3 Problems with Protectionism
2016 is shaping up to be “the Year of Protectionism” in American politics. Indeed, during the second presidential debate this year, in a race to show which candidate was more protectionist, one candidate (Trump) threatens to impose tariffs on foreign competitors, while the other candidate (Clinton) accused the first candidate of buying metal that has been “dumped” in America by foreign firms.
It’s easy to see why the issue is popular. “Protecting” American firms — and presumably, their workers — from foreign competition sounds like a great idea. After all, what patriotic American wants to see Americans lose their jobs to foreigners overseas? While arguments like these are used to rally the citizens and get them to support protectionist policies, these arguments ignore the fact that protectionist policies always distort the economy at the expense of consumers. As Murray Rothbard explained, protectionism harms the consumer by limiting competition, which benefits the “inefficient” domestic firms that “cannot make it in a free and unhampered market”:
As we unravel the tangled web of protectionist argument, we should keep our eye on two essential points: (1) protectionism means force in restraint of trade; and (2) the key is what happens to the consumer. Invariably, we will find that the protectionists are out to cripple, exploit, and impose severe losses not only on foreign consumers but especially on Americans. And since each and every one of us is a consumer, this means that protectionism is out to mulct all of us for the benefit of a specially privileged, subsidized few—and an in efficient few at that: people who cannot make it in a free and unhampered market
Protectionism is fundamentally about limiting choices and affordability for consumers.
Tarriffs Make Consumers Poorer
Tariffs have the effect of discouraging consumers from buying foreign products by raising the price. While domestic producers make up only a small proportion of the population compared to the consumers, we are supposed to assume that raising the price of goods will somehow help “the greater good.” As Rothbard points out, it is the average citizen (the consumer) that loses when tariffs are imposed because they have to pay more for goods that they could otherwise buy for a lower price. What is never talked about among those who argue in favor of tariffs is how paying higher prices has an adverse impact on the general population — especially on those with low or average incomes. When tariffs are imposed and these people have to pay higher prices for goods, the main avenue through which potential producers can create wealth is taken away. The portion of their income that would otherwise be saved or invested must now be spent to purchase the same quantity of goods. Even if the consumer or potential entrepreneur chooses to save money and buy less of the product, he is losing wealth because they have settled only for a second-most-desired option when what they really wanted was the imported good.
“Dumping” Is a Term that Translates to “Inexpensive Goods for Consumers”
Although tariffs are destroyers of the people’s wealth, anti-dumping policies are equally damaging to the nation’s economy. Investopedia defines dumping as “the export by a country or company of a product at a price that is lower in the foreign market than the price charged in the domestic market.” Dumping can also refer to a company selling a product in a foreign market at a price below its production costs. Just like trade without tariffs, trade without dumping restrictions can be incredibly beneficial for consumers. For example, a Chinese firm might decide to “dump” steel in America. If the firm were to do so, this would be of great benefit to the consumer. Even if the consumer could not directly buy steel at the lower price, the consumer would benefit because American producers (i.e., an auto manufacturer) that make steel products would likely see the price of one of their factors of production decrease. Moreover, the purchaser of steel would then be able to pass on this cost savings to their consumers. Although it sounds great when politicians say they are going to protect American businesses and create anti-dumping regulations, they are increasing the price of the product that is being “dumped.”
Protectionism Means the Government Picks Winners and Losers
If protectionism largely hurts the American consumer, why do politicians overwhelmingly support protectionist policies? The answer: protectionist policies enhance state power.
One way states can enhance their own power is by making promises to do favors for specific groups of people. Frédéric Bastiat’s The Law does an exceptional job of highlighting how the state serves itself by taking from one group of people and giving to another. Bastiat calls this concept “legal plunder.” He also points out the immorality of this concept when he writes
[W]hen a portion of wealth passes out of the hands of him who has acquired it, without his consent, and without compensation, to him who has not created it, whether by force or by artifice, I say that property is violated, that plunder is perpetrated.
In other words, people are taught to view government’s theft of property as moral and charitable while they are taught that one individual taking from another is theft and should be condemned. The point that Bastiat is making is that theft is theft, and theft is immoral regardless of whether a private citizen or a government institution is the thief.