Carpe Diem

We’re better off with free trade, so why do we have tariffs?

David Friedman explains in a post titled “Why Improving Things is Hard“:

There are good economic arguments to show that we would be better off if we went to complete free trade. That seems puzzling—if we would be, why don’t we?

The answer is provided by public choice theory, the branch of economics that deals with the workings of the political market. A tariff makes the inhabitants of the country that imposes it worse off but the politicians who pass the tariff better off, since it benefits a concentrated interest group at the cost of dispersed interest groups. More concentrated interest groups are better able to pay politicians to do things for them.Trade policy is optimized, but for the wrong objective.

6 thoughts on “We’re better off with free trade, so why do we have tariffs?

  1. David Friedman, who is Milton’s son, also favors pollution taxes for similar reasoning. It is profiting by special interests at the expense of the general interest that polluters benefit.

  2. Of course the post presents the Adam Smith point of view versus the merchantilist point of view. Not exactly a new issue. Of course it starts with the issue is having some industry be at home a national security matter? The protectionism of Abe Lincoln and his successors in particular in iron and steel was to build up a us steel industry. (for example on all subsidized railroads it had to be US iron and steel used for rails)

  3. The logic behind public choice theory can be, but seldom is, extended to the private world as well. Corporations can reward senior executives with lavish salaries, pensions and fringe benefits because the cost per outstanding share is unimportant to the shareholders as long as the price of the stock rises. Often the argument is based on the differential between executive salaries and those of line workers, which is not the point. Just as NFL owners reap the benefits of barely noticeable sales tax increases to publicly finance giant TV studios, so to do corporate executives, with the assistance of interlocking board directorates, filch a small percentage of profits that adds up to big numbers.

  4. Of course, this can be said for just about anything, not just tariffs. In public choice, it’s an explanation why bad policies keep getting passed (for example, ethanol or green energy subsides, militarization of the police, the War on Drugs, or health care subsidies).

    And, of course, everyone thinks their special interest is important, so they all lobby.

  5. You reminded me of something I was wondering about years ago. let’s say a certain country is subsidizing an industry, then what would happens if we didn’t penalize the practice. Sure they could be like Amazon and eventually turn a profit or the citizens of that country could get irritated that such a rich industry is being rewarded with government favor.

    • what would happen?

      well, the taxpayers of country X would provide a subsidy to us, and we would gain a higher standard of living as the result of more affordable goods.

      the subsidized company would, generally, fail to become a world class competitor, become dependent on such subsidies, and make bad investment and production decisions as a result.

      all in all, the imposing country would do itself harm, and we would reap a windfall.

      so, the question then becomes, why would we seek to punish those determined to give us their money?

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