Here’s a note to a long-time champion of protectionism Warren Platts.
Mr. Platts:
Commenting on David Henderson’s EconLog post titled “Who Bears the Burden of Tariffs?” you construct a hypothetical example in which a protective U.S. tariff on baseball caps causes no increase in the price paid by American buyers of baseball caps yet nevertheless has, as you say, a “protective effect.” In your hypothetical, the tariff incites the baseball-cap producer to increase its American operations to such an extent that the supply of baseball caps – and, hence, the price of baseball caps – remain unchanged. You use this hypothetical to suggest that tariffs can have a protective effect at no cost to domestic citizens.
You’re mistaken.
Even if the producer completely ‘reshores’ its baseball-cap production to the U.S., the supply of these caps will not be as high as it was before the tariff. It will be lower. The reason is that the producer manufactured the caps abroad because that was the lowest-cost method. Manufacturing the caps in the U.S. is more expensive. So even when all baseball-cap manufacturing is ‘reshored’ to the U.S., the supply of baseball caps will be lower, and the prices paid by buyers of these caps will be higher, than before the tariff.
The only way to escape this conclusion is to assume that the cost of producing baseball caps in the U.S. is identical to the cost of producing these caps abroad, and therefore the manufacturer’s decision to produce abroad rather than in the U.S. was a toss-up. While it’s true that under this highly implausible assumption – and only under this assumption – a tariff-induced ‘reshoring’ of all production of baseball caps to the U.S. will not raise the price of baseball caps, it is not true that this tariff will be costless to Americans.
Baseball-cap production in the U.S. cannot expand without drawing resources – capital and labor and other inputs – away from other productive activities in the U.S. Thus, as the tariff fuels an increase in America of the production of baseball caps, it necessarily also fuels a decrease in America of the production of other goods and services. As supplies of these other goods and services fall, their prices rise. Americans’ cost of living goes up. Americans pay.
There is no such thing as a free lunch or free tariff-induced greater domestic production. It is impossible for a tariff to have a protective effect without raising prices paid by domestic buyers.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
