Aug 13, 2018

Government Privilege: Trade Barriers

Matthew D. Mitchell Senior Research Fellow , Tad DeHaven Research Analyst

[This is the third in a series of short commentaries on The Bridge that discusses the various types of privileges that governments bestow on particular businesses or industries.]

For much of American history, trade barriers such as tariffs and quotas on imports have been a significant—perhaps the dominant—source of government-granted privilege. In a remarkable triumph of economic evidence over special interest pleading (the vast majority of economists oppose trade barriers), nations across the globe have cut tariffs steadily since the end of World War Two. The average US tax (tariffs are essentially taxes on domestic consumers) on dutiable imports peaked at 59 percent in 1932 and steadily fell to less than five percent in recent decades.

Firms and industries have, however, succeeded in occasionally securing exceptions to lowered tariffs. In 1983, the Reagan administration broke with its stated preference for free trade and, in response to a petition from Harley-Davidson, imposed tariffs of up to 49.4 percent on imported heavyweight motorcycles. Nearly two decades later, the George W. Bush administration imposed tariffs ranging from eight to 30 percent on foreign producers of steel.

Nonetheless, lower tariffs have remained the norm, which means that other barriers to trade, such as import quotas, anti-dumping laws, and direct or indirect subsidies may have become a more important source of trade privilege for certain firms. For example, the US sugar industry has used its political clout to obtain artificially high prices through a system of government supports that includes quotas on imported sugar. American consumers, including companies that utilize sugar in their products, pay a “hidden tax” of approximately $3 billion a year as a result.

Another example is the Jones Act, which is supposed to bolster the domestic shipbuilding industry by forcing shippers operating in our territorial waters to use vessels that are US built and owned. Although often justified on national security grounds by its backers, a Mercatus economic analysis of the Jones Act concluded that it “has had the same negative effect on the economy as any tariff or trade barrier, without providing any significant improvement in national security.”

Under the Trump administration, trade protections via tariffs have made a major return. The administration has slapped tariffs on Canadian softwood lumber, on all steel and aluminum imports, on an escalating volume of Chinese imports, and is now threatening tariffs on foreign automobiles. Countries targeted by the Trump administration, including traditional US allies, have responded with tariffs on US exports. In sum, the Trump administration has intentionally ignited a global trade war.

The question is: why?

There is an element of special interest politics at play. Although Trump campaigned on a promise to “drain the swamp” in Washington, the special privileges afforded to large US steel manufacturers are a textbook case of concentrated benefits and diffused costs. Steel interests are a relatively small and organized interest group while consumers are numerous and unorganized. So even though consumers end up paying more for protectionism than producers gain, consumers tend to be outmatched politically.

Relationships also matter. As the New York Times’ Jim Tankersley recently reported, “Two of America’s biggest steel manufacturers — both with deep ties to administration officials — have successfully objected to hundreds of requests by American companies that buy foreign steel to exempt themselves from President Trump’s stiff metal tariffs.” Indeed, the convoluted, bureaucratic waiver process is reportedly overwhelming the Commerce Department as thousands of American companies that utilize steel and aluminum seek relief from the administration’s financially destructive tariffs. There are also reports that Trump promised Apple CEO Tim Cook that iPhones assembled in China will be spared from tariffs. If true, it’s unfortunate that those thousands of US companies being punished by the president’s trade policies do not possess the same access to power as Mr. Cook.

But there may be something else at play as well. As economists Nathan Jensen and Edmund Malesky document in their recent book on targeted economic development subsidies (discussed elsewhere on The Bridge), politicians are highly motivated to hand out special favors because voters routinely reward them for doing so. Their findings are consistent with Paul Dragos Aligica and Vlad Tarko’s theory that favoritism is legitimized by populist ideology.  

An argument that is becoming popular with supporters of these tariffs who otherwise claim to support free trade is that the president’s seemingly reckless approach is actually the shrewd strategic maneuverings of a master negotiator whose true aim is to eliminate all trade barriers. That take, as others have noted, is probably wishful thinking (to put it politely). As our colleague Veronique de Rugy recently explained, “Nothing in what the president has ever said suggests that he's anything but a diehard mercantilist.”

When it comes to trade, the simplest answer may be the correct one: the president is wrong. How else does one explain bizarre statements like “Tariffs are the greatest!” and “trade wars are good, and easy to win”? He certainly demonstrates what economist Bryan Caplan calls anti-foreign bias, which Caplan defines as “a tendency to underestimate the economic benefits of interaction with foreigners.” But while ignorance can be bliss (as the saying goes), it can be quite problematic when it’s possessed by the head of state from the world’s largest economy.

Learn more: In The Pathology of Privilege: The Economic Consequences of Government Favoritism, Matthew D. Mitchell identifies multiple forms of government granted privilege (including tax privileges and contracting abuses), and explains their consequences. The full special report is free of charge via pdf, and is available as an ebook and paperback for purchase at Amazon.com and CreateSpace.com.

Support Mercatus

Your support allows us to continue bridging the gap between academic ideas and real-world policy solutions.Donate