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Rent-seeking: A significant cost of protectionism that doesn’t show up in the standard economic analysis of tariffs – Publications – AEI

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AEI Rent-seeking: A significant cost of protectionism that doesn’t show up in the standard economic analysis of tariffs Over the last several years, there’s been an ongoing and lively debate in the comment section of CD between the advocates of free trade and the advocates of protectionism (“scarcityists” as Jon Murphy calls them). Some of those debates have focused on the size of the deadweight losses and welfare effects from tariffs, the possible differences in welfare effects between a small country tariff and large country tariff, the cost to the economy per job saved by a tariff, whether there are any tariffs that increase domestic jobs and output on net, whether trade deficits have negative effects on the economy or output growth, the “legal plunder” aspect of protectionism, etc. –

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Rent-seeking: A significant cost of protectionism that doesn’t show up in the standard economic analysis of tariffs

Over the last several years, there’s been an ongoing and lively debate in the comment section of CD between the advocates of free trade and the advocates of protectionism (“scarcityists” as Jon Murphy calls them). Some of those debates have focused on the size of the deadweight losses and welfare effects from tariffs, the possible differences in welfare effects between a small country tariff and large country tariff, the cost to the economy per job saved by a tariff, whether there are any tariffs that increase domestic jobs and output on net, whether trade deficits have negative effects on the economy or output growth, the “legal plunder” aspect of protectionism, etc. – those are just some of the topics that have been debated recently. But there’s one topic that hasn’t yet been discussed, and that’s the significant costs imposed on the economy from the wasteful “rent-seeking” (lobbying) that takes place on behalf of domestic industries seeking protection from foreign competition via protectionist trade policies.

As Gordon Tullock wrote in 1967 in what is considered to be the seminal research article on rent-seeking (“The Welfare Costs of Tariffs, Monopolies, and Theft” ) “The welfare triangle method of measurement ignores this important cost [rent-seeking], and hence greatly understates the welfare loss of monopoly [and tariffs].”

Here’s just one example. The US has a long history of trade protectionism for American sugar producers in the form of tariffs and import restrictions on low-cost foreign-produced sugar that raises US sugar prices to about two times the world price. Currently, the world price of sugar quoted for futures contracts is less than 15 cents per pound compared to the domestic price of more than 25 cents. But when you’re an ongoing enterprise that continually engages in “legal plunder” from the American consumer to the tune of billions of dollars per year you have to devote significant resources to protecting your coveted position of being insulated from competition from more efficient foreign rivals. What American industry wouldn’t want to be in a position to charge twice the world price for their product!

Because sugar policies are subject to being challenged politically, mostly unsuccessfully, the sugar producers support a full-time rent-seeking trade organization called the American Sugar Alliance, here’s its mission:

The American Sugar Alliance is a national coalition of sugarcane and sugar beet producers, including sugar farmers, sugar processors, sugar refiners, sugar suppliers, sugar workers and others dedicated to preserving a strong U.S. sugar industry. The American Sugar Alliance works to ensure that sugar farmers and workers in the U.S. sugar industry survive in a world of heavily subsidized sugar. Only through a united effort can these dedicated Americans continue to offer a plentiful, secure and reasonably priced sugar supply. The American Sugar Alliance provides the backing and support to meet this national need.

Of course, what is “reasonably priced sugar” to the sugar producers is actually very “unreasonably priced sugar” to the American consumers, who have paid twice the world price for as long as the USDA has been tracking world and domestic sugar prices (see data here back to 1980). And to maintain those artificially high prices, the American Sugar Alliance employs a staff of at least five full-time employees at an office in Arlington, Virginia. In addition to the costs of running the American Sugar Alliance, there are probably other lobbyists who engage in rent-seeking activities to maintain the protection granted to US sugar producers by government trade policies. Therefore, a full accounting of the cost of trade protection for Big Sugar would have to include the millions of dollars in wasteful rent-seeking, in addition to the billions of dollars of costs imposed annually on US consumers through higher sugar prices. And as Gordon Tullock points out, those significant costs of wasteful rent-seeking won’t show up in a standard analysis of tariffs that attempts to quantify the deadweight losses and welfare effects of trade protectionism.

