Tariffs – An Austrian Economic Perspective
Credit for this line of thinking goes entirely to my dear friend Stephen.
Tariffs have been a policy tool used to protect domestic industries from foreign competition. Proponents argue that they create jobs, promote, and protect struggling economic sectors. The Austrian school of economic thought views tariffs as a flawed and harmful policy tool that distorts the natural motion of markets.
1. Market Interference
A tenant of Austrian economics, is belief in the open nature of unmanipulated exchange. The argument being, that market actions, driven by demand, are the most efficient way to allocate capital. When tariffs are imposed, this process artificially distorts the flow of goods and services.
By raising the cost to import resources, tariffs create price distortion. This interferes with the price signals that would otherwise guide producers and consumers to make decisions that align with demand. When tariffs protect an inefficient industry, resources are diverted from more productive ideas, leading to economic inefficiency.
2. Consumer Welfare
The argument that consumers should be making the decision; Tariffs directly harm consumers by raising the prices of imported goods. This limits a domestic consumer’s ability to choose the best product at the best price.
If a tariff is placed on lumber to protect a domestic lumber industry that does not have a comparative advantage, the result becomes higher prices for residential construction. Lower quality of lumber. Lower quality of construction. This forces businesses who rely on lumber to pay more for what they need and experience a lower quality product and passing the cost on to the domestic consumer.
3. Impacts on Innovation
Competition drives innovation. When domestic industries are shielded from foreign competition through tariffs, they will not innovate or improve their products or processes.
4. Retaliation
Tariffs provoke retaliation policy. Tariffs create a cycle of escalating trade restrictions. This harms all involved economies by increasing prices and reducing the variety and quality of goods and services.
5. Conclusion
If a country has a comparative advantage in producing a particular resource, they should freely export that resource at lower cost to other countries, which in turn, can produce resources specialized to their area of strength and efficiency. This creates a more productive exchange for both parties and increases overall economic prosperity.
The information in this post was written by S. Zachary Fineberg, CFP(r) Managing Member of Fineberg Wealth Management, LLC, a registered investment advisor. If you would like to schedule a consultation to discuss how Fineberg Wealth Management can help you reach your long-term financial goals, please make contact to discuss.
Image credits: Kevin Dooly, S. Zachary Fineberg
