Upfront disclaimer: This post is NOT about the most recent salvo of U.S. tariffs – enough apoplectic digital ink is gushing there already. It is about is an underlying question that these tariffs raised in my mind, which is the title of this article.
If there is one thing that nearly all economists, left, right, and center, can agree on, it is that free trade is good (see, for instance, a classic exposition of gains from trade on EcoNomNomNomics) and thus tariffs are bad. The main reason the local producers would need “protection” is because their goods (and services) are more expensive than the imports, and so by definition the consumers will pay more for their stuff. Thus, as is always noted, tariffs are a kind of tax on consumers. And yet…as far as I can tell all or nearly all nations impose tariffs on imported goods. So, what’s up with that?
This is not an area of expertise for me, so I went roaming the web to get some various opinions. The main reason given is to “protect local industry/agriculture”, and by extension, local jobs. We have to drill down deeper to see the reasoning involved.
In some cases, it is a simple, unsavory matter of a local industry having a powerful enough clout either at the business level or the labor level to lobby for special treatment (which costs the rest of the consumers more). But there are other cases where it is argued that it is important for national security to maintain a certain level of domestic production. For instance, historically nations like Japan and Switzerland maintained high tariffs on certain agricultural imports, in order to retain some domestic food production so they would not starve if something happened to interrupt international trade. Ditto for defense-related or other “strategic” production, and so on.
And in many cases, there just seems to be a gut feel that it is more patriotic or economically healthy to promote in-country production. Also, if a certain inefficient industry employs a lot of workers, the medium-term pain of letting that industry fail while resources shift elsewhere may be unacceptable. Economists promise us that the sooner or later those unemployed workers and empty factories will be put to some other, more worthy use, but it can be hard to believe in the “invisible hand” when suddenly you cannot pay your rent and no other jobs are available.
Two other factors came up. One is that for less developed counties without sophisticated internal revenue services, tariffs are a convenient way to collect revenue, and in fact may provide a significant share of government support. If I recall my high school history correctly, the fledgling United States government supported itself largely by tariffs, back in the day.
Another motive is what I would call “smart” tariffs, aimed not at indefinitely protecting inefficient producers, but at promoting improved production. What I have in mind is something I read some years ago, in an article I cannot now lay hands on, describing Korea’s path to industrialization. Protectionism was very much a part of that. The nation’s consumers did forgo short-term cheap consumption, in exchange for the development of domestic production which would in the long-term benefit everyone. I think one example was cigarettes. The government decided that cigarette production was a reasonable place to start industrializing, so they taxed imports to drive the price high enough to justify putting in cigarette-making equipment. After some years, they were happily making cigarettes, employing Koreans and building institutional muscle for the next phases of industrialization.
China has maintained a high degree of protectionism, including capital controls, and has grown and prospered mightily. So, I think that in assessing tariffs, it is essential to look past the immediate effects (which economists can always argue are “bad”, i.e., reduced consumption) to the longer-term impacts. Smart tariffs of the kind that East Asian countries have employed seem to have parlayed short-term consumer pain into long-term societal gains. Non-smart tariffs – -maybe not so much.
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