Saturday, March 3, 2018

Tariff Anyone?

     Recently, one sees a lot of warnings in the media about President Trump's intention to institute tariffs on steel. Steel is a strategic producer's good used in many chains of production and a tariff on it can be expected to have a significant impact on the economy. Many economists are saying that it will be an impact for the worse, not for the better. Why do they think they can say that?  To quote from Human Action by Ludwig von Mises:
"If A is in such a way more efficient than B that he needs for the production of 1 unit of the commodity p 3 hours compared with B's 5, and for the production of 1 unit of q 2 hours compared with B's 4, then both will gain if A confines himself to producing q and leaves B to produce p. If each of them gives 60 hours to producing p and 60 hours to producing q, the result of A's labor is 20p + 30q; of B's, 12p + 15q; and for both together, 32p + 45q. If, however, A confines himself to producing q alone, he produces 60q in 120 hours, while B, if he confines himself to producing p, produces in the same time 24 p. The result of their activities is then 24p +60q, which, as p has for A a substitution ratio of 3/2q and for B one of 5/4q, signifies a larger output than 32p + 45q. Therefore it is manifest that the division of labor brings advantages to all who take part in it."
     So it's obvious why people who aim at having more prosperous lives would participate in the division of labor.
     A tariff applied to an existing free market undoes the work of the division of labor. Instead of concentrating on producing the product or service in which a comparative advantage is enjoyed, the tariff makes competing products or services from outside of the tariff area more expensive, i.e., non-competitive. This allows factors of production in the tariff area to be used to produce a product or service that could not compete in a free market. The inevitable result of this hampering of the market is more input for the same output, i.e. impoverishment.
     
   

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