All Commentary
Wednesday, July 7, 2010

Tariffs Are Legal Plunder

Tariffs Result in a Net Loss to the National Economy

Everybody has an issue he reacts to most intensely. [Frederic] Bastiat’s was tariffs. And his most barbed comments were directed against those who favored governmental protection of national industry from foreign competition. He thought this legal method of cheating consumers by keeping prices above the market was a perfect example of how governments plunder their own citizens while promising them more jobs, lower taxes, better quality, and other rewards they can’t possibly deliver.

Bastiat’s definition of socialism, i.e., using the law to take money from some people and give it to other people, could more accurately be translated today as “the welfare state.” Even so, I’ll stick with his term— socialism. And he believed that the idea behind tariffs and other restrictions against free trade was the keystone that supported the legal plunder he saw all about him. He was convinced that if tariffs were abolished, the other elements of socialism would begin to collapse.

He was probably right. For if there were no restrictions against foreign competition— i.e., if foreign goods and capital were treated exactly like domestic goods and capital—the fearful cost we are paying for the other economic compulsions and prohibitions by government would be easily observed by everyone, and would thus soon fall.

Among the several “story examples” offered by Bastiat to expose the fallacy of improving the domestic economy by restricting foreign imports, his allegory on prohibiting Belgian iron from entering France is a classic. He begins by following the thoughts and actions of just one French producer of iron. A century and a third after he wrote it, his story reads as though the essence of it were adopted from today’s Congressional Record or from the editorial pages of any one of hundreds of our daily newspapers.

Our French protectionist was well aware that Belgian mine owners were able to produce and ship iron into France at less cost than he and other French mine owners could produce it and sell it at home. That fact was naturally reflected in the comparatively low price of Belgian iron in French markets. And just as naturally, the French people bought most of their iron from Belgian producers instead of from their own domestic producers. That fact displeased the French mine owners exceedingly, and the one we are here discussing decided to do something about it.

At first, he considered the possibility of personally stopping that undesirable trade. He thought that he might take his gun, sally forth to the frontier, and kill the nailmakers, locksmiths, and other users of iron who crossed the border into Belgium to patronize his competitors. That would teach them a lesson!

But, unfortunately, there was the possibility that those buyers of Belgian iron might object to being killed, and kill him instead. Moreover, he knew that he would have to hire men to guard the entire frontier to make his plan effective. That would cost more money than he had. So our hero was about to resign himself to freedom, when suddenly he had a brilliant idea.

He remembered that at Paris there is a large factory engaged in producing laws. He knew that everyone in France is forced to obey the laws, even the bad ones. So all he needed from the Parisian law-factory was just one small law: Belgian iron is prohibited.

Then, instead of having to guard the frontier with his own few employees, the government would send 20,000 guards — chosen from the sons of the very locksmiths and enginemakers who were carrying on this undesirable trade with the Belgians. Better still, the domestic mine owner himself wouldn’t even have to pay the wages of those guards. That money would be taken from the French people in general, much of it from the self-same buyers of Belgian iron. Our hero could then sell his iron at his own price.

With this ingenious plan, our French mine owner proceeded to the law-factory in Paris. (“At some other time,” interjected Bastiat, who was himself a deputy, “I may tell you of his underhand methods, but here I wish to speak only of what was divulged to the public”)

The protectionist ironmaker urged the authorities of the law-factory to consider the following argument: “Belgian iron sells in France for 10 francs per hundred pounds. But I would prefer to sell it for 15 francs. Now if you will only produce a law that says, Belgian iron shall no longer enter France, the following wonderful results will occur. For each hundred pounds of iron that I sell to the public, I shall receive 15 francs instead of 10 francs. As a result, I can expand my business and employ more workers. My workers and I will have more money to spend. This will help the tradesmen in our community. The tradesmen will, in turn, then also buy more goods. That will mean larger orders to their suppliers all over France. Those suppliers, in turn, will also expand their businesses and hire more workers. Thus employment and prosperity will increase throughout France. All this will result from that extra five francs that your law will permit me to charge.”

The producers of the laws in the law-factory were charmed indeed by the logic of our hero. They rushed to produce the requested law. “Why talk of hard work and economy,” they said, “and why use an unpleasant way to increase the wealth of our nation when a single law can do the same thing.”


Familiar Argument

That argument for protection from foreign competition is precisely (word for word) the argument advanced today in Congress and the media in general to support restrictions against Japanese automobiles, Brazilian shoes, Swedish steel, Argentine beef, and Chinese textiles. And, again, that’s the reason Bastiat’s works are as readable today as they were in 1850; he was dealing with ever-present and universal problems.

