“It’s the economy, stupid.”  Some of you may remember that phrase, coined by James Carville for Bill Clinton’s campaign.  Well, in all my brilliance, I am coining a new one: “It’s the free market, stupid.”

Tom Henderson has done it again with a great article essentially about the free market.  In this one, he explains how protection from the government sounds great in theory, but has unintended consequences for those it’s supposed to protect.

I must have to fix my record player; it keeps repeating the same message over and over.  Let the free market reign!  The competitive, well-run businesses will be rewarded naturally, and those that can’t handle the competition will diminish.  Even better, the consumer will always win when businesses must compete in a free market society.  -Greg

TOM’s ECONOMIC OBSERVATION: Import Tax: Unintended Consequences
by Tom Henderson

Who is really paying the import tax?

Some of you have asked that I comment on Trump’s proposal to initiate an import tax from all products coming in from Mexico to pay for the wall. This article is not going to comment on the issues of the wall, but rather address the economic issues of import tariffs in general, and protective tariffs in more detail.

First, we need to remember that “America” does not trade with “Mexico”. Countries do not trade with each other, individuals do the trading.

If I purchase a shirt manufactured in Mexico, I am not purchasing the shirt from “Mexico”, but rather from a retailer in America, which purchased it from a distributor in America, which purchased it from a manufacturer in Mexico.

Following this scenario, if a 20% import tax were placed on that shirt, the American distributor will pay more, and pass this tax on to the retailer, who would pass the tax on to me, the consumer. In other words, the import tax is not a tax on Mexico, but rather the American consumer.

But Tom, would not the import tax protect an American manufacturer that cannot compete with the lower price? The answer is yes, but it will be at the expense of the consumer, the retailer, the distributor and other merchants which are denied future sales because of the extra price I pay for the shirt.

For example, If I purchase a shirt manufactured in Mexico that costs me $35, and the same quality of shirt manufactured in America cost $50, I will have $15 extra dollars to purchase other goods or services, say a meal in a local restaurant. The result of my purchasing the shirt manufactured in Mexico is my having a shirt PLUS a meal at a restaurant, and at the same time, the restaurant owner not only has funds to keep an employee, but also enjoys a profit because of my purchase.

If I have to pay an extra $15 for my shirt, even if I buy one manufactured in America, I will not have the extra $15 to purchase another good or service. After the import tax, I would end up with only a shirt, where before I ended up with a shirt and a meal. It is obvious that I am better off purchasing the shirt manufactured in Mexico. Moreover, the restaurant owner, his/her employees, AND suppliers for things such as salt, meat, napkins, cleaning supplies etc. also benefit from my purchasing a shirt manufactured in Mexico at a lower cost.

Protecting the American manufacturer is not only a detriment to the consumer, but other retailers, suppliers, and distributers as well. Foreign imports is one way the market keeps prices from artificially rising out of proportion. The best analogy to explain the absurdity of tariffs to protect manufacturers from cheap imports is Bastia’s Petition of the Candlestick Makers. For those interested, you will find it humorous, while at the same time proving an economic axiom: Manufacturers Are Protected at the Expense of Consumers.

It will be helpful to realize that Making America Great again is a slogan, not an economic law. “America” is not merely manufacturers, but also consumers, retailers, distributors, employers, workers, unions, non-unions, etc. When protecting “America”, who is being protected: the manufacturer or the consumer? Which manufacturer and which consumer? The worker or the employer? Which worker and which employer? Big business or small business? When one element is protected from competition and free market principles, it is at the expense of other elements.

All of these entities are nothing more than a collection of individuals. Likewise, free markets are nothing more than individuals trading with each other, free from government involvement, whether the involvement grants favors or punishment on individual trade. When government enacts protective tariffs, a distortion in the market will result. Sometimes the distortion is relatively minor because if affects only one industry, as when Reagan initiated protective traffics to protect Harley Davidson. However, when applied across the board, protective tariffs can produce devastating results such as the Smoot Hawley Tariff Act, which sent the Great Depression into a tailspin.

The balance of trade argument is another false argument to justify protective tariffs. While this topic requires a discussion into itself, for this discussion just suffice it to say “balance of trade” is somewhat a myth. Since individuals trade with one another, and not countries there is really no such thing as “balance of trade”. In this example, if I purchase a shirt manufactured in Mexico for $35, I receive a shirt and the manufacturer receives my money. Who is more wealthy; me for having a shirt, or the manufacturer for receiving my money? There is no imbalance of trade.

Lastly, remember; our exports are paid with imports. American manufacturers (NOT AMERICA) export everything from natural gas to food to Mexico. If a trade war breaks out, these American entities will suffer greatly, as was the result of the Smoot Hawley Tariff Act. Protecting certain industries with tariffs will be at the expense of others.

How do you keep jobs in America? Simple, return to free market principles. Jobs and progress are a result of free markets, not a goal of free markets. Reducing regulations and cutting taxes is a step forward. It would be better if corporate taxes were eliminated rather than reduced, because all businesses merely pass taxes onto the consumer. This topic will be discussed in more detail in another issue.

For those who think I am anti Trump are on the wrong track, just as when Obama was in office many thought I was anti Obama. I am PRO FREE MARKETS. Just as I critiqued Obama on his anti free market actions, I will also point out the anti free market actions of Trump.

With the Democrats in power we had to deal with a set of specific forms of collectivism and anti free market principles under the guise of “we care”. It appears under Trump, we must deal with other forms of collectivism and anti free market principles under the guise of “good intentions”.

No matter what the reason for abandoning free market tenants, the outcome always favors one element at the expense of another. Protective tariffs are no exception. The purpose of this article is to put you on notice that if protective tariffs are enacted, there will be undesirable repercussions that might affect your real estate and/or notes. Act accordingly.

Tom Henderson/a.k.a.  The Note Professor
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