Many Americans today, especially Republicans, hold the view that it is better to buy goods that are made in America. As a result, they support tariffs on imported goods, so that consumers are encouraged to “buy American.” Somehow they think this is a way to increase the wealth of Americans. They think Americans will be better off if “the money stays within the country.” However, this is a myth that is rooted in the fallacies of protectionism and mercantilism. Tariffs can not create wealth; no legislation can. However, they will impose just as much harm economically on one side of a border as on the other.
Tariffs are a Sales Tax
Tariffs are sneaky; they hide what they truly are under their fancy name, tariff. In reality, tariffs are a discriminatory sales tax. When someone purchases and imports a specific foreign good, it is taxed at a certain rate. The purchase of a good is taxed, therefore it is a sales tax. But why is it that tariffs get evaluated differently from their brother normal sales taxes?
Most Republicans are against sales taxes and for good reason. Sales taxes decrease the wealth of the average consumer by making it more expensive to buy the goods that they want. This is the effect of all taxes. An individual will have less money to spend on either consumer or capital goods. Therefore, consumers will be able to buy fewer goods. Additionally, the productive sector of the economy will shrink as less money is being spent on capital goods. Sales taxes are just another way for the state to steal money from the populace. It is a way for the state to gain revenue, not benefit the public. But, why don’t tariffs receive the same scrutiny; they are after all just another form of sales tax?
There is one main difference between normal sales taxes and tariffs and that is that tariffs are discriminatory. Tariffs tax specific imported goods and not others. This is where protectionism comes into play. People claim that we need tariffs to “protect” certain domestic industries from foreign competition. Does this benefit the average American? Does this make the average American more wealthy? Remember tariffs are a sales tax and have the same effects as one. Therefore average Americans aren’t going to benefit; they will be paying more money for their goods. So, who are the real beneficiaries of tariffs?
The Actual Beneficiaries of Tariffs
The actual beneficiaries of tariffs are inefficient domestic producers. Tariffs make it so inefficient domestic producers face less competition. Their foreign competitors are taken out of the market (or reduced to insignificant competitors) by the tariffs. This is because consumers will be less likely or unable to buy the foreign competitor’s good because it artificially costs more because of the tariff. In this “protected” market consumers will have to buy from the domestic producers. This gives the domestic producers a captive market. They will have a much easier time selling their product because they have less competition.
Another byproduct of the decrease in competition is that domestic producers have fewer incentives to innovate, improve their product quality, or offer a better price. Therefore, the price of the goods made by the domestic producers will also tend to go up. They will not go over the price of the foreign companies, but nevertheless their prices will go up. Obviously, this doesn’t benefit the consumer; they will be paying higher prices across the board and have less choice in the products they can buy. However, it is a great benefit to inefficient domestic producers who can’t compete with foreign companies. With less competition they don’t have to offer as good of a product or deal. They will be able to keep their inefficient business operating instead of going under.
Tariffs Affect on Exports
Protectionists often favor exports, but they don’t realize that tariffs affect exports just as much as they affect imports. Tariffs will lower the amount of exports to the country that has had tariffs imposed on it. For example, if the U.S. put tariffs on Chinese goods to lower imports, it will also lower exports from the U.S. to China. This happens because Chinese people will have a harder time getting U.S. dollars. People in the U.S. will have decreased the amount of Chinese goods they buy because of the tariff. Therefore, the Chinese will not have access to as many U.S. dollars as they did before because Americans have stopped trading their dollars for Chinese goods. With less U.S. dollars the Chinese are unable to buy as many American made products, thereby decreasing U.S. exports. Protectionists don’t realize that tariffs are a double-edged sword. The export industry alongside consumers is one of the main losers in the tariff game.
