The Tariff as a means of protecting national Industry

Suppose two entities are trading. Objectively speaking, the traded services are of equal value. Let us assume that the trade is worth 100 MUs (Monetary Units). This represents each entity producing at 100% capacity, or at 100% employment. Now suppose that at a later time the services reaching trader 1 fall to 80%. It is immaterial as to the reason for the moment.

Since objectively speaking a trade must be of equal value, trader 1 will ratchet down his delivery to 80 MUs worth of service. This requires then that trader 1 work at 80% capacity, which is the same as 20% unemployment.

Notice that in the thought experiment, the entity could be a single person, a company, a region, a nation, or an international trading block. Additionally, the reason for the 20% drop in services rendered by trader 2 could very well be anything. Trader 1 simply knows he is not going to deliver 100 MUs in exchange for 80 MUs.

When tariffs are levied against imported goods by trader 1's government, this is equivalent to decreasing the services delivered to him by trader 2. Trader 1's income has just dropped the amount levied by the tariff. Whether the government confiscated the cargo, pirates confiscated the cargo, or it simply fell off the boat, for trader 1 it is all the same. He just knows he is getting less. His reaction is simple, and that is to produce less, which requires a rise in unemployment.

True to the nature of economic policy, the government claims to be "protecting national jobs", while the opposite is the case. Sure, the industry that lobbied for and bought the laws to put a foreign competitor at an unfair disadvantage augments its cash flow, but at the expense of the citizenry consumers. The government has reduced the total wealth of the nation even without accounting for the money lost through the tariff itself. But the story doe not end here. Some of the citizenry who previously provided services to the now disadvantaged trader are put out of work, for the disadvantaged have nothing to offer in the way of payment. A total net decrease in employment is the result of tariff policy.

Author: Scott Wallace Brians
Date: 26 December 2006
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