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Let’s Really Have Political Realism

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Here’s a comment left at the site Law & Liberty:

Among the justifications that Daniel McCarthy offers for protective tariffs is the claim that tariffs can be used to keep prices of goods over time lower (“Economic Nationalism as Political Realism [2],” Jan. 22). For example, if today’s low-priced U.S. imports bankrupt American firms, foreign firms tomorrow will gain monopoly power which they’ll then exploit to raise prices to monopolistically high levels. By preventing predatorily low prices today (the argument goes), tariffs protect us from monopolistically high prices tomorrow.

That tariffs might work in this way isn’t impossible. In this complex world of ours, almost anything is possible. But only a tiny fraction of possibilities are plausible, and an even smaller number are probable. And nothing is more improbable than governments using tariffs to keep tomorrow’s prices lower than they would otherwise be.

Economic theory reveals several reasons for the deep improbability of any such successful use of tariffs. These reasons include the fact that foreign firms aren’t a single entity: even if all American producers of, say, steel are driven out of business, there are hundreds of steel producers in dozens of different countries [3] and, therefore, competition amongst these firms to sell their steel in America would ensure that prices here are kept at competitive levels. Importantly, this reality renders self-destructive the efforts of any government to bankrupt all American steel producers by subsidizing steel exports.

But still, Mr. McCarthy might ask, what’s the harm in allowing our government officials nevertheless to use tariffs in case they judge that today’s low prices will bring about higher prices tomorrow. The answer is that government officials are political creatures who, as such, dispense tariff protection in order to protect special-interest groups today rather than to protect the general welfare tomorrow. (For powerful evidence, I recommend to Mr. McCarthy and your readers Douglas Irwin’s definitive 2017 history of U.S. trade policy, Clashing Over Commerce [4].)

Mr. McCarthy rightly calls for political realism. It is, therefore, ironic that his case for protectionism rests on assumptions about trade and trade policy that are fantastically unrealistic.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University