Why Only Have Tariffs at National Borders
If tariffs create wealth and prosperity as protectionists claim, then why not institute them at state borders, town borders, or household borders? What is the economic difference between a national border and a state or town border? They are all invisible judicial lines. They all determine taxes, voting, and specific laws. Does it make sense to impose a tariff on goods that are imported from a different county? If tariffs make people more wealthy, then why not? The money will be more likely to stay within the county, which will strengthen the county economy.
This is clearly preposterous. If a county were to put restrictions on imports, the entire county would be much worse off. Imagine that your county put a tariff on all imported goods. You would be paying much more money for everything, if you could even get it at all. You would get far fewer of the goods than you wanted. A single county would never have the means to produce the goods we enjoy every day. Is this what an increase in wealth looks like?
This same logic applies to national borders, however it is not as obvious because of the often large size of nations. The public doesn’t feel the negative effects of the tariffs as much because fewer producers are excluded when tariffs are imposed on a nation than on a county. There is more competition in a nation than in a county. However, the negative effects of tariffs are still there they are just not as pronounced.
Bad Arguments for Tariffs
There are many poor arguments for tariffs that protectionists use. All of them are rooted in fallacies and misunderstandings. Let’s go over some of the most popular ones.
“Tariffs Protect Workers Against Slave Labor”
This argument is a very common one. Many people are convinced that we need to save American jobs from foreign nations with much lower labor costs. They think that foreign nations with basically slave labor societies are going to take over American jobs. But in reality, slave societies are not very efficient. They don’t have the incentives that a capitalist society has to work hard. The only thing a slave society can produce better than a capitalist society is certain raw materials. Slave societies do not produce skilled laborers, so they are only capable of doing grunt jobs like mining or harvesting cotton.
These societies pose no threat to most industries in an economy like the United States. Most goods in a capitalist society require specialized equipment and knowledge to produce and slave societies will not have the ability to obtain those things. The reason U.S. workers feel threatened by foreign laborers is because they are the slaves. The U.S. labor market is far more restricted than, for example, China’s. (China’s governmental policies are much worse than the U.S.’s in many other areas, so don’t take this the wrong way. China is not ideal.) The best way to give U.S. workers the advantage is to drop all the restrictive labor laws (I am looking at you minimum wage).
“Protection Strengthens the Nation”
Protection does not strengthen any nation. As I have already discussed, protectionism makes people less wealthy on both sides of a border. The “protected” country’s citizens will be paying more for there goods therefore getting fewer of them.
This includes weapons of war. Less weapons will be available if the doors are shut on foreign trade. Trade benefits people on both sides of border however, so trading with an enemy nation during wartime will benefit the “enemy” just as it benefits the other nation. However, if a nation resorts to protectionism to stop benefiting the enemy, then they will also be worse off for all the reasons above. War is universally a bad thing and it hurts each country involved greatly. War weakens a nation just as protectionism weakens a nation and we should avoid it at all costs, but I digress.
“Tariffs and Immigration Control are the Same”
Here protectionists are confusing goods for people. Believe it or not, there are some big differences between goods and people. One, goods don’t vote. When goods come across an invisible judicial line (a national border) they can’t vote to change the judicial order, but people can. People change the politicians in power, not goods. Two, goods don’t bring a foreign culture. Goods can not change the social norms of a society like people can. Three, goods don’t bring a worldview. Goods are not going to try to talk to people and persuade them to adopt a different worldview. Goods are used by people. The goods are not going to change a society like a flood of immigrants can because they are not people.
Conclusion
Protectionism and it’s offspring, tariffs, are all around bad things. It does not benefit the nation. It weakens both nations on each side of the border. Trade is a good thing; it is one of the reasons the modern economy is efficient. People pay higher prices when there is less trade and less competition. This is the opposite of building wealth. Inhibiting trade will only make a nation poorer, not richer. Protectionism will only harm a nation economically; nothing about it makes a nation richer.
(For the sake of brevity, I left out the other result of protectionism, import quotas, from my analysis. They will have all the same effects as tariffs with very few differences. For all intents and purposes, they can be considered to have the same effects.)
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