“OK,” you may observe, “but you’ve got to admit that protectionism works, just as Bastiat’s fictional mine owner claimed. When the owners of the protected industries spend their profits, it does indeed create more jobs. Unrestricted foreign competition would simply wipe out all those jobs and profits. So what’s wrong with the French mine owner’s argument, if anything?”

Bastiat offered an answer to that question when his fellow-legislators advanced it in the 1800s.

Now in all fairness, we must do justice to the arguments of this mine owner who wanted a tariff to increase domestic employment. His reasoning was not entirely false, but rather incomplete. In securing from the government a special privilege, he had correctly pointed out certain results that can be seen. But he completely ignored certain other effects that cannot be seen.

True enough, the five-franc piece thus directed by law into the cash-box of the domestic producer does serve to stimulate the economy along the lines he predicted. That can easily be seen. But what is not seen is this: That five-franc piece comes, not from the moon, but from the pocket of some French citizen who must now pay 15 francs for the thing that cost him only 10 francs in a free market. And while the protected industrialist may well use the five francs to encourage national industry, the French citizen himself would also have used it for the same purpose, if he had been left free to do so. He would have used his five francs to buy a book, or shoes, or some other article or service he wanted. In either case, national industry as a whole would be stimulated by the same amount.

Thus the new tariff law has resulted in this: The protected industry now makes a high profit to which it is not justly entitled. The average French citizen has been duped out of five francs by his government, and must therefore do without the article or service he would have bought with it. One segment of the economy has profited at the expense of many others. True enough, because of the artificial price increases, new jobs have been created in the protected industry. But what is not seen is the fact that the extra money now spent for iron must necessarily result in reduced spending for other products and services, and thus fewer jobs in those industries. And worst of all, the people have been encouraged to think that robbery is moral if it is legal.

A popular argument today (one that Bastiat never heard) is that those five francs spent by the owners would actually be more productive than the same amount spent by U.S. consumers. The economists who support that argument assume that efficiency under “protected prices” will remain the same as under competition, and that the promised profits will be there as specified, and that those profits will be spent on new equipment, e.g., the United States Steel Corporation will actually use its government-created profits to modernize its facilities and not use them to buy an existing oil company. For the most part, however, reality simply doesn’t work out in harmony with that theory that’s still supported by so many of our leading economists.

As Bastiat said, all tariffs result in a net loss to the national economy and to the people in general. He demonstrates this net loss (both in products and satisfaction) in one of his stories on “compensatory tariffs,” i.e., retaliation against foreigners when they have an advantage (natural or artificial) that’s not possessed by our own producers. He was referring to cheaper labor costs abroad, subsidies and tax concessions given to native producers by their governments, and other advantages that foreign producers are said to have over domestic producers.

A poor peasant in France had planted a few grape vines of his own. After much sweat and time, he harvested enough grapes to make a cask of wine. “I shall sell this wine,” he said to his wife, “and buy enough material to enable you to make a trousseau for our daughter.”

Our honest peasant took his cask of wine to the nearest town. There he met an Englishman and a Belgian, and began to bargain with them about exchanging his wine for cloth.

The Belgian said, “Give me your wine, and I will supply you with 15 parcels of the material you want.”

Then the Englishman entered the bargaining with this offer, “Since we English can manufacture cloth at less cost than the Belgians, I will give you 20 parcels for your cask of wine.”

The peasant was about to sell to the Englishman when a customhouse official, who had heard the conversation, spoke to the wine owner, “My friend,” he said, “trade with the Belgian if you wish, but I have orders to stop you from trading with the Englishman.”

The astounded countryman exclaimed, “What! You wish me to be content with 15 parcels of material that come from Brussels when I can get 20 parcels that come from Manchester?”

The customhouse official answered, “Certainly, don’t you understand that France would suffer if you receive 20 parcels instead of 15?”

The peasant didn’t understand it at all, and said so in no uncertain terms.

Replied the customhouse official, “Well, I’m sorry I can’t explain it, but there is no doubt that it’s true. You see, all our government officials and journalists have agreed that the more a nation receives in exchange for its products, the more it is impoverished.”

Thus because of the protective French tariff against low-cost English textiles, the peasant got just as good a bargain by exchanging his wine for high-cost Belgian textiles. As a result, his daughter got only three-fourths of her trousseau. And those unsophisticated countrymen are still wondering to this day how it happens that a person is ruined by receiving four yards of cloth instead of three. They still don’t understand why a person with nine towels is richer than a person with 12.


