The people who benefit from import tariffs are the local capitalists. This is not an argument in favour of import tariffs. Why do we want to make those already rich richer at the expense of every consumer in the country?
This isn't the way that the subject is normally approached, this is true. But one useful method of analysis is to look at what people complain about and then unravel the logic of that complaint. As here, with import tariffs on mobile phones.
The Mobile Phone Industry Owners' Association of Bangladesh … “According to the association, illegal handsets currently capture around 40% of the market. The association leaders argued that smuggled handsets -- evading the 58% import tax -- are cheaper and undercut locally manufactured phones.”
They then go on to complain that if the illegal imports continue it will then reduce the amount of investment arriving to manufacture domestically. Obviously, true.
But, let us unravel this logic. Look directly at their complaint. Foreign-made mobiles are cheaper than domestically made ones. That's why there's that 58% tariff, to protect that domestic manufacture. That's also why people smuggle phones into Bangladesh because even at the risk of being illegal there's a profit to be made from the price difference.
So, who loses here? Every consumer of a phone in Bangladesh, obviously. They've got to pay more for their mobile. Those smugglers are, equally obviously, benefitting consumers by bringing those cheaper foreign-made items.
Even at the risk of being illegal there's a profit to be made from the price difference
Who benefits from the import tariff? Well, Domestically made phones can now be more expensive. So, who gains from that? Look at the complaint being made. If domestically made phones do not remain more expensive then there will be less investment. So, it must be the capitalists -- the investors -- who benefit from the high phone prices. No, this must be true. If without the tariffs and the high prices the capitalists will not invest then it must be true that the high prices caused by the tariffs must make the capitalists richer.
And why do we want to do that? Capitalism is a lovely system, clearly, but the reason it's lovely is not the joy of making capitalists richer in the slightest. It's that by allowing the capitalists to compete to get rich that the consumer becomes better off. Deliberately rigging the system to ensure capitalist profits at the expense of the consumer isn't the point at all.
Some will go on to say but the local assembly means better wages in local jobs. But that's not quite right. The wages in a factory in Bangladesh do not depend upon the profitability of the company itself. Wages are set across the whole economy -- it's the wage that can be gained in another job which sets the wage in this one. This is why a barber in London gets paid very much more than a barber in Dhaka. Because the other jobs around the haircut pay so much better.
Tariffs don't make workers better off and they definitely make consumers worse off -- and with mobile phones it's pretty obvious that each worker will also be a consumer. Further, tariffs make every consumer of that item in the country worse off -- with mobile phones that's pretty much everyone. The people who benefit are those capitalists -- we're deliberately rigging the system to make the already rich even richer.
This does not sound like good economic policy and indeed it isn't good economic policy. It might well be very good politics -- the capitalists always do have more power in politics than we consumers do -- but then that's just a good reason to decide fewer things by politics and more by economics. True, that then runs into something of a problem which is that policy is decided by the politicians who are usually far more interested in good politics than they are in good economics.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
