Protectionist taxes plunder the weak, destroying potential new jobs in Sri Lanka
ECONOMYNEXT – Sri Lanka is planning an ‘anti-dumping’ law to protect businessmen from exercising their power in markets. The anti-dumping law is the latest trick perpetrated by businessmen and politicians with the help of the coercive power of the state on helpless citizens.
Just weeks before Donald Trump slapped a tax on Canadian lumber forcing US consumers to pay more for their timber. Building costs in the US will go up, allowing timber merchants to plunder ordinary American families trying to build a house.
Not unlike the taxes slapped by steel oligarchs in Sri Lanka on steel used in construction.
The collapse of the Wellawatte building also needs to be examined in detail. Did they skimp on steel because of import duties?
Nationalists like Donald Trump base taxes on a false idea that free trade simply eliminates jobs and that it is some kind of zero sum game. Free trade in fact is a major driver of job creation, as well as being a force in raising living standards of the lowest income earners.
In Sri Lanka, the prices of a variety of building materials including tiles, sanitary ware, steel and electrical products are kept excessively high by the political class through import duties, to give billions of rupees of profits to a few rent-seeking oligarchs.
There are more cronies in shoes, and foods like rice are also kept high, with import duties to protect the profits of farmers and a few rice-milling oligarchs.
The plundering import taxes, which protect the pockets of oligarchs, do not protect ordinary citizens.
Import plunder taxes date back to the false economics of Mercantilism in 16th century Europe.
Alexander Hamilton, one of the founding fathers of the US, promoted import duties to help start-up domestic industries. Supposedly the taxes would be taken away after the infant became adult. This was called the ‘infant industry’ argument.
In the US, which was a large country with many states, where many firms competed with each other, it did less harm to the people than in other countries.
Ironically, when large domestic firms in steel and oil became so competitive and gained a large market share by selling lower priced goods, uncompetitive businesses lobbied and invented ‘anti-trust’ laws to push prices up, claiming that monopolies were keeping prices down.
As can be seen, these state interventions lobbied for by businessmen who want high prices have neither logic nor reason.
However some also point out that it is no accident that John D Rockefeller, who owned Standard Oil, that was broken up by ‘anti-trust’ laws, was a Jew, a minority in the US. In Sri Lanka parallels can be drawn where businesses owned by the minority seems to attract price controls by the state, while majority-owned businesses are getting import protection.
Infant industry ideas spread to Europe from the US, pushed by nationalist ‘economists’ like Georg Friedrich List (The National System of Political Economy), leading to German historical economics.
Riding on the back of earlier ideas propagated by the likes of Georg Friedrich Hegel, Germany eventually ended up in minority hate and Nazism along with other types of hate directed at foreigners.
Ideas of Hamilton and List were fully embraced in Sri Lanka during the latter part of British rule and are seeing a major revival in the US at the moment.
It is amazing that the most illiberal and hateful policies developed in the West are fully embraced in Sri Lanka while any idea or concept that gives a least bit of freedom to the citizens is reviled as ‘Western’.
Sri Lanka also re-embraced the Mercantilist ideas of the 16th century on which the Dutch and British East India Companies were based on, after independence. These firms which profited from state backed monopolies operating with the threat of violence, were demolished during the second part of British rule, along with the rise of freedom and classical liberalism in the UK.
In Sri Lanka industries like ceramics are not infant but geriatric and continue to enjoy protection.
The Sri Lanka Ceramics Council is a horrific example of a rent-seeking business lobby that reaches out to politicians to make profits by plundering homeless Sri Lankans with import duties.
The plunder by geriatric industries is justified by the jobs argument. Geriatrics convinces the people that ‘cheap imports’ will kill domestic jobs, even though the ‘infant industry’ argument can no longer be peddled.
They claim that foreign goods, sent after paying freight charges and even reasonable taxes are too ‘cheap’ for the poor people in Sri Lanka and massive taxes are needed to put them out of their reach.
Other claims are made that they are subsidized by foreign governments.
The claim is made that domestic jobs are lost by imports.
It is true that some businessmen that overcharge customers will lose market share and their monopoly status and some may even go out of business.
If 500 workers lose jobs, with a factory closure, their individual loss is large and visible. But if twenty million people are exploited their individual losses are small.
It does not make economic sense for individual consumers to lobby ministers or even write to a newspaper if a 100 rupee product is sold at 200 rupees with import duty protection. But an industry that makes a 100 million rupee profit a year has the economic incentive to launch a PR campaign and fund the election campaigns of rulers.
Cheaper goods themselves create more jobs, but that phenomenon is not seen.
Before Adam Smith and David Ricardo, the Mercantilists attacked trade deficits and imports based on this simple reality, just like plundering rent seeking oligarchs do now.
Indian cotton cloth imports for example were severely resisted in Europe, and there are historical accounts of women wearing Indian cloth being stripped naked.
Eventually however cotton displaced linens, woollen and other material and became a leading driver of the industrial revolution in Europe.
Let’s say someone is building a bathroom in his house. He decides he wants 250 square feet of vitrified tile, which is a strong tile used all over the world. In India online retailers are offering vitrified tiles ranging from 30 Indian rupees (about 72 Sri Lanka rupees) upwards for a 2×2 tile.
Due to massive taxes in Sri Lanka such tiles cost about 260 rupees a square foot or 1000 rupees a tile. A 2×2 polished vitrified tile is about 1600 rupees. Arbitrary prices are charged for different designs.
