing crafted timbers on behalf of the God of Israel and the people of Israel. The Lebanese workers probably did not care whether or not God would benefit from their craftsmanship, but they knew they would be fed well. They may not have cared one way or the other about the satisfaction of the Israelites with the quality of the temple, but they cared about their own empty bellies.
The servants of the king of Lebanon served the God of Israel and the people of Israel. The people of Israel did not serve the gods of Lebanon. But they did serve the people of Lebanon. The reason why the people of Israel were not serving the gods of Lebanon was this: God is the God of the whole world. He is sovereign. He is the owner of all the world. When a God-fearing person acts on behalf of a customer by providing high-quality goods and services, he is serving the sovereign God who owns the world. He is not serving whatever deity is worshiped, or not worshiped, by his customer. This is the nature of the covenant that God established with Adam in the garden (Genesis 2). It was actually established before Adam’s creation (Genesis 1:26–28). By serving someone else’s economic goals, a covenant-keeper is in no way responsible for the customer’s covenant with his own god. Put differently, the customer’s confession of faith is not a covenantal issue with respect to the legitimacy of trade. This is why covenant keepers are encouraged to establish exchange relationships with covenant-breakers. The God of the Bible is sovereign, not the gods of the various covenant breakers. When covenant-keepers establish mutually beneficial trade relationships with covenant-breakers, this might seem to extend the kingdom of the covenant-breakers alongside the extension of the kingdom of God. But this is not the case. This is because God is sovereign; all other supposed gods are not. The wealth of the sinner is laid up for the just. We learn this from Solomon (Proverbs 13:22). So, when a covenant-keeper enters into an exchange relationship with a covenant-breaker, thereby enabling the covenant-breaker to achieve his goals less expensively, he is increasing the future inheritance of covenant-keepers in history.
This is why the Bible does not authorize restraints of foreign trade imposed by civil governments. Such restraints restrain the construction of the kingdom of God in history. The construction of the temple is the archetype of this principle of trade. This is not an argument against tariffs when they are used exclusively for raising revenue. Every tax is a restraint of trade. But it is an argument against all forms of import restrictions that are not exclusively revenue devices.
Had there been restraints of trade between Lebanon and Israel, this would have reduced the productivity of workers on both sides of the border. The workers on both sides of the border would have been poorer. Their income would have been lower. This is because they would have been less productive. To maximize their production, they needed to specialize. But the biggest loser in the arrangement would have been God. He wanted a temple. He wanted a high-quality temple. The only way for God to get what He wanted was through the skills that He had imparted to covenant-breakers in Lebanon. Free trade enabled Him to get what He wanted.
Once we understand this argument, then we should be able to understand why restraints on trade across national borders make people on both sides of the border poorer than they would otherwise have been. In short, protectionism reduces wealth. It makes people poorer than they otherwise would have been. We know this because free trade makes people richer than they otherwise would have been.
In the case of the king of Lebanon and King Solomon, each of them had individual goals. Each of them was a judicial representative of his respective populations Each of them had lawful authority. Each of them imputed value to his own goals. But each of them also did so as a representative agent. So, there was an individualism that underlies the exchange between the two kings, but there was also a corporate element. Each of them did this on behalf of his respective nation. That is to say, each of them did it with respect to the people in his nation.
If the exchanges had been made by private citizens on both sides of the border, this would not have made a difference in the economic logic of the exchanges. In each case, the citizens would be better off as a result of the exchanges, or at least they believed they would be better off before they entered into the exchanges. Otherwise, they would not have entered into the exchanges. We know from the logic of the case of Solomon and Hiram that the people in both nations were also better off as a result of the exchanges between the two kings. In short, free trade benefits the one and the many. Free trade benefits the corporate entity that we call the nation, and it also benefits the individuals who are covenantally part of the nation.
The false logic of protectionism denies the accuracy of this analysis. Those who favor restraints of trade imposed by the national civil government argue that the nation (one) and also the people residing in the nation (many) will be better off after import quotas or import taxes are imposed. They rarely mention what will happen to people on the other side of the border. But, if pressed to answer, they argue that people on the other side of the border will be harmed economically. In other words, restraints on trade benefit only people residing in the protectionist nation. They will be better off at the expense of those on the other side of the border.
