Modern-Day Protectionism Enables Cronyism and Corruption

During America’s early history, trade taxes were the major source of government revenue, but they were “revenue tariffs” rather than “protectionist tariffs.”

Lawmakers didn’t necessarily want to block imports. This was before America was plagued by an income tax and some source of revenue was needed to finance the government.

And since the central government back then was very small, as the Founders envisioned, the first tariff was only 5 percent and it applied equally to all imports.

Compared to what we have today, that was a pretty good system. But it seems inevitable that politicians – sooner or later – will manipulate and abuse any power they have.

It didn’t take long for that original tariff of just 5 percent to climb higher. And it also was just a matter of time before politicians begin imposing special tariffs on selected imports in response to pleading (and goodies) from various interest groups.

Today, government’s power over trade enables some utterly disgusting and oleaginous examples of insider dealing and rank corruption.

For instance, the Wall Street Journal is reporting about an odious example of unjust enrichment thanks to protectionism.

…tariffs on imports of newsprint…have been cause for celebration at private-equity firm One Rock Capital Partners LLC. Government records show that a team from the New York-based firm approached the Commerce Department, including one meeting with Secretary Wilbur Ross, saying Canadian newsprint imports were hurting One Rock’s investment in North Pacific Paper Co., a paper mill also known as Norpac. Commerce responded to One Rock’s appeal by setting tariffs on Canadian imports, causing newsprint prices to jump by as much as 30%, significantly lifting Norpac’s business prospects.

Yes, your read correctly.

Some bigwigs bought a paper mill and then used their connections to undermine competition from Canadian paper mills.

They get rich, but only by manipulating the levers of power, not because they provide value to consumers.

…the price surge threatens the viability of small-town papers across the country, forcing reduced publication days, layoffs and other cut backs. Canadian mills have historically supplied a large portion of U.S. newsprint. “This whole play by Norpac basically disrupted an entire industry,” said Paul Boyle, senior vice president at the News Media Alliance… The tariffs represent a remarkable success by a relatively little-known private-equity firm at pulling the levers of power in Washington for advantage. …Canadian Ambassador David MacNaughton called Norpac a “rogue actor seeks to game American trade laws for its own short-term advantage, while putting thousands of U.S. and Canadian jobs at risk.”

The obvious takeaway from this story is that protectionism is bad for the U.S. economy. Yes, a few rich insiders pocket some undeserved profits and there will be a few more workers at one plant, but those results will be easily offset by the loss of jobs and income elsewhere in the economy because of the adverse impact on newspapers, advertising, and related sectors.

But I want to highlight another negative effect. I wrote back in 2011 that there are many well-meaning folks on the left that support class-warfare policies because they assume that rich people got their money illegitimately.

Well, this story is sad confirmation that this is often true.

I tell all my statist friends that punitive and destructive taxation is not the right response to this kind of sleaze. Instead, we need to get rid of protectionism (and subsidies, cronyism, and other forms of special favoritism). Make sure we have a system where people instead get rich by satisfying the needs and wants of consumers.

And I tell my Republican friends that if they don’t want crazies like Bernie Sanders, Elizabeth Warren, and Alexandria Ocasio-Cortez to wind up in charge of Washington, they need to stop playing footsie with special interests and instead fight for genuine free markets.

Sadly, neither group is taking my advice.