Mises Daily Articles
Tariffs as Welfare-State Economics
I have found over the years that when I debate with people who promote tariffs, meaning sales taxes on imported goods that are enforced by people with badges and guns, they always adopt arguments that apply only to America's side of the border. They refuse to adopt those very same arguments for people on the other side of the border.
I challenge defenders of tariffs to state their arguments in terms of both of the people who want to trade, not just the American. The ethics and economics of restricted trade surely apply to the person who wants to trade on the other side of the invisible line known as a national border. If the arguments for restricted trade apply to the American economy, then surely they apply to the other nation's economy. Logic and ethics do not change just because we cross an invisible judicial line. I take this position because I want the pro-tariff person to face the implications of his position.
It never ceases to amaze me that I am almost never able to persuade a person who defends tariffs to follow the logic of his argument. Without exception, the person insists that the invisible line dividing two jurisdictions called nations is economically significant, and therefore sales taxes on imported goods on the American side of the border are legitimate, wise, and beneficial to the vast majority of Americans. Yet, when I ask him to make exactly the same case with respect to the people on the other side of the border, which means either Canadians or Mexicans, the person has enormous difficulty in making his case. What seems utterly clear to him with respect to Americans on their side of the border seems ridiculous when he tries to state the case from the point of view of the Mexican or the Canadian on the other side of the border.
Why is this? Why is it that an argument that sounds utterly logical and utterly ethical from the point of view of an American who defends American tariffs on imported goods should not feel equally logical and equally ethical from the point of view of the Mexican or Canadian on the other side of the border?
There is a reason for this. His argument is ludicrous. When he applies it to people across the border, the argument becomes far more obviously ludicrous. So, he prefers not to consider what happens on the other side of the border.
For the sake of argument, let us start with a real-world situation. In France, the government has long protected French farmers against imports of American food. American grain would lower the price of grain in France. French farmers would find it less profitable to compete. So, they get protection by law. This legal precedent goes back to 1892.
The competition began with the development of the grain reaper in the 1840s. Then came the advent of the railroads in the 1850s: cheap transportation from the grain belt to New York City's harbor or to the Mississippi River. Then came steamships in the 1870s: large ships that sailed year-round. They held a lot of grain. As a result, American farmers became the most efficient wheat farmers on the face of the earth. Canadians were also very efficient, but Canadians struggle against the weather. Canada is located far north: a shorter growing season. This gave an advantage to American farmers.
The French government, under pressure from French farmers, raised tariffs against imported food in 1892: the Méline tariff. The main targets of this legislation against imported food were American farmers. The French government deputized bureaucrats to go to the borders and impose restrictions on imported American grain. This reduced demand for American grain in France. This meant that American wheat farmers could not legally establish a voluntary arrangement with French grain wholesalers, who sold to French bakers, who wanted to sell lower-cost bread, and who wanted to buy lower-cost American-produced grain to do this.
How ethical was this action on the part of French farmers? How ethical was the use of political pressure by French farmers to raise the price of bread for poor Frenchmen, merely for the sake of gaining more income for themselves, and, as a side effect, reducing income for American farmers?
A consistent American defender of tariffs should rejoice in the fact that the French government succumbed to the pressure of the French farmers, even though American farmers were the losers. The tariffs in France reduced trade. According to the pro-tariff advocate, this made Frenchmen richer. The defender of American tariffs should feel good that French politicians thought so highly of the logic of tariffs that they passed the 1892 tariff and have continued to restrict imports of food into France until this day.
What's sauce for the goose is sauce for the gander. Whatever constitutes wise economic policy on one side of a border constitutes wise economic policy on the other. Agreed?
As for poor Frenchmen, who want less expensive bread, a consistent defender of tariffs should conclude that these people deserve higher prices, and they deserve it for the sake of the nation, as defined by French farmers. This is a variation of the famous French phrase: "Let them eat cake."
Can you imagine an American defender of the idea of tariffs in (say) 1895, going public with his praise of the French government's restrictions on the import of American farm products? Can you imagine any American magazine or newspaper publishing such a defense? Can you imagine a newspaper aimed at American farmers publishing an article by a defender of tariffs, who argued that it was not only the right of the French government to keep out American farm products, but that it was even a moral responsibility to do so?