This logic is opposed to the logic of exchange. The logic of exchange tells us that both parties in the exchange are better off after the exchange. It does not matter that there is an invisible judicial line called a national border separating the two people who make the exchange. The free market economist argues that exchange leads to net benefits for both of the parties involved in the exchange. In short, the benefit of one of the parties does not come at the expense of the other. They both benefit.
It is an ancient fallacy that the profit of one of the parties comes at the expense of the losses sustained by the other. This argument goes back to a French essayist in the late 1500s, Michel de Montaigne. His essay’s title conveys his argument: “The Profit of One Man Is the Loss of Another.” Ludwig von Mises called this the Montaigne fallacy. What Montaigne described is accurate with respect to a rules-structured game in which betting is involved. The winner in such a game is the beneficiary at the expense of the loser. The game does not create wealth. It merely redistributes wealth that players bring with them into the game. Each player expects to win at the expense of the losers. This is not true of participants in the market process. This is why the mathematical analysis of games does not apply to the free market. This is because there are no “rules of the game” in the market’s competitive pricing of assets. Market pricing is a system in which entrepreneurs deal with economic uncertainty. There are no known mathematical patterns. In contrast, games are governed exclusively by risk, which is governed by mathematical patterns. Uncertainty is different from risk. This was first explored in depth by a young economist, Frank H. Knight, in Risk, Uncertainty, and Profit (1921). Mises agreed with Knight on this point, as he wrote in Human Action (XV:8, note 18) So does Mises’ disciple, Israel Kirzner.
People bring valuable knowledge and property into the free market social order. They seek to better their conditions through voluntary exchange. They exchange knowledge or property in the broadest sense—ownership claims—for what they regard as more valuable knowledge or property. This creates wealth when both parties forecast their personal outcomes correctly. Both parties win. This is how individual wealth increases. It is therefore how social wealth increases.
It is worth noting that Montaigne’s analysis also applies to the competition between God and Satan for covenantal allegiance of people. A person is either a covenant-keeper or a covenant-breaker. Whenever someone is converted to saving faith in the God of the Bible, the kingdom of Satan suffers a loss. But there is no exchange relationship between God and Satan. Rather, this a battlefield of souls. This competition is not part of the market process.
Protectionism launches a debate about restricting trade across national borders. It is never a debate about restricting trade across state, county, town, and city borders.
1. A Single Logic
This raises a question: why is the logic presented by defenders of protectionist sales taxes and quotas not equally valid to regional borders inside a protectionist nation? If economic logic is universal, then it has to apply on both sides of every border. Protectionists admit this with respect to borders inside the nation. They reject it with respect to their nation’s border.
I have never heard anybody argue that there should be a sales tax imposed on goods imported from across the street, across town, across the county, or across a state border. Such a suggestion would not be taken seriously by economists, and it is unlikely that it would be taken seriously by legislators. But, with respect to a national border, tariffs and quotas are almost universally imposed. Tariffs are sales taxes on goods imported from outside a nation. A quota is a restriction on the number of imported goods allowed per year. A national government collects no taxes from a quota, and it must spend tax money to enforce it. These import restrictions are imposed at the border by customs agents. These restrictions have proven to be cost-prohibitive to enforce when goods are delivered by air carrier. They are impossible to enforce with respect to information sold on the World Wide Web. An increasing percentage of international commerce is delivered digitally across borders. So, tariffs applied to a relatively small percentage of international commerce. In the United States as of 2020, it is about 1% of total revenue is generated. Around the world, it is something in the range of 3.5%. The amount of money collected from tariffs is so minuscule that they are not taken seriously as revenue sources. Therefore, they exist only because of special-interest political pressure groups that want protection from imported goods that are sold less expensively than domestically produced goods. The economic function of tariffs has to do with protection, not revenue.
