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Revenue Tariffs vs. Protectionist Tariffs

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Tags Protectionism and Free Trade

04/03/2018

In 1828, Congress passed a tariff that raised duties on various imports to such extremes that it become pejoratively known as the Tariff of Abominations. In protest of these high duties, Vice-President John C. Calhoun secretly wrote The South Carolina Exposition and Protest, denouncing the “unconstitutional, oppressive, and unjust” bill. The protest was made in opposition to “the whole system of legislation imposing duties on imports — not for revenue, but the protection of one branch of industry at the expense of others.”

The controversy resulted in the infamous “nullification crisis” in which South Carolina stood against Andrew Jackson and the national government until a compromise was reached that lowered the existing duties. South Carolina agreed to submit, though there was no real indication that any substantive change in the law had taken place; the duties were simply lowered.

As I have argued elsewhere, the tariff controversy took a backseat to other political issues after 1833, but the disagreement between the North and the South, generally speaking, still survived regarding the issue of tariffs. Once the southern states seceded, the Republican-controlled Union government had no real resistance to the passage of the Morrill Tariff in 1861. The Confederate States of America demonstrated their contrasting opposition to protectionism by allowing their Congress “To lay and collect taxes, duties, imposts, and excises for revenue” but in the same clause, their constitution specifically prohibited “any duties or taxes on importations from foreign nations [from being] laid to promote or foster any branch of industry” (emphasis added).

Protectionism was certainly the justification for the high tariffs, and this argument continued well after the Civil War. Andrew Carnegie himself credited the steel tariff as his reason for pursuing the steel industry as opposed to another venture. When the Smoot-Hawley Tariff was passed in 1930, imposing duties on more than 20,000 imported goods, protectionism was again the justification. Even among the anti-protectionism South, certain exceptions were quietly tolerated, such as the sugar tariff that protected Louisiana and Texas planters, though this was opposed by southerners in other regions.

The problem with all of these disputes — tariffs as a tax versus tariffs as a boost to domestic industry — is that there is no fundamental difference between one or the other. It is true that a bill may be worded to reveal an intended purpose for either revenue-raising or industry protection, and politicians will advocate for a bill on such arguments as well. It’s likely that these intentions are sincere. But nonetheless, there remains no real economic difference between a revenue tariff and a protectionist one.

It almost seems too obvious to merit saying, but recent debates illustrate the necessity of sometimes stating the obvious: the economic effects of a tariff are independent of the intentions of the bill. Tariffs can vary according to how high or low the imposed duties are, and they can vary according to the industries targeted. But all tariffs, regardless of their respective purposes, have the same effects. They raise money for the government and they raise prices for consumer goods (either directly for imports of consumption goods, or indirectly for imports of production goods). Politically, it is not uncommon for other countries to institute their own retaliatory tariffs in response, which only compounds the harmful effects of tariffs for both countries. And perhaps the most significant effect, yet the one most likely to fly under the radar, is the reallocation of resources into less efficient lines of production.

Conservative commentator (read: cheerleader) Dinesh D’Souza revealed his own inability to grasp this last point when he recently touted the announcement from the CEO of US Steel that they will be opening a new steel plant as a result of Trump’s tariffs. He sarcastically claimed that “poor Milton Friedman would be puzzled” by this phenomenon. But for anybody who is familiar with Frédéric Bastiat’s writings, there is nothing puzzling about US Steel’s behavior.

Bastiat writes:

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen: it is well for us if they are foreseen. Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee.

Henry Hazlitt, one of Bastiat’s greatest modern expositors, puts it even more clearly in the context of the tariff controversy:

The effect of a tariff, therefore, is to change the structure of American production. It changes the number of occupations, the kind of occupations, and the relative size of one industry as compared with another. It makes the industries in which we are comparatively inefficient larger, and the industries in which we are comparatively efficient smaller. Its net effect, therefore, is to reduce American efficiency, as well as to reduce efficiency in the countries with which we would otherwise have traded more largely.

These effects hold true regardless of whether a tariff is intended to “protect” domestic industry or not. The announcement by the CEO of US Steel merely demonstrates that protectionist policies do have some beneficiaries — in this case, giant companies — at the expense of consumers and other business, such as the myriad industries that require steel for their own production. The 500 jobs D’Souza believes would have left Milton Friedman baffled will undoubtedly come at the cost of any number of unseen jobs that are not created in steel-consuming businesses, in addition to the higher prices of goods all consumers will suffer as the result of these anti-trade policies.

Protectionism is an economic fallacy that simply won’t die. Trump’s tariffs are nothing more than the old mercantilist ideology that the profession of economics was effectively invented to refute. What most economists today call the Law of Comparative Advantage, Ludwig von Mises always referred to as “The Ricardian Law of Association,” in which he flatters David Ricardo (deservingly) for always having been “fully aware of the fact that his law of comparative cost, which he expounded mainly in order to deal with a special problem of international trade, is a particular instance of the more universal law of association” (Human Action, p. 159).

The myths of protectionism and mercantilism are based on the political allure of exoteric successes, such as US Steel’s 500 new jobs. But the Law of Association reminds us of the esoteric failures of these policies. Free trade means letting those who can produce best and most efficiently do so, in whatever industry they may, and through trade, everybody benefits from the higher productivity. This is true whether it is between two individuals, and it is true if it is between two nations.

Chris Calton is a 2018 Mises Institute Research Fellow and an economic historian. He is writer and host of the Historical Controversies podcast.

See also his YouTube channel here.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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