Protectionism ensures slower growth

Excerpts from an article in Forbes by Jeffrey Dorfman, a professor of economics at the University of Georgia. USA , follow

Dorfman claims that tariffs help uncompetitive industries because:

  • They put a penalty on imports in the form of a tax
  • Domestic producers that would otherwise lose market share to imports are able to produce more and find domestic markets for those goods
  • This maintains jobs in the protected industry
  • And, by keeping factories open, it also means more capital stays in the industry benefiting from the tariffs

 

These outcomes are pretty much the point of the tariffs, but they impose both obvious and hidden costs on the economy

The obvious costs are twofold:

  • First, consumers of the products sold by the protected industry must pay a higher price thanks to the tariffs
  • Second, jobs and profits are lost in the rest of the economy because the higher prices induced by the tariffs leave less money to be spent on everything else

 

These costs are much discussed, particularly during any ramp up in trade disputes and tariff levying

What is mostly overlooked is the hidden cost of tariffs – ergo, slower economic growth

At any given time, the US economy has a certain amount of capital to invest in productive activities:

  • Tariffs protect uncompetitive businesses from shrinking or going bankrupt
  • And because these protected industries are larger with the tariffs than without them, more capital is trapped in those low-growth or shrinking sectors of the economy benefiting from tariffs
  • That lowers the average return on capital

 

Without tariffs, those industries would shrink, and capital be reallocated to faster-growing parts of the economy – this reallocation of capital would boost aggregate output thanks to the faster growth and mean there would be more future capital to invest in other productive uses – and economies with more capital have higher economic growth and higher wages thanks to the productivity derived from that capital

Thus, removal of tariffs would boost economic growth and create a feedback loop that would keep economic growth accelerating

 

Tariffs thus cost an economy jobs because the costs imposed on the rest of the economy outweigh the gains awarded to the protected industries

Conclusions:

  • Protectionism doesn’t just mean current economic losses from both the taxes and the disruption of rearranging global logistic networks
  • It also means slower growth for as long as certain industries are protected
  • This effect compounds over time, growing for every year protectionism continues and protected industries remain larger than optimal
  • One thing markets are good at is allocating capital – sure, they make mistakes and those investors lose money – and markets do a better job than politicians when choosing which industries to support from foreign competition
  • Hence, overall, more tariffs mean an inferior capital allocation, a lower average return on capital, and thus slower economic growth

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