Who Ultimately Pays the Cost of Protective Tariffs?

It is a benefit of sound economic theory that it proves very useful in the refutation of popular fallacies and misconceptions about the workings of the market economy. One such fallacy is the assertion that government interventions through protective tariffs are without negative consequences for the people of the imposing country. Politicians and statesmen have employed these talking points to earn the support of the majority of the voting masses who are mostly unable to fully comprehend economic arguments.

This article attempts to briefly assert that government interference with domestic markets are precursors of protective tariffs which, in turn, impair the welfare of consumers by imposing the burden of higher prices for commodities acquired in the market.

Effects of Coercive Interference with Industrial Activities

One of the immediate effects of government interference with business is a rise in the costs of production. It is characteristic of such government interventions that they necessitate the introduction of further schemes to salvage the industries concerned from the disastrous effects. This is always the case, given that the previous interventions would already produce outcomes that are judged dissatisfactory, even from the point of view of the government and supporters of these policies.

Another significant effect arising from higher costs of production is the attempt to translate these higher costs into higher prices of products (though this is not always possible). Regarding minimum wage increases by fiat, the corresponding increase in the prices, reduction of other services, reduction of other worker benefits, etc. tend to absorb the gains attained by the wage earners through the minimum wage legislation. This is apart from the more disastrous effect of permanent unemployment always occasioned by minimum wage laws and labor union interferences with industrial activities.

Tariffs Are Superfluous Under Domestic Free Trade

Tariffs are superfluous under conditions of domestic free trade. This is more so because the actions of domestic entrepreneurs and other market participants tend to be already adjusted to prevailing conditions of the market. Put simply, production tends to be fully adjusted to consumption demands. Barring the emergence of large maladjustments in the structure of the market in the short run, price discrepancies between the factor markets and the product markets are already in the process of being reconciled by daily actions of entrepreneurs. Under this state of affairs, the competitiveness of domestic entrepreneurs is not hampered given the absence of institutional restrictions. The more efficient producers in the domestic market are in better positions of competing in the world market. Therefore, the imposition of protective tariffs under conditions in which domestic products are competitive becomes superfluous.

Protective tariffs become “necessary” as a result of failing industrial policies in the domestic market. They are usually imposed because the industrial conditions of production in a country are unfavorable for competition; most particularly, competition with foreign products. 

Furthermore, considering that the effects of domestic industrial policies are only limited to the domestic market, foreign producers are not hit by the high costs of production occasioned by these policies. It then follows that they supply the commodities in question at cheaper prices relative to the domestic producers. Most importantly, given that these policies have the effect of reducing the competitiveness of local producers, the desirability of protecting domestic enterprises against their more efficient foreign counterparts become a matter of urgency. As Mises remarks in his book Omnipotent Government,

It is obvious that all interventionist measures aiming at a rise in domestic prices for the benefit of domestic producers, and all measures whose immediate effect consists in a rise in domestic costs of production, would be frustrated if foreign products were not either barred altogether from competition on the domestic market or penalized when imported.

He further adds:

The aim of the protective tariff is to undo the undesired consequences of the rise in domestic costs of production caused by government interference. The purpose is to preserve the competitive power of domestic industries in spite of the rise in costs of production.

Who Ultimately Pays the Cost of Tariffs?

It is always and everywhere the citizens and consumers of the domestic market who pay the cost of protective tariffs. Contrary to the suppositions of politicians and the empty babbles of statist demagogues, the burden of higher prices occasioned by the imposition of import duties on each unit of those classes of commodities imported into the country are borne by domestic consumers.

Furthermore, given the restriction of foreign competitors by virtue of the tariffs, the conditions become more propitious for the establishment of local monopolies. As with every institutionally-established monopoly, the supremacy of the consumers in determining the quantities and qualities of commodities becomes subverted. The local monopolies now determine the quantities to be made available to the consumers in accordance with their attempts to fit supply with optimum monopoly prices. Ultimately, certain groups of consumers become unable to satisfy their most urgent wants given their inability to obtain these goods at the prevailing competitive prices in the world market.

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