Freeman

ARTICLE

Tariff War, Libertarian Style

AUGUST 01, 1969 by GARY NORTH

Mr. North is a Ph.D. candidate in history at the University of California, Riverside.

"Common sense economics" is a phrase used to describe the eco­nomic reasoning of the proverbial man in the street. In many in­stances, this knowledge may rest on principles that are essentially correct. For example, we have that old truism that there are no free lunches. If some of our profession­al experts in the field of govern­mental fiscal policy were to face the reality of this truth, they might learn that even the skilled application of policies of mone­tary inflation cannot alleviate the basic economic limitations placed on mankind.’ Such policies can make things worse, of course, but they are powerless to do more than redistribute the products of in­dustry, while simultaneously redistributing power in the direction of the state’s bureaucratic functionaries.² On the other hand, not all of the widely-held economic beliefs are even remotely correct; some of these convictions are held in inverse proportion to their val­idity. The tariff question is one of these.

The heart of the contradictory thinking concerning tariffs is in the statement, "I favor open com­petition, but…." Being human, men will often appeal to the State to protect their monopolistic posi­tion on the market. They secretly favor security over freedom. The State steps in to honor the re­quests of certain special interest groups—which invariably pro­claim their cause in the name of the general welfare clause of the Constitution—and establishes several kinds of restrictions on trade.

Fair trade laws are one exam­ple. They are remnants of the old medieval conception of the so-called "just price," in that both approaches are founded on the idea that there is some underlying objective value in all articles of­fered for sale. Selling price should not deviate from this "intrinsic" value.³ Monopolistic trade union laws are analogous to the medieval guild system; they are based in turn upon restrictions on the free entry of nonunion laborers into the labor market.

Tariffs, trade union monopolies, and fair trade laws are all praised as being safeguards against "cut­throat" competition, i.e., competi­tion that would enable consumers to purchase the goods they want at a cheaper price—a price which endangers the less efficient pro­ducers who must charge more in order to remain in business. The thing which most people tend to overlook in the slogan of "cut­throat competition" is that the person whose throat is slashed most deeply is the solitary con­sumer who has no monopolistic organization to improve his posi­tion in relation to those favored by Statist intervention.

People are remarkably schizo­phrenic in their attitudes toward competition. Monopolies of the supply of labor are acceptable to most Americans; business mo­nopolies are somehow evil. In both cases, the monopolies are the prod­uct of the State in the market, but the public will not take a con­sistent position with regard to both. The fact that both kinds operate in order to improve the economic position of a limited spe­cial interest group at the expense of the consumers is ignored. Busi­ness monopolies are damned no matter what they do. If they raise prices, it is called gouging; if they cut prices, it is cutthroat compe­tition; if they stabilize prices, it is clearly a case of collusion re­straining free competition. All forms may be prosecuted. No firm is safe.

The State’s policies of inflation tend to centralize production in the hands of those firms that are closest to the newly created money—defense industries, space-orient­ed industries, and those in heavy debt to the fractional reserve banking system. It is not surpris­ing that we should witness a ris­ing tide of corporate mergers dur­ing a period of heavy inflationary pressures, as has been the case during the 1960′s in the United States. Yet, with regard to busi­ness firms (but not labor unions), the courts are able to take action against almost any firm which is successfully competing on the market.

As Dr. Richard Bernhard has pointed out, "What is becoming illegal under federal law in the United States is monopolizing —as the law now defines monopolizing; and, since this is now con­sidered a crime, it is possible that perfectly legitimate business ac­tions by one firm may, if they `inadvertently’ lead to monopoly power, put a firm in jeopardy of the law."4 Thus, we see a rational economic response on the part of business firms—consolidation for the sake of efficiency on an in­creasingly inflationary market —prosecuted by the State which has created those very inflationary pressures. There is an inconsist­ency somewhere.

Tariffs Are Taxes

A tariff is a special kind of tax. It is a tax paid directly by impor­ters for the right to offer foreign products for sale on a domestic market. Indirectly, however, the tax is borne by a whole host of people, and these people are sel­dom even aware that they are pay­ing the tax.