You say you can't imagine this? Neither can I. Why not? Because the argument for tariffs is economically irrational. It is easier to see this when you are the victim of a tariff. Your self-interest clarifies the argument. It makes clear that a pro-tariff argument is a defense of special-interest laws that favor inefficient producers who cannot compete effectively with imports. Customers prefer imports. Customers must therefore be thwarted through state coercion, domestic producers assert. "The customer is always right, except when he buys imports!"
The French government succumbed to the political pressure of French farmers, for a very good reason: French farmers voted as a bloc. They also provided money for French politicians' campaigns.
The poor people in France did not have an equally well-organized voting bloc, nor did they understand the logic of the free market, which identified them as the great losers of the tariff system.
Obviously, no politician in France paid any attention to the complaints of American farmers, who were obviously the losers in the arrangement. What did a French politician care about the opinions of an American farmer?
Nevertheless, a defender of market liberty in France should have cared. Equally, on the other side of the Atlantic Ocean in the United States, a defender of market liberty should also have cared. The defender of market liberty in France should have taken very seriously the losses sustained by American farmers. The defender of market liberty in the United States should have taken very seriously the losses sustained by poor people in France, who had to pay more for the basic staple of their lives: bread.
In short, an ethical defense of liberty, as well as an economic defense of liberty, applies equally to both sides of any national border. Anyone who claims to defend market liberty for his own people should be equally prepared to defend market liberty for the people on the other side of the national border. This is the doctrine of the rule of law. This widespread acceptance of this principle has made the West rich.
Tariffs versus the Rule of Law
The difference between the defender of tariffs and the defender of market liberty is this: the defender of tariffs does not believe, nor does he go public, with a systematic defense of the legitimacy of tariffs on the other side of the border. What he wants is a no-tariff situation on the other side of the border, and a tariff law on this side of the border. He wants Americans to be able to sell whatever they want at the best possible price to people on the other side of the border. But he does not want to have people on the other side of the border to be legally allowed to sell at the best possible price for people on this side of the border.
This is different strokes for different folks, and it is a denial of a fundamental principle of both ethics and economics. It denies the equal applicability of the legitimacy of justice on both sides of an invisible line, namely, a national border. People who favor tariffs are willing to admit that people should have a legal right to trade without state interference with people across the street, or people outside the zip code, or people across the county line, or people across the state line, but then they think the state should revoke this right at the national border. The logic of free trade supposedly stops at the national border. So does the logic of ethics.
No matter how many times I say this, no matter in how many ways that I say it, there are people who come back to me and argue for exactly the same principle that I have described here: the nonapplicability of the logic of tariffs on the other side of the border.
The logic of badges, guns, and sales taxes must be applied on both sides of the border. The ethics of badges, guns, and sales taxes must be applied on both sides of the border.
Any American who has the slightest hesitation to defend the legitimacy of the French government when it establishes tariff restrictions against the import of American farm products should think carefully about the ethics of his defense of tariffs that are imposed by the US government on the import of French goods or any other goods.
To do this requires the ability to apply economic logic and ethics to people on both sides of the invisible line known as the national border. Very few people have this ability. Very few people who defend tariffs have this ability. They literally cannot bring themselves to understand that what is sauce for the goose is sauce for the gander. They really believe that American politicians who restrict imports and thereby restrict exports are acting in good faith, and are benefiting the vast majority of Americans. Yet they will not apply the same logic to the government on the other side of the border.
The Same Effects on Both Sides of the Border
The economic effects of a tariff on this side of the border are the same as the economic effects of a tariff on the other side of the border. Pro-tariff advocates do not understand this.
If the government of the United States restricts trade with somebody across the border, the foreign exporter cannot get his hands on American dollars. He would otherwise have been able to get his hands on American dollars, because he would have been able to sell goods to an American. He could then have taken those dollars and deposited them in an American bank. This is what exporters do all the time. They have bank accounts in the countries they export to. The foreign exporter could then have spent those dollars on American goods and services. Or he could have invested in American businesses. (Sad to say, he could also have bought US Treasury bills, thereby funding the federal government.)
When the US government restricts foreign sellers of goods and services from selling in the United States, this action reduces the number of dollars available to foreigners to buy American products. This means that a tariff against imports has exactly the same effects as an American tax on American exports. The person on the other side of the border is kept from buying American products.
In the case of an export tax, he is kept from buying American products by a man with a badge and a gun who sticks the barrel of the gun into the belly of an American exporter and tells him, "you cannot legally sell to that foreigner until you pay the tax." In the case of a tariff, the government sticks a gun in the belly of an American importer, and tells him "you are not allowed to import goods from that foreigner until you pay the tax." In both cases, the foreigner is not given the right to spend his money on American products.
