We cannot expect markets to bail us out when we are damping the very forces that make them work.
Michael Brendan Dougherty thinks I gave domestic markets short shrift when I asserted that they cannot bring the price of a good below its pre-tariff level, since unprofitable production at a certain price point may only be made profitable by the higher price that tariffs create. In response, he argues that tariffs can ultimately lower prices by encouraging more investment in domestic industry, generating competition and innovation that help discover new cost efficiencies.
If only that were the case, tariffs would be a catalyst for economic growth that supply-siders have been sleeping on. But theory and empirical evidence say otherwise. Instead of making domestic industries more dynamic and efficient, protectionism makes them flabby and complacent by blocking out foreign competitors.
Tariffs impose a disadvantage on importers, raising a product’s domestic price above what is offered internationally. The added cost to businesses and consumers functions, effectively, as a subsidy for less efficient economic arrangements. Michael argues that foreign companies may not truly be more efficient producers, as they are often subsidized or protected by their own governments. But given the unknowable multitude of factors that go into prices, which Michael notes in his references to Hayek, it is impossible to disentangle the effects of foreign economic policies from real comparative advantages, and therefore impossible to correctly offset distortionary policies with tariffs.
(Regardless, the opportunity cost of preventing lower international prices for Americans is the same no matter the cause. Imagine if China did not subsidize manufacturing whatsoever, but was still able to make phones and footwear at a lower cost thanks to its staggering economies of scale. It would undercut U.S. manufacturers all the same, allowing us to shift labor and capital to more valuable uses. Protectionism draws those resources back into lower-value industries.)
By stifling access to foreign markets, tariffs reduce the competitive pressure that Michael says is essential to developing cheaper production methods. I agree that tariffs do not “abolish competition,” as domestic producers still must deal with one another. But just as dissolving the National League would not abolish competition in baseball, it would surely diminish it!
Markets do not become more competitive with less competition. Once insulated from global price pressures — which factor in all the efficiency discoveries that happen abroad — domestic companies have far less incentive to innovate or invest in cost-saving measures themselves. Their prices remain higher than what businesses and consumers would otherwise be free to pay.
This is not mere theory. Many industries in the United States today meet Michael’s qualifications for stable, predictable trade protection that long predates the current Trump administration: shipping and shipbuilding, steel and aluminum, sugar and lumber, food and apparel, light trucks and solar panels. In none of these industries have production costs fallen below what they are abroad. Hence, in none of these industries have domestic prices fallen below international levels. Americans pay significantly more in all cases, decades and even centuries into these protectionist experiments. Steadily coddled, our “infant industries” never grew up to fare for themselves.
The one example Michael cites of protectionism ultimately reducing prices is South Korea’s burgeoning manufacturing sector in the 1960s and 70s. Certain firms were undoubtedly boosted by industrial policy, but not through tariffs. That period of development was marked by export promotion after South Korea turned away from its previous strategy of import substitution, which had failed to spark industrialization. The country succeeded by thrusting its manufacturers into global competition, not by shielding them from it. It was that competitive pressure that yielded greater productivity, innovation, and efficiency — the same competitive pressure that tariffs suppress.
It’s perfectly legitimate to argue that the high price of protectionism is worth the benefits to national sovereignty or security, as Michael does elsewhere. (I have argued against this approach on separate grounds.) What I can’t let him get away with is claiming a free lunch: that tariffs are all upside if you simply let producers innovate around them. Sadly, we cannot expect markets to bail us out when we are dampening the very forces that make them work.