By Jeff Thomas
Feature Writer for Doug Casey’s International Man, Strategic Wealth Preservation and 321gold.com
French economist Frédéric Bastiat was a man far ahead of his time. He was a “classical liberal,” which, today, would identify him as a libertarian. He expanded upon the free-market argument set forth by Adam Smith in 1776.
In 1845, the French government levied protective tariffs on scores of items, from sewing needles to locomotives. The intent was to protect French industries from companies outside France that could produce the goods more cheaply.
The reaction from Mister Bastiat was to publish The Candlemaker’s Petition,
a satirical proposal to the government that was intended to help them to see
the nonsense of protective tariffs.
The petition was presented as having been sent “From the Manufacturers of Candles, Tapers, Lanterns, Sticks, Street lamps, Snuffers and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol and Generally Everything Connected with Lighting”.
Their plea to the Chamber of Deputies was that the government pass a law, “requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses”.
Mister Bastiat’s satirical petition did an exemplary job of exposing the tendency of governments to pander to special interest groups, to the detriment of everyone else.
Throughout the ages, protective tariffs have been created for this purpose and, historically, they work only briefly, if at all.
In 1930, the US introduced the Smoot-Hawley Act, which raised tariffs on over 20,000 imported goods. Not surprisingly, the source-countries for those goods retaliated by passing their own tariffs against the importation of American-made goods.
The net effect, in addition to the new laws cancelling out each other, was that free trade took a major hit, consumers in all countries affected had less access to a variety of goods and the GDP of each nation suffered, as overseas orders dried up.
Of course, the justification for Smoot-Hawley was that the US had suffered a stock market crash and the demand to protect surviving businesses was considerable. Not surprising then that, whenever a given country finds itself in an economic squeeze, industry leaders shout “foul!” and governments appease them with tariffs.
Again, not surprisingly, we observe the tariff question rearing its ugly head today, most visibly in the US, where new President Donald Trump has vowed to place tariffs on a number of countries, most notably on Mexico (20%) and China (a whopping 45%).
As is always the case when a government declares it will create a dramatic tariff, those who impose it look no further than the immediate effect – that of limiting importing goods to protect domestic industry. The immediate secondary effect is that goods from those countries suddenly become far more expensive and domestic industry is either unable to produce the goods at all, or at best, at a much higher price.
At present, Chinese goods amount to 19% of American imports and Mexican goods amount to 12%. With nearly a third of all goods purchased by Americans during a difficult economic period increasing dramatically in price, the impact to the cost of living can be expected to be substantial. If the tariffs are extended to other jurisdictions, as in 1930, a few domestic industries would enjoy a brief period of benefit, but the population (and eventually all industry, through knock-on effects) would be heavily impacted.
So, why on earth are political leaders so quick to impose tariffs? Well, don’t forget: tariffs are paid to the government. Any government that’s facing revenue problems will be tempted to go for a quick injection of revenue, even if it will ultimately be destructive. Regardless of how much damage tariffs do to the people of a country, tariff revenue is like manna from heaven for governments.
Of course, the revenue source tends to dry up before long, as ultimately, tariffs are destructive to free trade. Most tariffs are either abolished or at least lowered at some point. In the meantime, they’re like plaque in a body’s arteries, creating a sclerotic effect on the economy. Invariably, they’re a heavy price for a country to pay for a brief period of additional revenue that political leaders may squander.
But, understandably, the temptation is great for any government and, since memories tend to be short, governments can serially con the public into another round of protectionism every generation or so.
Returning once again to Mister Bastiat’s satirical petition, his final paragraph stated, “Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!”
On the surface, tariffs sound like a good idea, but in reality, they’re veritable icebergs of economic destruction. Two principles should always be considered when musing on a tariff:
Tariffs (protectionism) never benefit a nation. They do, however, often increase the revenue received by the imposing government.
The more a people pay for products, the lower their standard of living.