One of the glorious things about trade is it increases the value of resources. Let’s say I earn $10. With that $10, I can consume 3 apples. The value of my labor is 3 apples. Now, let’s say that trade opportunities arise. Via trade, I can now consume 6 apples with my $10 worth of labor. The value of my labor has doubled!
Now, let’s say local apple growers, angry that more apples are entering the market, successfully lobby for a tariff on apples. The effect of the tariff means I can now only consume 4 apples. The value of my labor has fallen!* Tariffs (and taxes in general) from the prospective of the consumer are value destroyers. Tariffs, in this manner, are akin to a disease destroying apple crops (or, perhaps more accurate, bandits constantly raiding apple crops).
Let’s look at the mirror image here – the same situation, but from the producer’s point of view:
In autarky, the value of apples are $3.33 per apple. Following the opening of trade, that value falls to $1.67. With the implementation of the tariff, the value rises to $2.50. From the prospective of the producer, tariffs are value creators.
In an upcoming blog post, I will be writing about some rules of thumb I think (with the help of Armen Alchian) are helpful in determining whose value perspective should prevail. However, I wanted to emphasize the value-changing nature of tariffs in this blog post, so I will end it here.
*To the untrained eye, one might argue “You were consuming 3 apples. Even with the tariff, you’re consuming 4. You still are made better off! So why not enact the tariff?” While it is true that one is better off in this tariff-trade scenario than in autarky (no trade), we must look beyond the seen effects for the unseen effects. One would be considerably better off (to the tune of 2 more apples) without the tariff. The negative effects of the tariff, while unseen, are very real.