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.
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Jeff Thomas is British and resides in the Caribbean. The son of an economist and historian, he learned early to be distrustful of governments as a general principle. Although he spent his career creating and developing businesses, for eight years, he penned a weekly newspaper column on the theme of limiting government. He began his study of economics around 1990, learning initially from Sir John Templeton, then Harry Schulz and Doug Casey and later others of an Austrian persuasion. He is now a regular feature writer for Casey Research’s International Man (http://www.internationalman.com) and Strategic Wealth Preservation in the Cayman Islands.
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The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