The discussion above was inspired by Don Boudreaux’s comments on Cafe Hayek a few days ago:

Economists have long understood that people with special privileges – say, producers protected from foreign competition by tariffs – act in ways that generate outcomes that are less valuable than are the outcomes that would be generated in the absence of such privileges. But in 1967 Gordon said, “The costs of those long-understood inefficiencies, while real and regrettable, are small in comparison with the wastes of resources used when people strive to get such privileges – that is, to seek rents.” If, say, U.S. tire producers expect that their profits will rise by $200 million if Uncle Sam slaps a punitive tax on Americans who buy non-American-made tires, these tire producers won’t sit around twiddling their steel belts hoping that Uncle Sam will impose such a tariff. These tire producers will actively seek such a tariff; they’ll lobby for it.

Yet lobbying requires resources: the buildings and office supplies used by lobbyists, the vehicles and fuel used to ferry lobbyists to and fro in their privilege-seeking efforts, but mostly the time and effort of the lobbyists themselves. And the greater the expected benefit of securing a special privilege, the greater is the amount of resources those in search of such privileges will use in that search. Such resource expenditures are beneficial to the rent-seekers themselves, for these expenditures increase these rent-seekers’ prospects of actually securing the sought-after special privileges that yield rents (that is, excess profits). But from society’s perspective these expenditures are wasteful: the building used to house lawyers who seek rents for their clients is not available to be used for genuinely productive activities (such as serving as office space for tech start-ups, or for lawyers who specialize in helping commercial clients write better contracts).

The lobbyists themselves are typically hard-working, highly educated, and creative. So when they use their education, time, and creativity working hard for clients seeking special privileges, they do not use their education, time, and creativity actually producing outputs that expand the size of the economic pie. All that hard work and creativity is wasted in simply trying to redraw the slice-lines of a given-sized pie. Over time, society loses because, and to the extent that, productive resources are wasted in acts of seeking special privileges.

And there are also additional rent-seeking costs that have to be accounted for when determining the full cost of protectionism: a) the rent-seeking activities by domestic buyers of foreign inputs like sugar-using industries who will seek to challenge protected domestic producers like sugar beet farmers and b) the “contagion effect” where successful rent-seeking outcomes for one domestic industry like sugar producers will inspire other domestic industries to pursue protectionism through government policies.

Here’s Gordon Tullock on those two points:

The potential customers [of foreign inputs] would also be interested in opposing tariffs and would be willing to make large investments to that end. Once the tariff is imposed, continual efforts to either break the monopoly or muscle into it would be predictable. Here again considerable resources might be invested. The beneficiaries of the monopoly [tariff], on the other hand, would be willing to put quite sizable sums into the defense of their power to receive these transfers.

As a successful theft will stimulate other thieves to greater industry and require great investment in protective measures, so each successful establishment of a monopoly or creation of a tariff will stimulate greater diversion of resources to attempts to organize further transfers of income.

Bottom Line: When defending or supporting tariffs and other protectionist trade policies, the “scarcityists” therefore have to include the wasteful rent-seeking activities that lead to protectionism as a significant cost of the special privileges enjoyed by domestic producers through government policies favorable to those producers but very unfavorable to consumers. Even if the deadweight costs of a tariff according to standard economic analysis are negligible, or even if a large country or small country tariff could be shown to have positive effects under some unrealistic or convoluted assumptions, the rent-seeking costs would be large, significant and ongoing and would therefore most likely result in net welfare losses for society. So the challenge for protectionists is to demonstrate that there could be any tariff or protectionist trade policy that would provide net benefits for a country, once we account for all of the costs imposed on consumers and all of the costs incurred in wasteful rent-seeking.

Related: See CD post “25 reasons why protectionism is taken seriously when it’s actually a form of economic suicide.

Rent-seeking: A significant cost of protectionism that doesn’t show up in the standard economic analysis of tariffs
Mark Perry

Mark Perry

Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan’s Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem. At AEI, Perry writes about economic and financial issues for American.com and the AEIdeas blog.

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