The logic of tariffs is worth considering, but not because tariffs have much effect in international commerce. It is worth considering because the fallacies of trade restrictions have been widely believed for half a millennium. The most famous defenders of tariffs are collectively known as mercantilists. They were dominant in England from the late 1600s until the publication of Adam Smith’s refutation of mercantilism, Wealth of Nations, in 1776. The debates continue to go on, but they are almost always debates between academically trained economists, who are almost universally defenders of free trade, and representatives of specific special-interest groups that seek to persuade politicians to enact tariffs in restraint of trade. Sometimes one of these groups will hire a trained economist, but these economists take a stand in opposition to what they were taught at the university. They are economists for hire. They and their arguments are not taken seriously by the vast majority of academic economists. This is because their arguments are logically faulty. They involve the fallacy of applying rival arguments of what will happen on both sides of the border. Mises called this error polylogism: multiple logics.
2. Smith, Jones, Green, and Brown
It is best to begin economic analysis with a discussion of the decision-making process of individuals. It is much easier to understand arguments that begin with individuals. We understand our own decision-making process.
Let us say that Smith is a buyer of some good. Jones is a seller of that good. They both live on the same side of the street. Smith traditionally buys the item from Jones when he runs out of the item.
Green moves in across the street. It turns out that he sells an item similar to the item sold by Jones. He sells the item at 20% less than Jones does. He is nevertheless able to make a profit.
Smith decides that he wants to buy the item from Green. This is no surprise.
This upsets Jones. He has suffered a decline in income. He tries to persuade Smith that Smith should buy the item from him. But Smith prefers a lower price. So, Jones makes an emotional appeal. Smith should not be buying the item from Green because Green lives on the other side of the street. Jones says that people on the side of the street where he and Smith live should stick together. They should only buy from each other. He defends this in the name of an economic philosophy: “this side-ism.” Smith is not impressed. He doesn’t care which side of the street the seller lives on. He cares about the price.
Jones then goes to Brown, who also lives on his side of the street. He says that Brown should join him in a crusade to save the way of life on this side of the street. To achieve this, the town council must impose a sales tax on anything produced on the other side of the street. This will protect producers on this side of the street.
Brown is not skilled at understanding economic cause-and-effect. He also does not understand the judicial principle of the rule of law: the same law should apply to everyone. So, he and Jones go to the local town council to persuade its members to impose a tariff on goods produced on the other side of the street. Jones does the arguing. He says that the community will be benefited on the basis of this side-ism.
I ask: should the town council agree to pass such a law? Is it economically logical? Is it judicially logical? Is it morally valid? No. Also, it would create a nightmare of enforcement problems: imposing tariffs down the middle of every street in town.
Now apply the same logic to the border of a city in relation to the contiguous county. County politicians will see that this is ridiculous. They will appeal this to the state supreme court or some higher jurisdiction. They court will reject the city’s plan.
The result is this: Jones must learn how to compete with Green. If he fails to do so, he will go out of business. Eventually, Brown will probably see that it is better for him also to buy from Green. The result is what we call free trade.
2. Smith, Jones, Green, and Wong
I will extend the argument. A new seller appears on the scene. He sells the same item that Green sells. Jones has learned to compete, so that he can almost match the price offered by Green. The new seller is named Wong. He sells the item at 20% less than Green does, and 21% less than Jones does. He is able to do this because he has a cousin in China who has hired him as the local distributor. His cousin produces the item inexpensively. He passes on the savings to anyone who will buy from Wong.
Smith is impressed. The quality of the product is just as good. He can save 20% by purchasing it from Wong. He starts buying from Wong.
At this point, Green and Jones get together. They decide they had better get the town council to impose a tariff against the products sold by Wong. But the council is not allowed to do this by state law. The council has to apply the same sales tax on every item sold inside its jurisdiction. It is not allowed to discriminate between one seller of the item and a rival seller of the same kind of item. The state government supports this principle, and so does the national government.