Once you see it this way, I hope you will see that the losers in this arrangement are on both sides of the border. American exporters are not able to sell as many goods and services to foreigners as they would have been able to sell, had the government of the United States not sent out men with badges and guns to prohibit trade. The American importer of foreign goods cannot buy as many foreign goods, so the foreigner does not get his hands on American dollars, and he does not spend the money on American goods and services. Also, he does not invest in American companies.
The Economics of War and Peace
We do not see export restrictions very often. We do see them in wars. We do not see them in peacetime. Why don't we see them in peacetime? Because these laws are a liability to most Americans. They reduce trade between Americans and foreigners. Whenever a tariff is imposed, this restricts exports to the foreign country, because people in the foreign country cannot get access to as many dollars as they would have been able to gain access to if trade had been allowed.
Why doesn't the defender of tariffs defend with equal fervency state-imposed export restrictions? If the economic effect is the same, namely, a reduction of American exports, why don't defenders of tariffs go to the public and tell voters that they need to vote for politicians who will vote in Congress for tariffs and also vote to establish barriers to American exports?
The answer is obvious: American voters are not stupid enough to vote for legislation to restrict American exports. Unfortunately, because they do not understand the logic of economics, which is an affliction they share with all defenders of tariffs, they do not understand the tariffs have the same effects as export restrictions. So, they are willing to vote for politicians who vote for sales taxes on imported goods. They do this on the assumption that this is good for all Americans, when it is obviously terrible for American exporters. It is also terrible for customers who would have been able to buy goods made abroad at cheaper prices.
To reduce imports, it is necessary only to restrict exports. The government does not have to pass a tariff. It need only pas an export tax. Let me explain.
When, during wartime, the US government has imposed export restrictions to those nations with which the government is at war, the government has also imposed import restrictions against goods sold by residents of that same foreign nation. In wartime, voters do have the ability to understand the logic of an export restriction. They do understand that by imposing an export restriction, the government is interfering with free trade. This is what import restrictions do, too.
From a logical standpoint, a fleet of American ships that kept goods from flowing to the enemy nation would also restrict goods coming in from that nation. That is the logic of a naval blockade. But this is the logic of both tariffs and export taxes. The goal is to reduce trade.
If it is impossible for people in the other country to get their hands on dollars, then they cannot buy from exporters in the United States. The whole point of the export restriction is to make certain that nobody on the other side of the border with dollars has the ability to buy American goods. In wartime, exporters accept this for the sake of the national cause. They realize that it is a wartime restriction. As soon as the war ends, the export barrier is supposed to be repealed. But if the export barrier is supposed to be repealed, then the import barrier is also supposed to be repealed, and for exactly the same reason: peace has been restored.
Men understand that export barriers are wartime measures. They also understand the import barriers are wartime measures. They understand the logic of war. The logic of war is against voluntary exchanges between people on different sides of the border. Yes, we all know of stories of some minimal trade that goes on between military units that are actually involved in combat. It happened during the American Civil War. It was not supposed to happen with respect to military armaments, but it happened with respect to things like tobacco, which Southerners had to exchange, and other items, such as medical items, which the Northerners had in greater abundance. But there is not supposed to be wide-open borders between warring sides in a great conflagration. Voters accept this.1
After the hostilities are over, and peace has been restored, the trade barriers are supposed to go down. But, because certain manufacturers on both sides of the border are now threatened by imports from across the border, they are sometimes successful in persuading governments to pass import restrictions, although not export restrictions, in order to keep away the competition. In other words, peace really has not been restored completely.
Every tariff that is imposed deliberately to restrict the import of goods and services from abroad is a mini-act of war. Tariffs should be seen as acts of war. They should be analyzed economically and ethically as acts of war. During wartime, they are clearly seen as acts of war. They are accepted by the voters in the name of the life-and-death struggle of military conflict. The problem is, the logic of peace is not extended to imported goods after hostilities have ceased.
Any time a government sends out a man with a badge and a gun to restrict trade, this is an act of war. Nobody should favor a restriction on other people's trade unless the results of that trade are comparable to the results of trade during wartime.
I have never seen the logical case for tariffs based on the application of the ethics and economics of war. There is no understanding by the promoters of tariffs that what they are doing is calling for an economic policy that is widely accepted in wartime, but which should have no place in any peacetime economy.
