320 Years of History
Gold Member
I don't know what drives the fascination and seeming preference for economic protectionism. There quite simply is no greater economic/financial well being to an economy and the people in it from tariffs, subsidies and quotas than there is by not having them. That is well understood by every single economist on the planet. It is Econ 101 for high school students and it is plain to see in very simple graphs.
(DWL = deadweight loss)
What to notice about the impact of a tariff: Domestic producers benefit at the expense of domestic consumers and foreign producers. The green triangles represent efficiency or well being lost because that isconsumer surplus that is forgone after the tariff. The yellow rectangle is not deadweight loss because it is tariff revenue for the government.
Be sure to note the indirect effects of tariffs. For example, any of the three forms of protection shown in this post -- tariffs, quotas and subsidies -- will lead to a decrease in net exports for America’s trading partners, which means a decrease in Aggregate Demand and the possibility of higher unemployment, recession, lowerincome, thus less demand for American products abroad. So, not only does the tariff hurt American consumers through higher prices and lower quantity, but it harms other American businesses whose products are no longer in demand from foreigners whose incomes have declined thanks to the American tariffs.
Note also the regressive nature of tariffs. Much like a VAT or an excise tax, tariffs place a greater burden on low income earners than high income earners, as a particular tax on imports represents a larger percentage of a poor person’s income.
(DWL = deadweight loss)
Subsidies appear to result in less of a financial well being loss to society than tariffs, but this is unclear since the size of the subsidy is unknown. Obviously, larger subsidies create a greater welfare loss, because they result in more scarce resources being allocated towards the production of a product which the US lacks acomparative advantage. The size of the green triangle in the graph above represents the size of the welfare loss… or the degree to which resources are being over-allocated towards this product.
The Quota scenario is the most complicated to understand graphically. Here’s how to interpret the graph above. The government says that foreigners can only import Q1Q2 units, which means at Pw, where American firms are only producing 0Q1 units, there is a severe shortage of automobiles. The price rises in response to the excess demand, which attracts more firms into the automobile market (or existing firms open new plants) shifting domestic Supply out.
The Quota scenario is the most complicated to understand graphically. Here’s how to interpret the graph above. The government says that foreigners can only import Q1 to Q2 units, which means at Pw, where American firms are only producing 0 to Q1 units, there is a severe shortage of automobiles. The price rises in response to the excess demand, which attracts more firms into the automobile market (or existing firms open new plants) shifting domestic Supply out.
The price will settle where the new domestic Supply curve intersects demand, but the number of cars produced by American firms will equal 0Q4 minus Q1Q2. In other words, since foreigners were happy to import Q1 to Q3 even at the lower Pw before the quota, they will continue to import as much as they are allowed (equal to the government’s quota of Q1Q2 at the new higher price. But since consumers demand Q4 at the new higher price, new domestic producers will step in and satisfy the demand beyond what foreign firms can meet with their restricted imports. So the domestic output is represented by two segments, 0Q1 and Q2Q4. Imports are represented by Q1Q2 (restricted by the government’s quota). Confusing, but once you study it for a while it makes sense.
The charts and discussion above is the easy way to understand tariffs, quotas and subsidies. If you'd prefer to understand the above concepts by working through the math that makes it so, check out the content at the links below. To come to the same understanding, you'll need to do a lot more work -- it's the same work high school and college econ students perform when learning about how tariffs, quotas and subsidies work -- to arrive at the conclusions noted above.
So What Does All This Mean?
Well, it means that when politicians (or candidates) advocate for protectionist measures, there's one central question that they must be called to answer. What is that question?
Economists know this. I think most politicians know it too. It's the average citizen who doesn't know it. Politicians have got one primary goal: to get elected. Knowing that most voters aren't going to ask the question I noted above, politicians can focus their rhetoric on short term gains, which is what will get them elected.
Quite simply, unlike many things where it's very hard to determine how much one has lost by going "this way" instead of "that way," the losses from trade protectionism are measurable, quantifiable, and numerous times they have been measured, and it doesn't matter whether one uses standard models or alternative ones, the answer comes out the same every time: protectionism is a losing proposition overall.
(DWL = deadweight loss)
What to notice about the impact of a tariff: Domestic producers benefit at the expense of domestic consumers and foreign producers. The green triangles represent efficiency or well being lost because that isconsumer surplus that is forgone after the tariff. The yellow rectangle is not deadweight loss because it is tariff revenue for the government.
Be sure to note the indirect effects of tariffs. For example, any of the three forms of protection shown in this post -- tariffs, quotas and subsidies -- will lead to a decrease in net exports for America’s trading partners, which means a decrease in Aggregate Demand and the possibility of higher unemployment, recession, lowerincome, thus less demand for American products abroad. So, not only does the tariff hurt American consumers through higher prices and lower quantity, but it harms other American businesses whose products are no longer in demand from foreigners whose incomes have declined thanks to the American tariffs.
Note also the regressive nature of tariffs. Much like a VAT or an excise tax, tariffs place a greater burden on low income earners than high income earners, as a particular tax on imports represents a larger percentage of a poor person’s income.
(DWL = deadweight loss)
Subsidies appear to result in less of a financial well being loss to society than tariffs, but this is unclear since the size of the subsidy is unknown. Obviously, larger subsidies create a greater welfare loss, because they result in more scarce resources being allocated towards the production of a product which the US lacks acomparative advantage. The size of the green triangle in the graph above represents the size of the welfare loss… or the degree to which resources are being over-allocated towards this product.
