Tariffs and Comparative Advantage

Tariffs are in the news again, eliciting howls of protest from the free trade lobby. One of its prime tenets is that trade provides benefits and efficiencies all around, based on the theory known as comparative advantage.

Broken down to its essence, it works something like this. If Country A is better at making widgets than Country B is, and Country B is better at making gadgets, both benefit from trade. An economic efficiency results if Country B buys its widgets from Country A and Country A buys his gadgets from Country B. But if tariffs are imposed, it disincentivizes this trade.

Next suppose the guy across the street is better at making widgets than you are, and you’re better at making gadgets; you can both benefit from trade. An economic efficiency results if you buy your widgets from him and he buys his gadgets from you. But if you’re both liable for income tax, it disincentivizes this trade.

The exact same thing applies if the street happens to be an international border and the tax happens to be a tariff.

This last point is where the free trade dogma has its blind spot. Its arguments are valid, but it fails to see that they’re just as valid when any tax drag is imposed on any commerce. Its flawed ideal would be a tax system where the entire tax burden is imposed on internal domestic commerce and none at the border, favoring international trade but at the expense of disproportionately burdening domestic production and impairing its efficiency.

In a perfect world, all commerce would be free. But we don’t have a perfect world, we have governments, and they will collect taxes. So free trade is a utopian ideal, not a real world policy option. Somebody’s commerce is going to be taxed. Why it should be exempt simply because it crosses an international border hasn’t been answered, let alone asked.