What's Wrong with Tariffs?

I'm reading another of the recent rash of books which concern development policies in the third world over the past 50, or so, years. This one, "Bad Samaritans" by Ha-Joon Chang supports protective tariffs for countries trying to establish their own domestic industries without having to worry about the competition from already dominant foreign firms.

This is part of a small, but increasingly vocal, heterodox movement which disagrees with the conventional wisdom that "free trade" is the correct solution to all international economic issues. I'm not interested in rehashing the arguments, other than to point out that the "protectionists" can point to some rather successful examples that illustrate their thesis. In this book, it is the author's home country of South Korea.

I'd like to examine another idea, that of using tariffs in developed countries as a way to compensate for existing wealth and tax inequalities. Suppose a developed country imposed a tariff on items which it doesn't produce locally, or produces in such small quantities that there is, essentially, no domestic industry. A good example would be consumer electronics or shoes in the US.

Suppose the government imposed a tariff on these items and then adjusted the income tax rate so that the average consumer came out with as much spending power as before. You pay an extra $100 in the retail price of your next TV, but your income tax is reduced by $100.

Arguments that the tariff would limit trade don't hold up, the (average) consumer has just as much money to spend as before. There should be no change in demand and there is no domestic market which is being given "unfair" protection in violation of the current free trade agreements. If everything is a wash, then why do it?

Notice that I said that the average consumer would come out the same, but the distribution will not be uniform. For example those at the bottom, who don't buy many consumer electronic items, will see a net increase in after tax income, while those at the top who buy lots of expensive gadgets will end up paying more in taxes. The result is a (slight) shift in income toward the poor. If, there is also some slight decrease in purchases of imports, this is also a benefit, since the balance of payments is much too lopsided these days.

I see this as a mechanism similar to the VAT. By pushing the tax onto consumption rather than income, it hits the wealthy more and defuses the objections of the conservatives who always complain about taxes being too high. What they mean is that the income tax is too high, but a VAT or tariff hits everyone equally, that is everyone pays the same rate, but the amount you pay depends upon your own behavior.

Even in the current climate where tariffs are frowned upon (or "illegal" according to the WTO) I could see a country making a valid claim for this mechanism, since the tariff is only a variant tax collection mechanism and not being used to protect local interests.

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There are a lot of economists out there proposiing a VAT and since Europe already has it and it works, I think it sounds like the way to go.

The tariffs in my view should be used by only when needing drastic measures.

Right now our trade agreements are written so biased against America we are guaranteed to "lose" in the trade war.

Propserous America proposes such a policy change.


I'm not sure what you mean by "Right now our trade agreements are written so biased against America we are guaranteed to "lose" in the trade war."

Do you mean that trade is bad for the average American or do you mean that the country suffers as a whole?

Most critics of US policy think just the opposite that the trade laws favor US multinationals. When the WTO agreements have stalled the US has switched to bilateral agreements with weak states. There is no way that a treaty between, say, Nigeria and the US is going to favor Nigeria.

If you are complaining about the ability of the WTO to supersede local law (the cases of Canadian softwoods and MBTE) then you have to understand that these provisions were put in by the US in the first place. As the softwood issue shows the US is perfectly capable of ignoring the rulings of the WTO anyway...


I think the answer is a huge depends but overall I think the WTO being able to supercede US domestic law, especially via GATS is a disaster and that one must address many issues "locally" because it is in the best interest of that locality (i.e. nation-state) to do so.

I'm more of the mind set of using strategic trade, whereas clauses that are working are kept and tariffs, conditions that are clearly damaging the US national interest and absolutely US workers, middle class interests are modified.

I'd say myself, I'm in the Horizon Project camp pretty firmly in terms of policy modifications, but toying with this VAT tax idea.

I do understand the MTBE was put in there, but not by "Americans", by multinational corporations that happen to be incorporated in America, lobbying American representatives (cough, cough).

Thanks, rdf

Interesting idea, and welcome to the forum.

My recollection is that the WTO has indicated that a VAT passes muster.

Is this correct?

VAT legal under WTO

International Trade law blog has it in a paragraph or two.

This says VAT is legal whereas tariffs can be challenged (which makes me wonder how come the US isn't challenging China's tariff schedule and their manipulation of).

and it appears the US is the only stupid one without a VAT policy.

This sure sounds like something we need to dig into further as a possible policy reform for it sounds like it would be easy to get through congress and also not be challenged via the WTO after the fact.

If anyone has some more detailed papers, references to this (I guess it's a complex series of rules and per country)
I'd like to read them.

Note on this blog post I link to they mention Peru has a VAT
(we just signed this) so maybe the claim that is being made on the Peru trade deal that Peru is going to lower it's tariffs for more US exports is bunk as well?


A european commenter on another site explained some issues about VAT to me, and it sure sounds a lot like a tariff. It may be the quickest, "second-best" way to deal with trade imbalances at this point.