Henry George On Tariffs

An excerpt from, “Henry George’s Protection or Free Trade: A Critical Review” By Charles L. Hooper, Econlib, February 6, 2017:

Henry George published his spirited defense of free trade, Protection or Free Trade, in 1886. In this classic, George paid special attention to how protectionism affected the working class. Except for the slightly dated writing style and examples from a century ago, Protection or Free Trade could have been written yesterday. With the election of protectionist-leaning Donald Trump and some renewed hostility to free trade, it’s helpful to consider the book that the late Milton Friedman said was, “the most rhetorically brilliant work ever written on the subject.”

. . .Protection or Free Trade examines why free trade has so few advocates and defenders. Everyone benefits from free trade, but special interests benefit noticeably if they can limit free trade for their specific industry. “Free trade … offers no special advantage to any particular interest…”. Worse, those who benefit from limiting free trade may extrapolate that benefit to others. “Those who are specially interested in protective tariffs find it easy to believe that protection is of general benefit.” 

Protectionism is sometimes justified for supposedly benefiting average people. According to George, “[t]he slave owners justified slavery as protecting the slaves. British misrule in Ireland is upheld on the ground that it is for the protection of the Irish.” George saw protectionism for what it is. “Trade is not invasion. It does not involve aggression on one side and resistance on the other, but mutual consent and gratification”  and “It is not from foreigners that protection preserves and defends us; it is from ourselves.” 

George had a clear-eyed view of voluntary trade and showed how it is mutually beneficial and increases overall wealth. “If I trade with a Canadian, a Mexican, or an Englishman it is for the same reason that I trade with an American—that I would rather have the thing he gives me than the thing I give him. If I did not want the thing I am to get more than the thing I am to give, I would not wish to make the trade.” Those who worry that foreign companies are hurting us by “dumping” their underpriced products on American consumers have it exactly backwards. Wrote George: “There is no one who in exchanging his own productions for the productions of another would think that the more he gave and the less he got the better off he would be. Yet to many men nothing seems clearer than that the more of its own productions a nation sends away, and the less of the productions of other nations it receives in return, the more profitable its trade.”

. . .George made an important distinction between a revenue tariff and a protective tariff. The objective of a revenue tariff is to provide tax revenues to the government, while the objective of a protective tariff is to dissuade citizens from buying foreign goods. The two types of tariffs directly conflict. With a revenue tariff, the U.S. government would want Americans to buy more Toyotas because the revenue from the tax is equal to the number of units purchased times the tariff per unit. With a revenue tariff, the government may pocket more tax revenues from each Toyota purchased than from each GM. With a protective tariff, the U.S. government wants Americans to purchase fewer Toyotas, leaving the sales to a domestic producer such as GM. A successful protective tariff will generate less revenue—perhaps even zero—than a successful revenue tariff. Many protectionists confuse the two objectives.

If a tariff is placed on Toyotas, Toyota may decide to absorb the new tax or to raise prices to compensate. The first case leaves the market unchanged, with a direct transfer of money from Toyota to the federal government. The second case allows GM to raise its prices to match. “An import duty can only fall on foreign producers when its payment does not add to price; while the only possible way in which an import duty can encourage home producers is by adding to price.”  The main beneficiaries of higher-priced domestic cars? GM’s shareholders. The main losers? American consumers.

The way to encourage local producers is by creating situations in which they can increase their prices, which benefits some business owners and hurts consumers. Not all businesses benefit because the “finished products of some industries are the materials or tools of other industries.”  For instance, protecting domestic steel producers leads to higher steel prices, which hurts domestic auto manufacturers and shipbuilders. There is no way to encourage everyone; helping one industry hurts others, always for a net loss. Jobs are a primary reason that some favor protectionist policies, but tariffs on imports hamper economic activity and tend to reduce the quality of jobs in the economy.

George found that protectionist measures artificially protect some businesses and their shareholders, but not necessarily workers, all of whom are “unprotected” and earn wages set by the market. He concluded by saying, “We have seen that protective duties cannot increase the aggregate wealth of the country that enforces them, and have no tendency to give a greater proportion of that wealth to the working class.”