Tariffs Corrupt the Market Process
When governments erect tariffs, they do so mainly to protect domestic industries from market pressure by foreign businesses. This justification is politically popular since it makes it sound like our own companies will become stronger and provide plentiful jobs and growth for our economy. However, what are the long-term effects of sheltering domestic firms from international competition? A recent paper by the American Action Forum highlights many of the concerns I have about how tariffs can corrupt the natural process of the market.
By giving homegrown industries preferential treatment, the government weakens their motivation to pursue new ideas or improvements. The paper states, “Limiting the access of foreign firms in the domestic market through tariffs reduces any incentive domestic producers have to develop new products, knowing there will be fewer options for consumers that are comparatively more expensive.” In a truly free market, firms must compete for customers to sell their goods and services. This competition can be manifested through price differences or quality differences. Both of these types of differences spur innovation. Sometimes a firm will want to find ways to reduce costs (and hopefully in turn price), so they look for better technology or better processes to help them achieve that. Toyota was a famous example of this kind of advancement when they implemented their “Just-in-Time” production strategy (Just-in-Time Production System (JIT) in Lean Manufacturing - SixSigma.us).
At times, a business may aim to improve the goods or services it delivers, so they also attempt to find better technology or processes to do so. Apple was a famous example of this kind of progress with their vertical integration of both software and hardware in their products (Vertical Integration Works for Apple - But It Won’t for Everyone - Knowledge at Wharton).
Since trade barriers inherently stifle market rivalry, national companies feel less pressure to lower prices or enhance the value of what they offer. This is harmful to our economy because it damages our global presence (something I rarely see tariff proponents bring up) but it’s also detrimental to our national welfare since we are deprived of either higher-quality products or less costly products. What justification is there for making consumers bear higher costs for inferior goods?
While protecting jobs may sound humane and wise on the surface, the truth is that tariffs in the long run will both reduce jobs and our overall quality of life. Policy makers must not be so myopic when they promote the benefits of tariffs. Their myopia can have devastating effects on our economy.