An Indian would build his bathroom spending 18,000 rupees for 250 square feet of tile. A Sri Lankan would have to pay 65,000 rupees. To block the economic freedoms of Sri Lankan and undermine consumer sovereignty, the rulers charg excise taxes per square foot, not on value.
If imported tiles were available after paying a reasonable tax rate of say 15 percent, and the bathroom was tiled at 100 rupees a square foot, which is 38 percent higher than India, it would cost only 25,000 rupees. .
Even that is 40,000 rupees cheaper than buying the overpriced tiles in Sri Lanka.
The 40,000 saved would not disappear. The consumer will spend it elsewhere, increasing his living standards, and creating jobs in the process.
He may decide to paint a room in the new house, which he planned to move in leaving bare because he did not have money, giving a job to a painter.
His wife may decide to buy some furniture, giving jobs to carpenters. She may install curtains giving money to weavers and a tailor.
Or he may spend it on services, many of which are springing up now as small businesses.
He may take his kid to see an amusement park. Or the entire family may go on a trip, as many Sri Lankans are now doing, and stay in a small hotel.
His wife may hire an interior decorator to advise her. They may pay a gardening service to professionally design the garden.
She may go to a hair dresser, and spend some of money.
Or he may decide spend it on a three-month, computer course for his eldest daughter, giving jobs to IT teachers and raising the child skills and making it easier for her to get a job.
None of these activities that happen when you remove protectionism, are counted, when people claim that ‘jobs are lost’, due to free trade.
The family may buy a refrigerator, a washing machine, go shopping and buy any number of things boosting the retail sector and giving more taxes to the government.
The plundering protected business generates tax losses for the government. The plunderers profits primarily by selling an overpriced goods and taking the tax that would otherwise have gone to the government. This is called tax arbitrage.
Long term effects
Protectionist food taxes (which even nationalists like List did not advocate) are among the worst. The underdevelopment of the brain and stunting that takes place in children when milk and maize (protein malnutrition) is taxed, cannot be undone.
In East Asia, after free trade reduced food prices (especially in former Communist nations, where improved land rights also boosted agricultural productivity and output) an entire new generation of children who are much taller than their parents are now growing up.
Protection for building materials, which push up the cost of capital stock, also have long-term consequences that will continue to harm the population and business.
Overpriced steel pushes up all building costs. In Sri Lanka there is no protection for cement. Significantly cement manufacture is dominated by minorities and foreigners.
When building costs go down with free trade, the capital investment is reduced. An hotelier for example will build a hotel cheaper and become more competitive internationally, when steel, sanitary ware and electrical cables are cheaper.
When steel is cheaper, factories will be cheaper, making Sri Lanka’s exports more competitive.
When a houseowner’s loan is lowered with free trade, the bank may make less profits, but his disposable income will be higher throughout the repayment period, allowing him to consume more and create more jobs.
When smaller loan is taken to build a house or factory, more money is released for investment in another industry or sector, creating more jobs and value.
Job Loss Fallacy
The job loss fallacy can be seen most obviously in countries with near complete free trade. Dubai, which has free trade, for example, has created jobs ten times its population.
Millions of Indians, Bangladeshis, citizens of former Soviet states, Philippines, also Britishers and Americans are working in the UAE.
It was not just oil that created jobs in Dubai and other countries in the Middle East. Enough countries with oil ranging from Venezuela to Nigeria to Iran and Iraq has ended up as basket cases.
Singapore has massive volume of expat workers. Hong Kong has seen long term in-migration with free trade.
Countries like Vietnam has leapt ahead and poverty went crashing down much faster than China and Korea, as it had to free trade to join the ASEAN.
Even money spent on foreign countries will come back.
If Sri Lanka buys an Airbus, French and British aviation workers may buy more Sri Lankan apparels.
When Sri Lanka buys cars from India, more Indian tourists can come from that country.
If free trade destroyed jobs, North Korea should be a net importer of labour, instead of being a self-sufficient hell. Sri Lanka should have been net importer of labour in the 1970s during our most ardent autarky effort.
The Nazi autarky was also not a heaven. Germany became a much bigger economic power after it abandoned autarky and Nazis were defeated.
Capitalism, unlike the earlier economic systems like Mercantilism and feudal serfdoms, lifted millions out of poverty and raised consumption due to competition that made it impossible for producers and merchants to exploit the fellow human being.
Capitalist competition promoted innovation, reduced costs and improved the utility of goods and services.
The problem with free trade is that, not all of the effects can be seen readily seen, unlike a factory closure. Mercantilists and protectionists use the fact to mislead the general population.
"Trade that is unusually disruptive for some workers is trade that is unusually beneficial for consumers and other workers," explains Donald J. Boudreaux, Professor of Economics at George Mason University.
"Abnormally large and widespread price cuts in domestic industries that compete with imports mean both abnormally large gains for consumers of those products and the release of resources for the creation of new industries and jobs elsewhere in the domestic economy."
"Economists’ greatest service is to help the public see economic consequences that otherwise remain unseen."
This column is based on ‘The Price Signal by Bellwether‘ published in the April 2016 issue of the Echelon Magazine. To read Bellwether columns as soon as they are published, subscribe to Echelon Magazine at this link. The i-tunes app can be downloaded from here.