Sri Lanka is planning an ‘anti-dumping’ law to protect businessmen from poor consumers exercising their power in markets. An 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.
In some countries, anti-dumping laws are enacted to stop businesses and rent-seeking oligarchs from heaping even more burdens on poor consumers and plundering them without mercy.
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. They are 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 and rising living standards for the lowest-income earners.
In Sri Lanka, prices of a variety of building materials including tiles, sanitary ware, steel and electrical products are kept excessively high by the ruling political class through import duties, to give billions of rupees in profits to a few rent-seeking oligarchs. There are more oligarchs 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.
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.
Infant Industry
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 an adult. This was called the ‘infant industry’ argument.
The US, which is a large country with many states, and where many firms competed with each other, 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.
[pullquote]Free trade is, in fact, a major driver of job creation, as well as rising living standards for the lowest-income earners[/pullquote]
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, which 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 seem 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 is 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 the 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 after independence. They profited from state-backed monopolies operating with the threat of violence, which were demolished during the second part of British rule, along with the rise of freedom and classical liberalism in the UK.
In Sri Lanka, geriatric 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.
Geriatric Plunder
The plunder by geriatric industries is justified by the jobs argument. Geriatrics convince the people that ‘cheap imports’ will kill domestic jobs. They claim that foreign goods, sent after paying freight charges and even reasonable taxes, are too ‘cheap’ for poor people in Sri Lanka, and massive taxes are needed to put them out of reach. The claim is made that domestic jobs are lost by imports. Other claims are made that foreign governments subsidize them.
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, their individual loss is large and visible. But, if 20 million people are exploited, their individual loss is small.
It does not make economic sense for individual consumers to lobby ministers or even write to a newspaper if a Rs100 product is sold at Rs200 with import duty protection. But an industry that makes a Rs100 million profit a year has the economic incentive to launch a PR campaign and fund political election campaigns.
Cheaper goods themselves create more jobs, but that phenomenon is not seen. Before Adam Smith and David Ricardo, Mercantilists attacked trade deficits and imports based on this simple reality, just as 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 replaced linen, wool and other material to become the leading driver of the industrial revolution in Europe.
Unseen Jobs
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 Rs72) upwards for a 2×2 tile. Due to massive taxes in Sri Lanka, such tiles cost about Rs260 a square foot or Rs1,000 a tile. A 2×2 polished vitrified tile is about Rs1,600.
[pullquote]Protection for building materials, which pushes up the cost of capital stock, also has long-term consequences that will continue to harm the population and businesses[/pullquote]
Arbitrary prices are charged for different designs. An Indian would build his bathroom spending Rs18,000 for 250 square feet of tile. A Sri Lankan would have to pay Rs65,000. To block the economic freedoms of Sri Lankans and undermine consumer sovereignty, the rulers charged excise taxes per square foot, not on value.
If imported tiles were available after paying a reasonable tax rate of say 15 percent, and was retiled at Rs100 a square foot, which is 38 percent higher than in India, it would cost only Rs25,000 for the bathroom tiles.
Even that is Rs40,000 cheaper than buying overpriced tiles in Sri Lanka. The Rs40,000 saved would not disappear. The consumer will spend it elsewhere, increasing his living standards and creating jobs in the process. Or, he may decide to paint a room in the new house, which he initially planned to leave bare because he did not have money, thus 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 tailors, etc.
Or, he may spend it on services, many of which are springing up now as small businesses. He may take his kid to 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 hairdresser and spend some more money.
Or, he may decide to spend it on a three-month computer course for his eldest daughter, giving jobs to IT teachers and raising her skills to make it easier for her to get a job.
None of these activities 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 profit primarily by selling an overpriced good and taking the tax that would otherwise have gone to the government.
Long-Term Effects
Protectionist food taxes (which even nationalists like List did not advocate) are among the worst. Underdevelopment and stunting of the brain takes place in children when milk and maize (protein malnutrition) are taxed.
In East Asia, after free trade reduced food prices (especially in former communist nations, where improved property rights boosted agricultural productivity and output), an entire new generation that is taller than their parents is now growing up.
Protection for building materials, which pushes up the cost of capital stock, also has long-term consequences that will continue to harm the population and businesses. Overpriced steel increases all building costs. In Sri Lanka, there is no protection in cement. Significantly, cement manufacture is dominated by minorities and foreigners.
When building costs go down, capital investment is reduced. A 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 house owner’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 a 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.
[pullquote]The problem with free trade is that not all its effects can be seen readily. Mercantilists and protectionists use this fact to mislead the general population[/pullquote]
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 for 10 times that of its population. Millions of people from India, Bangladesh, former soviet states, the Philippines, the UK and the 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 and Nigeria to Iran and Iraq, have ended up as basket cases. Singapore has a massive expat workers sector. Hong Kong has seen long-term in-migration with free trade. Countries like Vietnam have leapt ahead and reduced poverty much faster than China or Korea, as it had free trade and joined 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 apparel. 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 a net importer of labour in the 1970s during our most ardent autarky effort.
The Nazi autarky was also not a haven. Germany became a much bigger economic power after it abandoned autarky.
Capitalism, unlike earlier economic systems like Mercantilism and feudal serfdoms, lifted millions out of poverty and raised consumption due to competition, which made it impossible for producers and merchants to exploit their fellow human beings. Capitalist competition promoted innovation, reduced costs, and improved the utility of goods and services.
The problem with free trade is that not all its effects can be seen readily, unlike a factory closure. Mercantilists and protectionists use this 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, a 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 the 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 the economic consequences that otherwise remain unseen.”