So, Green and Jones get together with other sellers of the same product all over the nation. They set up an organization to promote the sale of the item by producers who are located inside the nation. Then they hire a lobbyist to go to representatives in the national legislature. The lobbyist argues that Wong should not be allowed to sell at such low prices inside the national boundaries. There needs to be a tariff placed on the importation of this particular item. The lobbyist also offers to make a substantial donation to the political action committees of key politicians in the national legislature. The politicians need this money for their next political campaign to get reelected. So, they pass a law imposing a tariff of 20% on all items imported from outside the nation.
The winners here are Green and Jones. They can keep their prices high because they no longer face competition from Wong. Let us not forget the politicians who passed the law. They receive campaign contributions from the special-interest group that wanted the tariff. They are winners.
There are also losers. In Section A, I wrote about winners. In a voluntary transaction, both the buyer and the seller are winners. Both parties are buyers and sellers. By tradition, we call the person who sells money (gives up ownership) the buyer, and we call the person who sells a product or service the seller. But, analytically speaking, they are both buyers and sellers.
With tariffs, there are always losers. This is because tariffs involve state compulsion. The state has imposed an economic penalty on anybody who imports a product. He must pay a sales tax, called a tariff. So, let us consider the losers. One loser is Smith. He will have to pay more money for the item. This means that he will lose money. He will not retain as much money after he has purchased the item. Next, let us not forget about Brown. He also will have to pay more money for the item. There is a third loser: Wong. He had a good business going, but now it is no longer competitive. He will lose money. There is a fourth loser: Wong’s cousin in China. He will also lose money.
3. Different National Covenants
Jurisdictional boundaries inside a nation’s borders are marked by regional and local borders. These are judicial designations. Those people living inside a specific jurisdictional boundary are also part of a national covenant. National covenants differ from each other. Citizens within a nation’s boundaries are obligated to obey the laws within the national borders and also within the jurisdictional boundaries of the regional civil governments in which they reside.
An argument against free trade can be made on the basis that national legal orders are different from each other because of covenantal differences. But, in the case of trade between Solomon and Hiram, the text specifically says that the trade involved cooperation between the covenantal representatives of the two nations (I Kings 5:12). There was nothing wrong with trade between Solomon and Hiram, which meant there was nothing wrong with trade between Israel and Lebanon. The covenantal gods were different in the two nations, but trade was valid.
A familiar case against free trade is that residents in a foreign nation provide some crucial product or service to the residents in the other nation that would be vital in a crisis, such as a pandemic or war between the two nations. The foreign government might prohibit residents from exporting.
There is also a case for export controls of weaponry to a nation that could become a military threat. Who should decide? The military. Generally, military strategists do not pressure their governments to restrict exports of most weapons. Nations rich enough to have an extensive defense industry have policies of exporting almost all types of the nation’s weapons to any nation that will pay for them. Certain key weapons systems are retained as monopolies, but these constitute such a small fraction of total GDP that their value is essentially unmeasurable. These export controls have no impact on the economies of either the exporting nation or the potential importing nations. In other words, they are economically irrelevant.
Someone may argue in favor of tariffs against the import of some resource that would be important because of military considerations. This creates dependence on that foreign nation. The best response is this. The politicians should ask the strategists within each branch of the military if any item is so important that the branch of military will pay for the same items produced in the United States at higher prices. Each of the branches of the military would then pay for these purchases out of its own budget. Therefore, this branch of the military would suffer a reduction in its budget for other services within its budget. This would force the military to pay the price of maintaining any industry that the military says is crucial for fighting a future war. If something is so crucial for fighting a war that the military does not want to become dependent on from outside the nation, the military should pay for it. By forcing the various branches of the military to pay extra money for the items that they say are crucial, at the expense of the remainder of their budgets, the legislature would silence most of the requests from the military for the domestic production of their supplies.
There is always a threat that a foreign nation may specialize in the production of a crucial product line, such as medicines. In the year 2020, Chinese firms were major producers of medicines and medical equipment. A province suffered a pandemic early in the year. But Chinese manufacturers continued to export medicines and equipment to the United States and the rest of the world. The government did not prohibit these exports. As long as peaceful relations are maintained between China and any other nation, China’s government would have no cogent economic reason to stop exports. To prohibit exports would increase the cost of military hostilities between China and any nation that had become dependent on imports from China. This is another reason to favor free trade. It promotes peace. How? Because it imposes a high cost on conflict. Those individuals or nations who are fighting must then produce their own goods and services. This reduces the specialization of production, thereby raising the costs of production and reducing output per unit of resource input. This was one of the reasons why God cursed the land in Genesis 3:17. I have discussed this in Chapter 12 of my commentary on Genesis.