I am not talking about tariffs as a means of generating revenue. Every tax is a restriction on somebody's trade. The only justification for a tax ought to be that the tax will make possible greater peace. Any tax that is imposed as a means of extracting wealth from one group in order to be transferred to another group is an act of war. It is the politics of plunder.
Tariffs and the Welfare State
Taxation is supposed to apply to all people in approximately the same way. Modern welfare economics refuses to accept this principle. Welfare economics seeks to legitimize the use of people with badges and guns to confiscate money from one group of voters in order to transfer the money to another group of voters (minus commissions for government handling). This is class warfare. This is why Karl Marx, in the Communist Manifesto (1848), recommended as his second step in creating the transition between socialism to communism the establishment of a steep graduated income tax. He understood it as class warfare.
Why do conservatives want warfare at our national borders? Why do they think that the economics of war, although scaled down, should be the basis of our lives? Why do people really believe that it is legitimate for a government to threaten violence against two people on opposite sides of a national border, so as to benefit a small group of manufacturers who are threatened by competition from manufacturers on the other side of the border?
Nobody pays any attention to the domestic manufacturers who would otherwise have been able to export to people on the other side of the border. Remember: the economic effects of a tariff are the same as the economic effects of an export barrier. Yet defenders of tariffs simply cannot perceive this. They are impervious to the logic of economics.
The case against tariffs is the case against undeclared warfare. It is as simple as that. The case against tariffs is the case against special-interest politics based on a completely false economic analysis that is ultimately welfare state economics.
Anyone who defends a tariff for anything other than revenue is a defender of the welfare state. He wants to defend limited groups of American voters at the expense of the large majority of Americans. He wants special-interest legislation, which is based on violence and the threat of violence, in order to transfer money from one group of Americans to his favored special-interest group.
I do not make the case for free trade in order to persuade defenders of tariffs. I know that it is virtually impossible for anyone to persuade the defender of tariffs by using either economic logic or ethical arguments. They are impervious to both. Economic logic makes no sense to them. They cannot follow the logic of their position to its inescapable conclusions, which they reject. So, they deny the legitimacy of economic logic. As for ethics, they think that badges and guns and sales taxes are good for the nation. They fully approve of wealth-redistribution by government coercion, as long as this coercion transfers money to those domestic producers who would otherwise have been abandoned by customers.
I make the case for free trade to those people who really do want to be consistent in what they think and do. They do not want to be on the side of those people who want to protect their incomes by committing what are basically acts of war against other Americans, and by extension, against peaceful people on the other side of the national border.
To understand the logic of tariffs, always begin thinking about tariffs with the mental image of two people on opposite sides of the street. If you do not start with a pair of traders, and if you do not deal with the basic issues of trade in terms of people on opposite sides of the street, you will be easily manipulated by non-economists who want to defend the welfare state. They will use statistics that are irrelevant and arguments that are irrelevant in order to get you on the side of the politics of plunder, which the welfare state always is. They will claim that only antipatriots would oppose tariffs, in the same way that welfare-state socialists claim that only exploiters of the poor could possibly argue against the economics of violence that undergirds every welfare state.
My goal is to persuade people against both the economics and ethics of the welfare state. This includes my arguments against tariffs and against import quotas. If you are opposed to the welfare state and its use of the threat of violence to get into other people's wallets, then you had better oppose tariffs, import quotas, and all other restraints of trade between people on two sides of an invisible line called a national border.
If you still refuse to give up the idea of tariffs as legitimate ways to redistribute wealth, then you should at least admit to yourself and others that you favor the welfare state. It's time to come clean. You favor the politics of plunder. This is your argument.
You see this badge? That means I am here in the name of the People. You see this gun? That means the People have entrusted me with power to uphold their interests. You got that, boy? The People. You see where this gun is pointed, boy? At your belly. Now get out your wallet. Hand over your sales tax money. It's for the People. What's that? You say you would rather not make the purchase after all? It's too expensive now, you say? Well, that's for the People, too. Now you will buy from the People, if you buy at all. The People thank you. I thank you. You have a nice day, hear.
- 1. Just for the record, the Bank for International Settlements in World War II cleared accounts for banks on all sides. There was still trade. There were still transfers of gold. There were representatives from the major nations at the BIS. None of this was ever discussed publicly. The public would have suffered from "cognitive dissonance."