First, let us consider those in the United States. One group affected adversely by a tariff is that made up of consumers who ac­tually purchase some foreign prod­uct. They pay a higher price than would have been the case had no duty been imposed on the im­porter. Another consumer group is the one which buys an Amer­ican product at a high price which is protected by the tariff. Were there no tariff, the domestic firms would either be forced to lower their prices or shift to some line of production in which they could compete successfully. Then there is the nonconsumer group which would have entered the market had the lower prices been in effect; their form of the "tax" is simply the inability to enjoy the use of products which might have been available to them had the State not intervened in international trade.

Others besides the consumers pay. The importer who might have been able to offer cheaper prod­ucts, or more of the products, if there had been no tariff, is also hurt. His business is restricted, and he reaps fewer profits. All those connected with imports are harmed. Yet, so are exporters. They find that foreign govern­ments tend to impose retaliatory tariffs on our products going abroad. Even if those governments do not, foreigners have fewer dol­lars to spend on our products, because we have purchased fewer of theirs.

Two groups are obviously aided. The inefficient domestic producer is the recipient of an indirect gov­ernment subsidy, so he reaps at least short-run benefits. The other group is the State itself; it has increased its power, and it has increased its revenues. (It is con­ceivable to imagine a case where higher revenues might in the long run result from lower tariffs, since more volume would be involved, so we might better speak of short-run increases of revenue.) We could also speak of a psychological benefit provided for all those who erroneously believe that protective tariffs actually protect them, but this is a benefit based on igno­rance, and I hesitate to count it as a positive effect.

A second consideration should be those who are hurt abroad, although we seldom look at those aspects of tariffs. Both foreign importers and exporters are hurt, for the same reasons. The fewer foreign goods we Americans buy, the fewer dollars they have to spend on American goods and services. This, in turn, damages the position of foreign consumers, who must restrict purchases of goods which they otherwise might afford. This leaves them at the mercy of their own less efficient producers, who will not face so much competition from the Amer­icans, since the availability of foreign exchange (U.S. dollars) is more restricted.

The tariff, in short, penalizes the efficient on both sides of the border, and it subsidizes the in­efficient. If we were to find a bet­ter way of providing "foreign aid" to other countries, we might provide them with our goods (which they want) by purchasing their goods (which we want). That would be a noninflationary type of aid which would benefit both sides, rather than our pres­ent system which encourages bul­lies in our government and creates resentment abroad.

Protecting Vital Industries

What about our vital industries, especially our wartime industries? If they are driven out of business by cheaper foreign goods, what will we do if we go to war and find our trading patterns disrupt­ed? Where will we find the skilled craftsmen?

There is some validity to this question, but it is difficult to meas­ure the validity in a direct fash­ion. It is true that certain skills, such as watch making, might be unavailable in the initial stages of a war. There are few appren­tice programs available in the United States in some fields. Nev­ertheless, if there really is a need for such services, would it not be better to subsidize these talents directly? If we must impose some form of tax subsidy, is it not al­ways preferable to have the costs fully visible, so that benefits might be calculated more efficiently?

A tariff is a tax, but few people ever grasp this fact. Thus, they are less willing to challenge the tax, re-examine it periodically, or at least see what it is costing. In­direct taxes are psychologically less painful, but the price paid for the anesthetic of invisibility is the inability of men to see how the State is growing at their ex­pense. What Tocqueville referred to as the "Bland Leviathan"—a steadily, imperceptibly expanding State—thrives on invisible and indirect taxes like inflation, tar­iffs, and monthly withdrawals from paychecks.5 It ought to be a basic libertarian position to discover alternative kinds of tax pro­grams, in an effort to reduce the economic burden of the State by making the full extent of taxation more obvious.

Trade War, Statist Style

One advantage of the direct sub­sidy to protected industries is that such subsidies would not normally result in trade wars. When one nation sees its products discrimi­nated against by another State, it is more apt to retaliate directly. It threatens to raise tariffs against the offending country’s products unless the first country’s tariffs are reduced. If there is no re­sponse, pressures arise within the threatening country’s State bu­reaus to enforce the threat. That, it is argued, will frighten other nations which might be consider­ing similar moves. So the tariff war is born. The beneficiaries are the inefficient on both sides of the border and the State bureaucrats; the losers are all those involved in trade and all consumers who would have liked to purchase their goods at lower prices. This kind of war is therefore especially pernicious: it penalizes the productive and subsidizes the unproductive.

