The Protectionist Paradox: How Tariffs Undermine National Interests
ECONOMIC PERSPECTIVES – 161 [JUNE 2025] By Emile Woolf
As regular readers know, I have been compiling the essays in my “Economic Perspectives” series with a view to publishing the collection as a single work, which should come to fruition in a month or two. Meanwhile, I am ready to resume my spotlight on the hypocrisy and ignorance of fools in positions of power. I am sincerely grateful for the insights of Prof. Pat Barron that guided my thinking on international trade balances..
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During the past few months the world has been convulsed in arguments about tariffs - sparked by Donald Trump’s explosive use of extreme protectionist measures to “level the playing field” between trading nations, while selecting tariff rates that discriminate against countries he perceives to be the USA’s political foes - and have little to do with the competitive trading iniquities he cites as his justification.
But yet again we see that governments are crowd-pleasers, not thinkers. The reason I am close to despair on this issue is the collapse into facile economic illiteracy that has engulfed government-thinking everywhere since Trump’s suicidal act. In my naivety I assumed that most rational humans – including even governments - are by now aware that protectionist trade barriers always cause the greatest harm to the nations whose leaders inflict them, rather than to their ostensible targets.
Operation of ‘competitive advantage’
The self-evident thesis of ‘competitive advantage’, which is true at the level of individuals – a boxer’s long reach, an athlete’s long legs, or a writer’s gift of verbal facility - is equally true at the level of nations, each of which enjoys distinct and varying gifts pertaining to climate or natural resources. The very essence of ‘society’ – indeed the attribute that defines it – is that no society is self-sufficient; the happiness of its members is always enhanced by trading with members of other societies able to supply the goods and services it lacks at an affordable cost, otherwise known as its ‘imports’. The obvious method of paying for its imports is to engage the fruits of its own competitive advantages and export its own goods and services to other societies able and willing to pay for them at prices mutually agreed – no coercion. That’s commerce – everyone is better off.
But nations – as nations – don’t trade. Trading is undertaken by people and their businesses. Those people may reside in different countries, but the underlying rationale remains the meeting of individual needs and wants. In the absence of spuriously created barriers, deliberately designed to obstruct free trade by bestowing privileged treatment for political ends, the principle of competitive advantage will ensure that all parties to a transaction benefit, and state intervention is neither required nor warranted.
The failure of binary thinking
The economic ignoramuses in charge of the nation’s finances invariably indulge in binary thinking at its crudest level: “exports, good; imports, bad”, forgetting that the exports of every nation are other nations’ imports and it’s obviously impossible for every trading nation to have a surplus of exports over imports at the conclusion of any defined trading period. Even a particular nation’s persistent trade deficit merely represents the capital investments of its trading partners. Those investments, like its savings, are the seed-corn of economic advancement and growth.
The underlying delusion arises from confusing the trade itself with the means of settling trade debts. Exports are paid for in the exporting country’s own currency, and imports must be paid for in currency acceptable to the nation supplying those imports. This is the misguided rationale for favouring exports: a fear that paying for imports will lower the value of the importing country’s currency on foreign exchange markets.
When the state raises the price of imports by imposing tariffs it is instructing its citizens what they are permitted to buy with their own money. Tariffs are effectively a tax on the exercise of legitimate personal preferences - as sly as a tax on employing people and calling it National Insurance (NI) or taxing the naughty practice of buying things and calling it Value Added Tax! Governments always treat their citizens as idiots just waiting to be conned.
Protectionism is jingoism
But it is from the misguided notion that exports are better than imports that the anti-competition practice of protectionism emerges, bringing with it all the usual jingoistic flag-waving: “Protecting British jobs for British workers”; “protecting our own industries”, and the rest. These observations apply to both tariffs and their obverse idiocy: subsidies. The trouble with agitators for the protection of domestic industries is that they view trade economics through an upside-down prism. The problem is their implicit (and erroneous) assumption that it is the function of consumers is to serve producers. Rather, it is the function of consumers to consume, and the function of producers to serve their consumption demands. National boundaries play no part.
Despite all the evidence of economic history, the myth persists that protectionism is an effective tool for creating, and preserving, employment. The fallacy of this xenophobic mindset could hardly have been more succinctly expressed than in the writings of the 19th century economist Henry George on the virtues of free trade. To paraphrase: You wouldn’t fill your harbour with rocks to keep out the goods that your citizens want to buy, would you? Well, that’s exactly what you are doing when you slap tariffs on imports!
If the state’s bureaucrats seek a genuine role in facilitating trade it should begin by removing existing barriers – notably the regulatory excess that always ensues when governments immerse themselves in territory in which they have no legitimate role: for example, employing state busybodies to design warning signs on alcoholic drinks and cigarette packs, and vetting labels on pharmaceutical products - all on the pretext that citizens can’t think for themselves on matters of diet and health; and that producers of such goods don’t know that, in a market economy, honest labelling pays commercial dividends. And when the citizenry is repeatedly nannied through everyday decision-making, people really do cease to think for themselves – government is always at hand to tell you what to do. And another step on the road to totalitarian tyranny is taken.
The whole thing is a nightmarish charade, and its only useful attribute is that it demonstrates, in classic style, that all government meddling is, by its very nature, unsusceptible to any meaningful economic calculation.
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