By John H. Beck
Some politicians who favor of protectionist trade policies have recently claimed that tariffs will not raise prices for American consumers. They claim instead that foreign producers will bear the burden of these taxes. However, proponents of free trade have refuted this claim theoretically and with supporting empirical evidence.
Henry George, best known as the author of Progress and Poverty (first published in 1879), was not only an advocate of land value taxation. In Protection or Free Trade (first published in 1886), he argued for the elimination of all tariffs, at a time when tariffs were a major revenue source for the Federal government.
George wrote: “Free trade consists simply in letting people buy and sell as they want to buy and sell. It is protection that requires force, for it consists in preventing people from doing what they want to do.”
George compared protectionist policies to a blockade by an enemy navy during wartime. “Protective tariffs,” he wrote, “are as much applications of force as are blockading squadrons… The difference between the two is that blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people from trading.”
In George’s view, tariffs benefitted the rich while the poor bore the burden of these taxes through higher prices. Tariffs were implemented because the rich had the most influence on government economic policy.
George did acknowledge, however, that there were some exceptions to the general rule that tariffs increase prices for American consumers, such as when a commodity is produced by a foreign monopoly. But George insisted that, in all cases where a tariff serves the purpose of encouraging domestic production, the tariff would increase prices to consumers.
Tariffs are taxes, and modern economic theory teaches that who bears the burden of any tax depends on how the quantities demanded and supplied respond to changes in price. For example, the burden of a tax on land value––a tax as advocated by George and his followers, would fall entirely on the landowner because the quantity of land is fixed.
However, if the United States taxes goods imported from another country, the quantity of imports supplied is not fixed. In response to a tariff, the foreign producer may reduce the quantity produced or may sell these goods to consumers in other countries instead of exporting them to the U.S.
Except for special cases such as when the quantity supplied is fixed, economic theory alone cannot prove who bears the burden of a tax. Whether all or part of the burden of a tax actually falls on buyers can only be proven by empirical evidence. Some recent studies provide this evidence with regard to recent increases in tariffs.
Mary Amiti, Stephen Redding, and David Weinstein, in a paper published in the Fall 2019 issue of the Journal of Economic Perspectives, estimated the effects of the Trump administration’s tariff changes on the prices Americans paid for imported goods. They concluded that “close to all of the cost of the 2018 US tariffs was borne (so far) by US consumers and importers.”
Tariffs do not only increase the prices Americans pay for imported goods. All textbooks which discuss the principles of economics explain that the prices of domestically-produced substitutes for imported goods will be higher than what the prices of imports would have been under free trade, because domestic producers incur higher production costs.
However, these textbook analyses usually omit another reason for why domestic prices rise; that is, because protectionist policies enhance the monopoly power of domestic producers. The reduced competition from imports enables domestic producers to raise their prices above the cost of production and to reap the profits of a de facto monopoly.
As Henry George wrote in 1886, protective tariffs “foster monopolies at the expense of the masses of people.” Recent research confirms George’s conclusion. The study by Amiti, Redding, and Weinstein shows that “domestic producers raise their prices when their foreign competitors are forced to raise prices due to higher tariffs.”
American consumers not only pay higher prices for imported goods subject to tariffs. As a result of these tariffs, they pay higher prices for American goods, increasing the monopolized profits of American producers.
The bumper sticker on my car says it all: “Tariffs are taxes that Americans pay.”
John H. Beck Bio
Photo by Andy Li on Unsplash