Defenders of tariffs are either unaware of the fact that tariffs reduce exports. They simply do not understand the relationship between tariffs and exports.
Whenever an exporter in one nation sells his output to an importer in another nation, he sells for money. The money that he sells for is the monetary unit that is used in his own nation. This money is part of his nation’s banking system. A farmer in the United States who sells food to an importer in China does not want to be paid with China’s national currency, the yuan. He wants to be paid with United States dollars. He can spend dollars locally or on the Web. He cannot spend yuan.
In order for an importing company on the other side of a national boundary to purchase goods or services from across the border, it must have an account in a bank that is located inside the jurisdiction of the exporting nation. The importer uses money in its foreign bank account to buy the items. Its bank then transfers digital money of the exporter’s nation to the account of the exporter.
How does an importer on the other side of a border set up a bank account inside the exporter’s nation? He sells something of value to someone in the exporter’s nation. This is another way of saying that he buys this money. He buys it by selling something of value. If he cannot sell something of value to someone in the exporter’s nation, he must sell something of value to another foreigner who sold something of value to someone in the exporter’s nation. In short, if someone living outside a foreign nation wants to buy something from someone inside a foreign nation, he must sell something of value to someone inside that foreign nation. Put simply, trade requires trade. Simple, isn’t it? But protectionists do not believe this.
Digital money does not cross borders. It stays inside the banks of a specific nation. What is exchanged is ownership of digital money. Digital money stays inside computers. Money inside a bank account is digital. It is under the control of a national central bank. Example: U.S. dollars are in banks that are under the jurisdiction of the Federal Reserve System, the central bank. Example: yuan (also called renminbi) are in Chinese banks that are under the jurisdiction of the People’s Bank of China. Bank accounts denominated in yen stay inside banks that are under the authority of the Bank of Japan.
Goods cross borders. Money does not. Well, almost no money crosses borders. Physical paper bills issued by the Federal Reserve System do cross borders. Low-income day laborers from foreign nations who work for wages that are paid in paper currency inside the United States often send some of this money to relatives in their home countries, predominantly Mexico and Central American nations. United States paper dollars circulate in some Third World countries as a second currency. There are foreign markets that trade in U.S. dollars. This is true of no other currency. It has been a unique situation in the postwar world after 1945. This was not true from the 16th century until the middle of the 19th century. Spanish silver coins circulated throughout the West. Spanish silver dollars served as a major currency for colonial North America for three centuries. They were widely used in United States until 1857. This was also true of British gold sovereigns. But, with the abolition of the gold coin standard in most European nations with the outbreak of World War I in August 1914, currencies of one nation no longer served as money in other nations.
In order for most goods and services to cross borders, the ownership of digital money in banks must change on both sides of the border. (The main exception is paper currency for illegal imported addictive drugs, which are sold for paper money. The U.S. dollar is the primary currency in these markets.) Individuals and corporations own digital currencies in banks inside their own nation. If they want cooperation from anyone outside their nation, they have to provide goods and services to someone outside their nation. The same is true of everyone on the other side of the border. Economic cooperation is based on this: a transfer of ownership of digital money. This means that any restriction on imports from one nation must reduce the value of exports to the exporter’s nation. If someone on the other side of a national border cannot gain ownership of digital money in an exporter’s nation, that person cannot purchase anything exported from the exporter’s nation. This is why a tariff has the same economic function as a tax on exports. As surely as a tax on exports reduces trade, so does a tax on imports reduce trade.
