Tariffs as Crony Capitalism

At a time when the lumber prices are skyrocketing, the Biden administration is considering increasing tariffs on Canadian lumber from the current 8.99% to 18.32%. The announcement was immediately cheered by the U.S. Lumber Coalition, but criticized by Canadian authorities, who called the increase a “tax on the American people,” and vowed to challenge the new tariffs.[1] Indeed, this is just the most recent episode of a long history of trade disputes in which the U.S. alleges that the Canadian government subsidizes Canada’s lumber firms – a claim that the Canadian side consistently denies – and imposes tariffs on Canadian lumber. Previously, former President Trump imposed a 20% tariff on lumber imports from Canada, although this was eventually brought down to the current 8.99% after the WTO (the World Trade Organization) ruled in Canada’s favor.   
 
If firms in one industry successfully lobby the government to impose tariffs on imports, firms in other industries will attempt to follow suit, as tariffs act to reduce the competition domestic firms face from foreign suppliers. Indeed, during the Trump administration alone, the U.S. government imposed a 25% tariff on imported steel, a 10% tariff on imported aluminum, as well as tariffs on solar panels and washing machines. This is in addition to the more comprehensive 25% tariffs on a wide range of goods imported from China worth $250 billion.[2] It is revealing, too, that although President Biden has reversed many Trump-era policies, he has kept the tariffs in place.
 
Tariffs are taxes on imported goods, and American consumers ultimately foot the bill for these taxes. As with any tax, tariffs are not simply transfers from American consumers to Uncle Sam and to firms in the tariff-protected industry. Tariffs distort prices and consumption patterns and generate efficiency losses associated with tax-avoiding substitution behavior. This is in addition to the costs of socially wasteful administration and compliance expenditures, as well as the costs associated with anti-smuggling measures.
 
Gordon Tullock pointed out that there is an additional efficiency loss caused by a tariff: the socially wasteful lobbying efforts for, as well as against, the tariff.[3] For instance, the Trump administration’s implementation of the steel and aluminum tariffs was riddled with opportunities for such socially wasteful lobbying efforts by allowing for tariff exemption requests from businesses using steel and aluminum as production inputs, objections from domestic businesses in the steel and aluminum industries, as well as rebuttals and counter rebuttals. By the end of 2018, a total of 50,402 tariff exemption requests had been filed, greatly exceeding the Commerce Department’s expectations. Of these requests, 30% were approved, 10% were denied, and 60% were still pending a decision.[4]  
 
Along with being a tool in the government’s public policy toolkit, tariffs are also a major form of crony capitalism, where businesses earn profits not by providing quality products and services at competitive prices, but rather by fending off foreign competition using government power. Moreover, this comes at a cost to consumers and to the economy as a whole. The domestic firms in a tariff-protected industry win because they can sell greater quantities at higher prices. The politicians responsible for the tariffs win because they garner political support and campaign donations from the protected industry. Domestic consumers, however, lose because they pay higher prices and thereby also consume less. In addition, exporting firms in some other industries may face retaliatory tariffs imposed by foreign governments.  
 
Advocates of tariffs usually come up with some seemingly reasonable justifications. For example, the reason given in the Canadian lumber case was the unfair subsidies of the Canadian government to its lumber firms. However, there is little evidence the Canadian subsidies are real. In its justification of the tariffs on imported steel and aluminum, the Trump administration’s Department of Commerce relied on Section 232 of the Trade Expansion Act of 1962. This law allows for trade sanctions when imports pose a threat to national security.[5] This threat might be rebutted by noting that we have a safely diversified list of foreign steel suppliers, with the top four being Canada (16%), Brazil (13%), South Korea (10%) and Mexico (9%). Our main geopolitical competitor, China, is number 11 on the list, and accounts for less than 2% of our steel imports.[6] Another reason often used to justify a tariff is to protect jobs. Yes, it is true that a tariff on steel may be a good thing for American steel jobs, but there are far more jobs at risk because of the tariff in businesses that use steel as a production input. Furthermore, the jobs in some other exporting industries may also be at risk due to retaliations from our trade partners. Fair and free trade increases employment rather than decreasing it.  
 
If tariffs are bad economics, if they benefit only a relatively small group of people at the cost of a much larger group, why do they persist in a democratic society? The benefits of a tariff are concentrated among the stakeholders in the protected industry, while the costs of the tariff are ultimately dispersed among a much larger number of consumers. Mancur Olson showed that concentrated interests have an organizational advantage in getting public policies adopted that further their interests, even though the total of the costs to the dispersed consumers exceeds the benefits of the concentrated interests.[7] Individual consumers may rationally choose not to participate in the political decision regarding the tariff because the potential benefits from participation are small relative to the costs of participation, a phenomenon known as “rational ignorance” by Anthony Downs.[8]  
 
Although tariff advocates try hard to provide justifications – be it American jobs, national security, or unfair foreign competition, the truth is that tariffs are a form of crony capitalism, where politicians implement policies benefitting a specific group, the tariff-protected industry, at a net cost to the country. Moreover, the protected industry provides political support and campaign donations to keep these politicians in office. Finally, while tariffs are taxes on imports that cause resource misallocation and inefficiency, perhaps their most important issue is that, by favoring protectionism, tariffs run counter to free-enterprise and hinder our nation’s competitiveness in the long run.
 
 
References
 
[1] “Biden Administration Moving to Double Tariffs on Canadian Lumber despite Already Skyrocketing Timber Prices,” by Michael Lee, May 27, 2021, msn.com. https://www.msn.com/en-us/news/us/biden-administration-moving-to-double-tariffs-on-canadian-lumber-despite-already-skyrocketing-timber-prices/ar-AAKrPq4

[2] “Tracking the Economic Impact of U.S. Tariffs and Retaliatory Actions,” by Erica, York, September 18, 2020, Tax Foundation, https://taxfoundation.org/tariffs-trump-trade-war/

[3] “The Welfare Cost of Tariffs, Monopolies, and Theft,” by Gordon Tullock, Western Economic Journal 5 (1967), 224-232.

[4] “Growing Backlog, Inconsistent Rulings Cast Doubt over Tariff Exclusion Request Process,”By Christine McDaniel and Danielle Parks, January 28, 2019, Mercatus Center, George Mason University. https://www.mercatus.org/bridge/commentary/growing-backlog-inconsistent-rulings-cast-doubt-over-tariff-exclusion-request

[5] “Trump’s Tariffs Are a Case of Crony Capitalism,” by Samuel Staley, June 23, 2018, The Hill, https://thehill.com/opinion/finance/393744-trumps-tariffs-are-a-case-of-crony-capitalism
 
[6] “Trump Steel Tariffs to Hit These 8 Countries the Hardest – and China Isn’t One of Them,” by Jeffry Bartash, May 31, 2018, MarketWatch.com, https://www.marketwatch.com/story/trump-steel-tariffs-to-hit-these-8-countries-the-hardest-china-is-not-one-of-them-2018-03-01
 
[7] “The Logic of Collective Action”, by Mancur Olson, 1965, Cambridge, Massachusetts: Harvard University Press.
 
[8] "An Economic Theory of Democracy," by Anthony Downs, 1957, New York: Harper and Row.
 
 

Posted: August 03, 2021 by Dennis W. Jansen, Liqun Liu, Andrew J. Rettenmaier