There are many reasons why these wars get started. During periods of inflation, certain coun­tries wish to keep their domestic currencies from going abroad. These currencies, if they have in­ternational acceptability, are grounded in gold or in reserve currencies theoretically redeema­ble in gold. Foreign central banks can ask for repayment, and the inflating nations can be put into extreme financial embarrassment when too many of these claims are presented at one time. So they try to restrict purchases of foreign goods by their domestic popula­tions. Tariffs are one way of ac­complishing this end. Tariffs, in short, prevent international "bank runs," at least for limited periods of time.

Another cause is the fear of State bureaucrats during times of recession or depression that do­mestic industries will not be fa­vored when domestic populations buy from abroad. This was the case under the infant neomercan­tile philosophies so popular in the 1930′s.6 The depression was ac­companied by a wave of tariff hikes in most of the Western na­tions, with reduced efficiency and economic autarchy as a direct result. Domestic manufacturers cry for protection from foreign pro­ducers. What they are crying for with equal intensity is protection from the voluntary decisions of their own nation’s domestic pur­chasers; it takes two parties to make a trade, and protection from one is equally protection from the other.

The effect of tariff wars is re­duced efficiency through a restriction of international trade. Adam Smith, in the opening pages of Wealth of Nations, presents his now famous argument that the division of labor is limited by the size of the market. Reduce the size of the market, and you reduce the extent of the division of labor. The cry for protection should be seen for what it is: a cry for a reduction in efficiency.

In a country like the United States, where less than 5 per cent of our national income stems from foreign trade, the cry is especially ludicrous. We hurt the other na­tions, whose proportion of inter­national trade to national income is much higher (West Germany, Japan), without really aiding very many of our own producers. But there are so few vocal interest groups representing those who benefit from freer trade, while those who have a stake in the in­tervention of the State make cer­tain that their lobbyists are heard in Washington. The scapegoat of "unfair foreign competition" may be small, but being small, it is at least easy to sacrifice.

The Balance of Trade

In precapitalistic days, econo­mists believed that nations could experience permanent "favorable" balances of trade. A favorable bal­ance was defined as one where you sold more goods abroad than you imported, thus adding to the national gold stock. Wealth was de­fined primarily in terms of gold (a position which, even if falla­cious, makes more sense than the contemporary inclination to define wealth in terms of indebtedness). Prior to the publication of Wealth of Nations (1776), the philos­opher, David Hume, disposed of the mercantilist errors concerning the balance of trade. His essays helped to convert Adam Smith to the philosophy of classical liberal­ism. Hume’s essay, "Of the Bal­ance of Trade," was published in 1752 in his Political Discourses; it established him as the founder of modern international trade theory.

The early arguments for free trade still stand today. Hume fo­cused on the first one, which is designated in modern economic terminology as the price rate ef­fect. As the exported goods flow out of a nation, specie flows in. Goods become more scarce as money becomes more plentiful. Prices therefore tend to rise. The converse takes place in the for­eign country: its specie goes out as goods come in, thus causing prices to fall. Foreign buyers will then begin to reduce their imports in order to buy on the now cheaper home markets; simultaneously, consumers in the first nation will now begin to export specie and import foreign goods. A long-run equilibrium of trade is the result. A second argument is possible, the income effect. Export indus­tries profit during the years of heavy exports. This sector of the economy is now in a position to effect domestic production, as its share of national income rises. It will be able to outbid even those foreign purchasers which it had previously supplied with goods.

Last, we have the exchange rate effect. If we can imagine a world trading community in which we have free floating exchange rates on the international currency mar­kets (which most governments hesitate to permit), we can see the process more easily. In order to purchase domestic goods, for­eigners must have a supply of the exporting nation’s domestic currency. As demand for the goods continues, the supply of available currency drops lower. Foreigners competitively bid up the price of the exporting na­tion’s currency, so that it costs more to obtain the currency nec­essary to buy the goods. This will discourage some of the foreign buyers, who will turn to their own markets. Where we find fixed ex­change rates, the same process ex­ists, but under different circum­stances. Either black markets in foreign currencies will be estab­lished, or else some kind of quota restrictions will be placed on the availability of the sought-after currency, as demand rises for ex­change. Foreigners will simply not be able to obtain all the cur­rency they want at the official price. Thus, what we witness is an equilibriating process of the exchange of goods; there can be no long-run imbalance of trade. No nation can continue to export more than it imports forever.