Tariffs reduce trade because they decrease the ability of someone in an exporter’s nation to gain ownership of digital money in bank accounts inside the nation whose politicians have imposed tariffs on imports. Therefore, some people on the other side of the border who would like to buy exports from the nation that has just imposed tariffs on imports are unable to do so. They would like to gain ownership of money deposited in some bank inside the nation that has just imposed tariffs, but they cannot do this. They cannot do this because they cannot sell something of value to someone who has a bank account inside the nation that imposed tariffs. Why not? Because the tariffs have increased the domestic prices of items inside the nation that imposed the tariffs. An increase in domestic prices of imported goods was why the special-interest group pressured the legislature to impose the tariffs. That is the whole point of tariffs. Tariffs are supposed to reduce trade, and they do. This means the tariffs reduce the ability of people on both sides of the national border to sell something to people on the other side. People on both sides want to own money in banks on the other side, so they can buy things. But they cannot gain access to that money by selling something of value. People on both sides are thwarted by the tariffs on one side. Exporters on both sides are thwarted. Importers on both sides are thwarted. They cannot make deals with each other because tariffs on one side reduce the number of deals on both sides.
The logic of tariffs is this: tariffs reduce the volume of imports into a nation. This logic is correct. When the price of something rises, less is demanded. This is what economic theory teaches. But the logic of tariffs works in the same way on both sides of the border. When there is less trade, people on the other side of the border cannot purchase as many goods and services from exporters on this side of the border. Therefore, the logic of economics tells us that trade will be reduced for both importers and exporters on both sides of the border. Buyers on both sides of the border who would otherwise have purchased something from someone who lives across the border will not be able to do so. Why not? Because it now costs more than before to make exchanges on both sides of the border.
Supporters of tariffs never speak publicly about the fact that tariffs reduce income to the export sectors of the economy. A tariff benefits members of a special-interest group that seeks reduced competition from imports, but it also necessarily reduces the income of exporters. Because most people do not understand economic theory, especially politicians, they do not understand that a tariff has the same economic effect as a tax on exports. People who would not want to see the government impose a tax on exports nevertheless call for higher tariffs. This is because they do not understand economic theory. They do not understand that the logic of tariffs leads to an inescapable conclusion: higher tariffs on this side of a border reduce exports from this side of the border. Because would-be sellers on the other side cannot sell their goods on this side because of the tariffs, they cannot get ownership of money on this side to buy from sellers (exporters) on this side. This is the price of “this side-ism.” It is bad economic theory. It therefore produces bad economic results whenever it is implemented by a national government.
The logic of free trade is this: voluntary exchange increases producers’ output. It does so because each producer can specialize in whatever he does most efficiently. His output increases, so his wealth increases. By furthering specialization of production, voluntary exchange leads to greater personal wealth. It therefore also increases the wealth of societies that are involved in extensive voluntary exchange across national borders. We often call these societies “nations,” but that is too restrictive. The concept of society includes all organizations within a particular geographical area: families, businesses, voluntary associations of all kinds, and individuals living within a geographical region. This was the argument of Adam Smith in 1776. It is surely the implication of the exchange between King Hiram and King Solomon sometime around 1012 B.C. Because this is true, it should not take much creative thought to come to the conclusion that tariffs reduce people’s wealth because they reduce voluntary exchange. Tariffs reduce the specialization of labor. They reduce the output of most people in a society.
Most people do not understand the case for free trade: the case for personal liberty. No one who understands the case for free trade should promote tariffs in order to protect a special-interest group. Yet we find people who claim to be supporters of the free market who simultaneously affirm their belief that protectionism, meaning tariffs and quotas, will increase the wealth of the nation that imposes them. This means that they do not understand the case for free trade. They do not believe in voluntary exchange as a way to increase the wealth of individuals on both sides of a border. A tariff can increase the income of members of a special-interest group that has persuaded politicians to impose and then enforce tariffs. But this increased wealth of a tiny segment of the population is paid for by the reduced productivity and reduced range of choice (liberty) enjoyed by those people who are not part of the special-interest group.
People who favor protectionism do not think as economists. They do not understand economic theory. This is why free trade is a litmus test for economic theory. This is why opposition to protectionism is also a litmus test for economic theory. I hope you passed the test. If you need additional evidence, read my book, Protectionism and Poverty (2020).
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