Earlier today President Trump imposed tariffs on imported steel (25 percent) and aluminum (10 percent) from the European Union, Canada and Mexico. Not surprisingly, the tariffs triggered immediate retaliation from U.S. allies against American businesses and farmers.
“This is protectionism, pure and simple,” said Jean-Claude Junker, president of the European Commission. Junker is correct. The tariffs are are a form of protectionism that is frequently proposed by populist and Democrats. But what is wrong with protectionism? The short answer is that it makes Americans poorer.
To show why this is the case, let me start by defining a few key terms that are relevant to my argument:
Protectionism is the practice of shielding a country’s domestic industries from foreign competition by taxing imports. A protectionist is a person who advocates for protectionism.
Free trade is when international trade is left to its natural course without tariffs, quotas, or other restrictions. A free trader is a person who advocates free exchange of goods and services between nations without regulatory barriers such as tariffs or quotas. By definition, a (consistent) free trader opposes protectionism.
Consumption is the use of goods and services by households.
That last one is particularly significant. The importance of consumption to human flourishing is the primary reason many economists argue that, though both groups are essential, consumers should take priority over producers. As Adam Smith wrote in his book, The Wealth of Nations:
Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self evident that it would be absurd to attempt to prove it.
(For more on this point, see my post “For the Good of Mankind, Side With the Consumer.”)
Because of the importance of consumption I’ll add a new label, which identifies my particular position:
Consumption-first advocate — a person who supports policies (such as free trade) that prioritize consumption and the consumer and advocate for increasing overall consumption in a way that some policies (such a protectionism) do not.
Now that we have our key terms defined, let’s consider the disagree between protectionists and consumption-first advocates (and other free traders).
We should start by noting that for the majority of people who advocate protectionism, their motive is noble: they want to protect jobs. On this we consumption-first advocates are in agreement with them.
As I point out every month, jobs are one of the most important aspects of a morally functioning economy. They help us serve the needs of our neighbors and lead to human flourishing both for the individual and for communities. Conversely, not having a job can adversely affect spiritual and psychological well-being of individuals and families.
Jobs are of utmost importance in our economy, which is the primary reason people support protectionist policies and oppose policies that encourage globalization, such as “outsourcing” jobs overseas. Some protectionists believe that we should protect all jobs, while others advocate protecting jobs in certain industries or that have certain levels of income (e.g., high-paying factory jobs).
Almost all protectionists, free traders, and consumption-first advocates would (or at least should) agree that: jobs are important; that we should build an economy that is able to create/provide a job for anyone who wants one; and that every hardworking and motivated person should (eventually) be able to achieve a level of productivity in which they can earn a living wage.
However, the consumption-first advocate would say that while these goals are noble, they are merely a part of the larger goal of increasing human flourishing for as many people as possible. They would also point out that the purpose of the job is not merely to produce income. This is a crucial point that is often overlooked by protectionists, who tend to focus on jobs primarily as a source of income.
To be clear, the protectionists aren’t necessarily wrong. Income is certainly a crucial aspect of a job. But focusing primarily on income obscures the fact that the purpose of income is to increase consumption. Income is a means by which we can increase our consumption, but it is not the sole factor we should consider. That is why we should focus on consumption first, and only then on secondary considerations such as income.
The reason is that consumption is a better indicator of well-being and human flourishing than income, or even wealth. A good example of this is found in the recent movie The Martian. While he is stranded on Mars, the astronaut Mark Watney is technically still earning an income from NASA. But that money doesn’t do him much good when he is stuck on a planet without supermarkets. What matters most for Whatney’s life is his ability to consume goods and services necessary for survival — not how much income is sent by Direct Deposit each month into his checking account.
The same is true for income here on Earth. What matters most is not necessarily the level of income, but how much that income allows you to consume. It would be counterproductive to have a high income if the increase in income reduces your level of consumption. Similarly, it is counterproductive to increase the income for a certain part of the workforce when it reduces the level of consumption for everyone else in America. Unfortunately, that is exactly what protectionism does.
Let’s look at an example of how that happens. The U.S. government decides to implement a tariff that will “saves” 1,200 full-time jobs at a tire plant.
Each of the saved jobs pays an average wage of $40,070 a year ($20.69 per hour). Sounds pretty good, doesn’t it? Maybe that’s a policy we should support.
But what if I told you that those 1,200 jobs cost the American consumer $900,000 each? Oh, and while 1,200 jobs were created, it came at a cost to the American economy of 2,531 jobs. That might make us reconsider whether the policy was all that beneficial.
Unfortunately, this is not a hypothetical situation: it’s the real-world effect of a tariff on Chinese tires.
In his 2012 State of the Union address, President Obama claimed that, “over a thousand Americans are working today because we stopped a surge in Chinese tires.” What he failed to mention is that for every tire job that was “saved” two other jobs were lost or not created and that each job “saved” cost Americans an additional $900,000 a year.
If the workers only got $40,070, what happened to the other $859,930? It went into the pockets of the tire companies, many of which are not even located in the U.S. When the companies pushed for the tariffs to “save American jobs” what they were really doing was increase their own profits by preying on the economic ignorance of the American public about the effects of tariffs. (Crony capitalists are gifted in finding ways to get the public to support policies that make them richer while making other citizens poorer.)
This is a classic example of how protectionism focuses on that which is seen and ignores what which is not seen. Like the president, it’s easy for us to “see” that 1,200 jobs that saved. What is harder — indeed nearly impossible — for the public to see is the cost of the protectionist policy, including the jobs that weren’t created because of the tariffs.
Which brings us back to consumption. Because Americans had to spend an additional $900,000 more for tires than they would have without the tariff, they have less to spend on other goods and services. While those 1,200 tire workers may have been better off (depending on whether or not they could have found other jobs), the American public overall was made much, much worse off.
Somewhere a parent wasn’t able to buy new clothes for their children because they had to spend more money than was necessary on tires. Somewhere a single mother had to choose between putting food on the table and getting a new tire to drive to her job. Those are the types of tradeoffs the tariff forced Americans to make.
Also, keep in mind that we are only talking about the effect of one tariff on one small industry. Imagine the effect of all unnecessary tariffs on the entire economy, an effect estimated to be $500 billion a year. How many more good and services did we have to give up to “protect” those jobs?
This is why protectionism makes us poorer, not richer. While it looks like we are “saving” some jobs, what we don’t see is that it is costing us other job and that everyone, especially the poor, has to bear the burden in the form of higher prices. The more tariffs we impose, the more industries we “protect,” the poorer we all become.
Let’s be clear, however, about what this doesn’t mean. It doesn’t mean that we should just shrug when this “creative destruction” puts people out of work. It doesn’t mean that opposing tariffs means we shouldn’t be concerned about those who the tariffs would have helped. Consumption-first advocates and other free traders are not denying there is a problem; we are merely pointing out that protectionism is not the solution.