A Modern Application

I sometimes suggest to my students in international marketing that the use of compensatory tariffs by the European Common Market today gives precisely the same result that Bastiat pointed out in his story, i.e., tariffs cause higher prices and a decrease in products and services always. The students seem to understand the idea better when I put the transaction in story form, a la Bastiat.

“Take wheat, for example,” I begin. “And let’s follow the American owner as he enters a European port with a shipload of wheat grown in Kansas. The American owner wants to sell his wheat for, say, $3 a bushel. But the officials in the European Economic Community refuse to accept that low price and insist that the European purchasers must pay a much higher price.”

At that, my students begin to look at me strangely. “You mean the European people insist on paying more for the wheat to bake their daily bread than they need to?”

“That’s right,” I answer. And in spite of their doubting expressions, I continue with my story.

“You see, while the Europeans believe in competition, it must be fair competition. And those vast wheat lands in Kansas are just better suited to grow wheat than are the small European farms. So it’s not fair competition—obviously. Further, those Kansas farmers have another big advantage, i.e., vast amounts of capital (farm machinery) that’s just not available to European farmers. The result is unfair competition, i.e., the costs of production for many wheat farmers in Europe are perhaps twice as high as in Kansas. And while most Europeans claim to favor the free market economy and open competition, naturally it must be fair competition. Everybody is in favor of competition, as long as it’s fair. And since fair competition is obviously impossible when the Americans enjoy those two big advantages, tariffs must be used to equalize the situation. Fair’s fair, you know.

“First, the EEC officials check around Europe to find the cost of producing a bushel of wheat by the most inefficient wheat producer in all of Europe. The chances are that’ll be a French farmer who insists on growing grain on his land when the market says grapes or vegetables.

“Once the costs of this most inefficient wheat farmer in all of Europe are determined, then the compensatory tariff to wipe out the American production-advantage is set so that European consumers will find little or no advantage in buying American wheat over French wheat. The price to them will be about the same.

“That’s what most people seem to mean by ‘equal competition,’ i.e., tariffs to wipe out any advantage (natural or man-made) enjoyed by the foreign producer over the domestic producer. The result is that the Europeans must pay perhaps 100 percent more for their daily bread than would be necessary under free trade. And since there are always low-cost producers in any industry, those European wheat farmers who are more efficient than that marginal French wheat farmer just automatically reap high profits—while the people in general have less bread and other goods and services.”

Paying More Is Good?

By now, the students are horrified, of course. It’s just inconceivable to them that any people are so gullible as to pay twice as much as they need to pay for products and services. Then, to give them an even worse example, I take them to Japan and the “orange situation.” I explain that the Japanese insist on paying perhaps four times as much for their inferior domestic oranges as they need to pay for superior California oranges. We Americans have been trying for years to sell our excellent oranges to them at exceedingly low prices. The Japanese refuse to let us do it, however, and continue to insist that they’re better off when they pay three and four times as much as we are willing to charge.

At that point, some of my students become so angry at this “Japanese inscrutability” that they seem almost willing to go to war again to straighten those people out. You doubtless have guessed what I do next — I bring them back home and point out that we Americans insist on forcing ourselves to pay at least 50 percent more for an American car than the Japanese are willing to charge us for a similar or better car.

A chill settles over the classroom. The students who’ve been deriding those inscrutable Japanese are suddenly quiet. Then I begin to hear the all-too-familiar arguments you hear every day in Congress and read every day in your local newspaper—precisely the same arguments Bastiat heard as a member in the French Chamber of Deputies in 1848. “But we must protect American jobs. Those Japanese have the advantage of efficient and disciplined labor. It’s a part of their culture, and it’s obviously not fair. We Americans truly believe in the free market, of course, and competition. But the competition must be fair.” And so on and so on.

Truly, most of us Americans honestly believe that a nation prospers by paying more and getting less. Were that not so, tariffs and all other restrictions against peaceful people freely exchanging their goods and services would disappear immediately. We blind ourselves to reality by concentrating on the producers and their problems instead of on us consumers and our problems. We worry about who produces, instead of what is produced and at what price. We just don’t seem to understand that a nation and its people are better off when we get more for our money, i.e., when we have more products and services, not less.

I now understand what Bastiat meant when he observed that logic is not in any way related to laws that (in various ways) take money from people who have earned it and give it to people who have not earned it. According to Bastiat, that process is the mainspring of socialism, and it’s a sure way to the destruction of both the producers and the consumers in any nation.