I am against protective tariffs. They weaken economic efficiency, give out special benefits to industry, hurt consumers, and reduce freedom. Nevertheless, they have been used by any countries, both large (U.S., Brazil) and small (Mauritius, Tunisia) in the furtherance of industrialization. Why is this so?

According to this article, the key factor is lack of urbanization. Singapore and Hong Kong were both solidly free-trade from the beginning because they had no substantial rural population. Mauritius, Brazil, Taiwan, the People’s Republic of China, and Tunisia, meanwhile, all had large rural populations.

This makes some sense.

What is the effect of a protective tariff? It is to shift domestic consumption from the products of foreign exporters to those of domestic producers. Who’s hurt by the protective tariff? Consumers, especially who don’t work in protected factories or benefit from their business. Who benefits? Domestic producers.

Hurting the farmer to benefit domestic manufactures is easy.  But what if there is no farmer to encourage to move to the factory, but only a city-dweller? What if there’s no one for uncompetitive domestic manufacturers to sell to but urban dwellers? Then protective tariffs just redirect resources which could be used for the advancement of cutting-edge modern urban services to manufacturing for no good reason. It’s redistributing resources from most city-dwellers to a few city-dwellers. This is the opposite of the case in which there are numerous farmers to buy protected goods, as cities as a whole can benefit from farmers as a whole via the protected urban manufacturing sector. Thus, Chicago supported the Republicans, who were the champions of protective tariffs, before the Great Depression.

Protection in partly rural societies.

Protection in partly rural societies.

Protection in fully urban societies. Notice the net benefit to the cities is much lower.

Protection in fully urban societies. Notice the net benefit to the city is much lower.

It’s notable U.S. protective tariffs began in 1816, when the U.S. was just beginning to industrialize and still very much an agricultural nation, with its infant industries threatened by foreign, especially British, competition. And it’s notable they mostly ended in the 1930s, when the U.S. had mostly urbanized, the manufacturing sector had fully bloomed, and foreign trade had collapsed to a trickle.

When domestic firms can benefit from the profits of foreign manufacturing and get greater political power than those protected domestic manufacturing firms that can’t do so, that’s when protective tariffs come to a permanent end as a significant means of stimulating domestic industry, and outsourcing begins. This is especially true if domestic firms can own factories overseas. Thus the National Association of Manufacturers’ condemnation of the Republican presidential nominee’s domestic industrial protection plan to benefit grandparent industries for the benefit of domestic industrial workers in, say Ohio and Pennsylvania, at the expense of most Americans, as in, say, California and Washington.

Advertisements