Do “Infant” Industries Need Protection?
It is a common cry of the protectionist that free-trade hurts businesses that are just starting up. The protectionist says, “If the new industries are not protected, they will be crushed by foreign competition which operates on slave labor and a depreciated currency! Our jobs will be exported overseas and capital will flow out of our country and into theirs, thereby impoverishing us!”
This fallacy, like many fallacies, comes about because the protectionist is not considering both the Seen and Unseen effects. Let’s say a new car manufacturer has just opened shop for the first time, and like any other business, he needs customers as soon as possible to pay the cost of his obligations, but he can’t compete against the foreign car companies such as Toyota. So, he petitions the government with the following plea:
“If you will protect my business from competition by implementing tariffs on imported vehicles, at least until my business is well established, I will be able to hire more workers, pay higher wages, and enrich the country with my product. The result is a higher standard of living for my workers, a better material standard of living for the country, and more tax revenue flowing into the national coffers.”
The government passes this proposal, and thus this “infant” business is now protected. It is commonly believed by protectionists that protection increases National Production. In reality however, protection does not increase production by one cent. To illustrate this, consider a typical consumer; suppose he has some money to play around with ($30,000), so he decides to go out and splurge. He buys some books, a new television, a stereo system to go with the television, and a brand new laptop. To show you the money he’s spent so far, let’s put everything into a list. The following numbers are real prices taken from www.tigerdirect.com and www.amazon.com:
Books: “Stephen King’s IT”, “Stephen King’s The Shining”, and “Stephen King’s The TommyKnockers”. Total price is $21.96.
Television and home theatre system: total price for both is $2,297.98
Laptop: Alienware 14 with a 4th Gen Intel Core i7 processor running at 3.4 GHz, 8 GB DDR3 Ram, 750 GB HDD, Nvidia GeForce GT 750M GPU, 14″ Display, comes with Windows 8, and it’s Silver. This costs $1,199.99.
The total amount of money he’s spent thus far is $3,519.93.
Now, our consumer decides to buy a car. He has a choice of buying from the protected industry, or from Toyota (we’ll just keep his choices there for the sake of the example). He, at first glance, chooses Toyota, and decides to buy a new Toyota Prius for $20,100. He goes into the dealership, and upon reading the contract, he is shocked to discover that his purchase will be subjected to a 35% tax of the amount paid. This means he owes the dealer $20,100, and he owes the government $7,035 to account for the tariff. Outraged, he decides to go with the protected industry who’re selling a car for $24,654. Had our consumer been allowed to buy the Toyota Prius without being subjected to a tariff, he would’ve still had $4,554 to either play around with some more, or invest. Individually, this means that our consumer has suffered a loss of $4,554. This loss also hurts the surrounded businesses who might’ve otherwise acquired his business.
The protectionist policy does not increase production one bit; on the contrary, it diminishes production by hindering voluntary exchange. Ah, but the protectionist is sure to cry out:
“That may be true, but if resources are allowed to just flow out of the country unchecked, we will be left impoverished without a doubt.”
Alright, so we shouldn’t be importing anything. What about exporting finished products?
“Absolutely! That’s what we need! Hurrah for tariffs!!”
The protectionist doesn’t seem to understand that the entire reason we have exports is to pay for imports, and he doesn’t understand that protection does nothing but harm for those not being protected.