The Quota scenario is the most complicated to understand graphically. Here’s how to interpret the graph above. The government says that foreigners can only import Q1Q2 units, which means at Pw, where American firms are only producing 0Q1 units, there is a severe shortage of automobiles. The price rises in response to the excess demand, which attracts more firms into the automobile market (or existing firms open new plants) shifting domestic Supply out.
The Quota scenario is the most complicated to understand graphically. Here’s how to interpret the graph above. The government says that foreigners can only import Q1 to Q2 units, which means at Pw, where American firms are only producing 0 to Q1 units, there is a severe shortage of automobiles. The price rises in response to the excess demand, which attracts more firms into the automobile market (or existing firms open new plants) shifting domestic Supply out.
The price will settle where the new domestic Supply curve intersects demand, but the number of cars produced by American firms will equal 0Q4 minus Q1Q2. In other words, since foreigners were happy to import Q1 to Q3 even at the lower Pw before the quota, they will continue to import as much as they are allowed (equal to the government’s quota of Q1Q2 at the new higher price. But since consumers demand Q4 at the new higher price, new domestic producers will step in and satisfy the demand beyond what foreign firms can meet with their restricted imports. So the domestic output is represented by two segments, 0Q1 and Q2Q4. Imports are represented by Q1Q2 (restricted by the government’s quota). Confusing, but once you study it for a while it makes sense.
The charts and discussion above is the easy way to understand tariffs, quotas and subsidies. If you'd prefer to understand the above concepts by working through the math that makes it so, check out the content at the links below. To come to the same understanding, you'll need to do a lot more work -- it's the same work high school and college econ students perform when learning about how tariffs, quotas and subsidies work -- to arrive at the conclusions noted above.
- Tariffs examined in real world situations -- The first problem (water with and without VAT, which is the tariff in that example) is all you will need to solve. You'll need to create your own graphs, but what you'll end up with, assuming you do the math correctly and accurately graph your work, is graphs like the ones above.
- Why politicians like protectionist policies -- After studying how tariffs, quotas and subsidies (protectionist policies), you will be able to see how the cost of having them is "hidden." Of course, it's only hidden to folks who don't know how they work. Once one knows how they work, they're not hidden at all, but it does take some doing (as the exercise above will illustrate if you perform it) to quantify the so-called "hidden" costs of the protections.
- Simplifying difficult calculations: consumer choice of two-part tariffs -- This document explains how businesses can implement their own tariff system to drive consumer choice. Though the focus of the discussion in this document is not about governmental policy, it illustrates how the very same "hidden" nature of a tariff can be used by businesses to drive many/most consumers to choose a product that yields higher revenue/profit for the business. If you're familiar with the various schemes that cell phone service providers/carriers offer as go service and equipment, you've seen this idea in action.
- Tariffs and Quotas: Effects on Imported Goods and Domestic Prices -- This presentation (video) is essentially the same thing depicted in the charts and narrative above, but if you want watch a video instead of read it, this is for you.
So What Does All This Mean?
Well, it means that when politicians (or candidates) advocate for protectionist measures, there's one central question that they must be called to answer. What is that question?
Given that protectionist measures are well understood to impose the greatest burden on lower income individuals, what measures do you intend to implement to mitigate those burdens and what is the estimated quantifiable impact of them, either as a percentage of personal income/spending or a specific sum per person?
At the very least, if a candidate or politician is going to advocate for protectionist measures, they must be held accountable to show how those measures are going to make individuals, businesses, or the society as a whole better off overall. Now the fact is that it's all but impossible to show that whatever short term gains may result from protectionist measures outweigh the long term losses, and the reason it's impossible is because there are no long term gains from protectionism.- Gains from Protectionism
- Barriers to Trade
- The Political Trade-Offs of Trade
- “Protectionism vs. Free Trade in achieving Economic Development”
- Unpopular free trade is better than popular protectionism
- Trade Protectionism -- This is a short, nontechnical exposition of the political economy of protection. It asks how do political forces operate to generate protection, and what determines the magnitude and form that protection takes.
- Advantages and Disadvantages of Trade Protectionism
- The Benefits of Free Trade: A Guide For Policymakers
Economists know this. I think most politicians know it too. It's the average citizen who doesn't know it. Politicians have got one primary goal: to get elected. Knowing that most voters aren't going to ask the question I noted above, politicians can focus their rhetoric on short term gains, which is what will get them elected.
Quite simply, unlike many things where it's very hard to determine how much one has lost by going "this way" instead of "that way," the losses from trade protectionism are measurable, quantifiable, and numerous times they have been measured, and it doesn't matter whether one uses standard models or alternative ones, the answer comes out the same every time: protectionism is a losing proposition overall.
- How Costly is Protectionism?
- Trade Restrictiveness and Deadweight Losses from U.S. Tariffs
- Measuring the Costs of Protection in the United States
- Cost of Protection: Where Do We Stand?
- Why Protectionism Doesn’t Pay
- Alternative Approaches to Measuring the Cost of Protection
- Using the Gravity Model to Estimate the Costs of Protection
- Measuring Economic Effects of Technical Barriers to Trade on U.S. Exporters
- What are the Main Causes and Effects of Economic Protectionism?
- An economic perspective on the use of non-tariff measures [of protectionism]