Tariff War, Libertarian Style

When some foreign State de­cides to place restrictions on the importation of goods from another country, what should be the re­sponse of that latter country’s eco­nomic administrators? Their goal is to make their nation’s goods at­tractive to foreign purchasers. They should want to see the inter­national division of labor main­tained, adding to the material prosperity of all involved. If this is the goal, then policies that will keep the trade barriers at low levels should be adopted. Instead, there is the tendency to adopt re­taliatory tariff barriers, thus sti­fling even further the flow of goods. This is done as a "warn­ing" to other nations.

If the 1930′s are anything like representative years of such warn­ings, then we should beware of conventional tariff wars. In those years a snowballing effect was produced, as each nation tried to” out-warn" its neighbor in an attempt to gain favorable trade positions with all others. The re­sult was the serious weakening of the international specialization of labor and its productivity. At a time when people wanted cheaper goods, they imposed trade restric­tions which forced prices upward and production downward.? Pro­fessor Mises’ old dictum held true: When a State tries to improve economic conditions by tampering with the free market, it usually succeeds in accomplishing pre­cisely the results which it sought to avoid (or officially sought to avoid, at any rate).

The best policy for "retaliation" would be to drop all tariff barriers in response. A number of things would result from such action. For one thing, it would encourage the importation of the goods pro­duced by the offending country. Then the three effects described earlier would go into operation. The offending nation would find that its domestic price level would rise, and that its citizens would be in a position to buy more for­eign goods (including the goods of the discriminated country). What would be done with the cur­rency or credits in the hands of citizens of the high tariff nation?

They could not spend it at home. If we, as the injured party, con­tinued to make it easy for our citizens to buy their goods, we would provide them with lots of paper money which could be most easily used to buy our goods in re­turn. We would gain the use of the consumer goods produced abroad, and we would be losing only money. We would be getting the best possible goods for our money, so the consumer cannot complain; if we had imposed re­taliatory tariffs, consumers would have had to settle for domestically produced goods of a less desirable nature (since the voluntary con­sumption patterns are restricted by the imposition of a tariff). Our prices would tend to go down, making our goods more competi­tive on the international markets.

The tariff is a self-defeating de­vice. As American dollars came into the high tariff nation, they could be exchanged for our gold. But this would tend to increase the rate of inflation in that coun­try, as the gold reserves would most likely serve as the founda­tion for an expansion of the do­mestic money supply. Domestic prices would climb, and the citi­zens would attempt to circumvent the tariffs in various ways. Black markets in foreign currencies and goods are established; foreign goods are purchased in spite of tariff barriers; pressures for freer trade can arise, especially if the discriminated nation has wisely refused to turn to retaliation in the traditional way.

The statist tariff war is irra­tional. It argues that because one’s citizens are injured by one re­striction on foreign trade, they can be aided by further restric­tions on foreign trade. It is a contemporary manifestation of the old cliché, "He cut off his nose to spite his face." It is time that we accept the implications of Da­vid Hume’s two-hundred-year-old arguments. The best way to over­come restrictions on trade, it would seem, is to establish poli­cies that encourage people to trade more.

 

—FOOTNOTES—

1 Cf. Gary North, Marx’s Religion of Revolution (Nutley, New Jersey: Craig Press, 1968), pp. 56-57.

2 Bertrand de Jouvenel, The Ethics of Redistribution (New York: Cambridge University Press, 1951), pp. 72-73.

3 Gary North, "The Fallacy of ‘Intrinsic Value’," THE FREEMAN (June, 1969).

4 Richard C. Bernhart, "English Law and American Law on Monopolies and Restraints of Trade," The Journal of Law and Economics (1960), p. 142.

5 Robert Schuettinger, "Tocqueville and the Bland Leviathan," THE FREEMAN (January, 1962).

6 "The interests which, in times of prosperity, find it hard to enlist support for their conspiracies to rob the public of the advantages of cheapness and the division of labor, find a much more sym­pathetic hearing." Lionel Robbins, The Great Depression (London: Macmillan, 1934), p. 65.

7 Wilhelm Röpke, International Eco­nomic Disintegration (London: Hodge, 1942), ch. 3.

 

***

Free Trade

Free trade is such a simple solution for so many of the world’s ills. It doesn’t require endless hours of debate in the United Na­tions… or any other world-wide debating society. It requires only that one nation see the light and remove its restrictions. The results will be immediate and widespread.

W. M. CURTISS, The Tariff Idea

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August 1969

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