One of the most important aspects of governance is trade policy, for it is part of both domestic and foreign policy. Without a proper understanding of the tools available to a sovereign, it is impossible to use trade policy effectively in either an offensive, defensive, or administrative capacity. This is essential for libertarians as well as reactionaries, since the logical conclusion of libertarianism is a world of sovereign private property owners who function as kings of their own particular hills, determining the norms to be followed thereupon. Since most of these tools may be understood as tariffs (taxes levied on imported or exported goods) of one type or another, let us explore the various tariff options available to a sovereign, their domestic and international effects, and other considerations of economic theory in order to determine the best course for achieving particular goals.
0. The King-Pill
Before delving into the subject matter proper, let us preempt the objection that there is something inherently anti-libertarian about restricting trade. It is true that in the ideal libertarian utopia described previously, tariffs as we know them would be impossible, as one cannot impose taxes upon or pay taxes to oneself. But even if every person in the world were somehow put in absolute power over equal plots of land, this precise condition would not persist for long. Economic inequality occurs naturally over time as a result of differing preferences and abilities, and the profitability of managing primary property would only accelerate this process.
Liberty allows people to assert individual preferences, and some people would prefer to cast aside the burdens of any crown, no matter how small, for they would rather apply their talents to other endeavors besides governance. Some people simply lack the entrepreneurial ability to run a business, and a libertarian government is simply a private business with primary property. Other businesses fail not due to incompetent management, but due to circumstances outside of the control of the business owners. Like any other failed business, such primary property owners would be bought out by more competent managers, likely putting the former owners into a rental relationship of some kind. Another possibility is military conquest. Just as some people in democratic societies do not believe in democracy, one should anticipate that some people in a libertarian society would not believe in libertarianism and would attempt acts of conquest. It may be that some such attempts would not be stopped by the attacked property owners or anyone else. In such cases, the conqueror will get away with gaining property by seizing control of it. On a sufficiently long timescale, natural disasters, climate change, and geological activity would destroy some land and create new land elsewhere, leaving some former property owners landless while opening up opportunities for homesteading. All of these factors would cause primary ownership to move away from the aforementioned types of property owners and toward those who are more able and willing to carry out sovereign functions. Note that new lands, whether on Earth or elsewhere, would allow for some dynamism in the long-term, but those with means would be most capable of reaching, utilizing, and defending those lands.
Therefore, we may expect the Matthew effect to play out, after the Biblical parable of the talents and Jesus' declaration that “For to everyone who has will more be given, and he will have an abundance. But from the one who has not, even what he has will be taken away.”[1] Eventually, a society consisting of many landless people renting from a few landed people, much as citizens effectively rent from nation-states today, will result. Even among those who maintain allodial titles in land, some may find it beneficial to negotiate protection agreements with larger sovereigns. The result would resemble a feudal hierarchy with a monarch of sorts at the top, lords and vassals who nominally own land but rely upon a monarch for security, and peasants who rent land.
To understand these processes and results is to swallow the king-pill; even if all means were distributed equally, a new order of hierarchy and authority would eventually emerge. Whereas any real development of a libertarian social order will occur from less egalitarian conditions, the process of consolidation of sovereignty and stratification of society would occur more quickly than in perfectly egalitarian initial conditions.
As primary property owner, a libertarian monarch may decide who is allowed on his property and under what conditions. Traders who would enter his lands against his will are trespassers just like any other unwanted people. Those who would engage in trade activities on his property against his will are breaking the terms under which they may be within his kingdom, making them trespassers as well. Therefore, a libertarian monarch may set trade policy within his territory as a corollary of his private property rights. But just because he can set one trade policy or another does not mean he should. Let us proceed to our consideration of the range of policies that he may enact.
1. Types of Tariffs
It may be tempting to divide tariffs into categories of revenue-generating and industry-protecting, but this is a sliding scale rather than a strict dichotomy, for all tariffs have both effects to differing extents. Setting a tariff rates is therefore a balance between revenue maximization and industry protection. We begin at zero, for a negative tariff would both harm domestic industry and cost the sovereign while providing no domestic benefit. (The reasons why a sovereign might enact a negative tariff will be explored in Part II, but let us concern ourselves only with non-negative tariffs for now.) To examine the range of effects, let us consider a simple example in which avocados grown in the United States cost US consumers $1.50 each, while avocados grown in Mexico cost US consumers $1.00 each. At a tariff rate of zero, there is no revenue and no protection. Adding a small tariff, say 5 percent, will result in most people still buying the Mexican avocados and paying $1.05 instead of $1.00. (Merchants will treat tariffs as a cost of doing business and usually include them in the final price that consumers pay, so a tariff usually functions as a consumption tax targeted at particular goods from particular origins. Otherwise, the business must eat the cost, reducing its ability to spend money elsewhere.) A few people may decide to switch, but if all else is equal, most people would rather pay the revenue tariff and continue buying the cheaper foreign product, and there is no way to be sure that the reduced price difference is what caused a few people to reconsider their choices. Even so, there is no such thing as a pure revenue tariff that has no protective effect whatsoever.
If tariffs are raised to bring the items near parity, then at least in theory, consumer behavior will change sharply around the point of parity. In this example, a tariff of 45 percent should still have a mostly revenue-generating effect, while a tariff of 55 percent should cause most consumers to switch to buying American-grown avocados whenever they are available. At exactly 50 percent, there should be roughly equal protection and revenue effects, with the tie broken by nationalist sentiment, brand recognition, customer loyalty, etc. But tariffs rarely stay at parity, as special interests and consumer advocates compete to destabilize the equilibrium. It is important to remember that as tariff rates pass parity, consumers who switch to domestic goods will not pay above parity. If a domestic good is 50 percent more expensive than a foreign good in a free market and a 80 percent tariff is applied, the consumers who switch pay 50 percent more, not 80 percent more. This incentive is how protective tariffs function. One must also remember that this extra cost goes into the pockets of domestic producers rather than into the sovereign's coffers.
Once past the point at which protection effects dominate, there is not much point in raising tariffs further unless one wishes to either enrich a domestic industry in addition to protecting it or ban imported goods outright rather than merely make them undesirable to consumers. One may interpret trade sanctions, embargoes, and import/export quotas as tariff rates of infinity, for the effects are identical. However, the revenue effect would not disappear completely at infinity. If there are customers for a good or service and people who can provide, then there will be efforts to make trade occur regardless of legality. As long as there are smugglers who attempt to evade trade prohibitions and the sovereign is able to seize some of their illicit goods, there will be revenue to collect even at an infinite tariff rate.
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References
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