Tariffs 2

I’m getting a surprising deluge of reader responses to the two columns I wrote dealing with the issue of tariffs.

Frankly, I did not expect this. I hesitated writing the first column because the subject might be too esoteric or too technical for the general readership.

The reader response to the two columns proved otherwise. And because of that, I will push this debate further – both with that protectionist group passing itself off as the "Fair Trade Alliance" (which should more accurately be called the No Trade Alliance) and the groups that lobbied for Executive Order 241which illogically raised tariffs for some goods but not for others.

I will add two more points to this debate: first, the wisdom of relying on tariffs for government revenues; and, second, the relationship between tariffs and crony capitalism.

We live in an increasingly borderless world where information, technologies and capital flow across political boundaries with little inhibition. It is a world of the Sovereign Individual: the consumer empowered with choice about what information to absorb, what taste to cultivate and what goods to buy.

It is an anachronism in this borderless age that the flow of goods should be constricted by tariff walls that admit some goods but not others, raise the costs of consumption not at the dictate of market forces but on the whim of bureaucrats and political players.

In an earlier age, when economies and cultures where more territorially defined because movement of people and transfer of information were inefficient and costly, tariffs were used by governments to raise money for themselves. In that earlier age when trade added only marginal wealth to the national economies, that was acceptable practice. It distorted domestic production insignificantly.

In the present age, when much wealth is created by transactions across borders – such as outsourcing of components, tourism, exchange of fresh and processed food, exchange of services such as call centers, backroom financial operations, software design and animation work – tariff barriers hamper rather than abet wealth creation.

For instance, if we impose heavy duties on such "luxury" imports as wines, tourist vans and processed foods, we suffer the consequences by raising the cost of tourism services and discouraging tourism arrivals. Government may earn marginally from the increased tariffs but lose heavily in terms of potential tourism employment and related tourist spending in the local economy.

In a way, high tariffs become the instruments by which government shoots our own economy in the foot.

In an earlier age of protectionism, our government relied more on taxing trade rather than taxing wealth created domestically. That did not only produce a stagnant economy. It also produced a government that was not accountable to a large domestic base of taxpayers. Instead, government was more accountable to an oligarchy that drew its profits from a captive domestic market.

There is much to say about free trade and broadening the base of democracy. If a government relied exclusively on taxing domestically produced wealth, it will have greater incentive to broaden economic opportunities for its people. Also, a large class of taxpayers will constantly demand that the political leadership be accountable to it.

By contrast, if government relied heavily on revenues drawn from duties paid by a small comprador elite, it will not matter much if the mass of the population is dirt poor. Government largesse from tariffs will be used for patronage politics and the politics of economic dependence on the state.

It is arguable that tariff dependent governments have greater propensities for authoritarianism.

Our experience with authoritarianism has been tragic. It is not coincidental that the authoritarian regime imposed on us during the seventies happened after a long phase of "economic nationalism" that produced a government financed by compradors rather than by a broad base of politically conscious taxpayers.

That long phase also produced a deep-seated business culture of tax avoidance rather than tax acceptance.

It is also not coincidental that our experience with authoritarianism was deeply tainted with crony capitalism. If we carefully investigate the phenomenon of crony capitalism, the social base of the Marcos dictatorship, we will discover that the main instruments for cronyism was regulation and nationalization.

Inspect the major Marcos cronies one by one. Each of them prospered because they enjoyed monopolies guaranteed by state regulation or cornered sections of the domestic market on the basis of stiff tariff protection.

As cronyism thrived, the rest of the economy was punished. As a small class of politically connected clans enriched themselves using favorable regulation and tariff protection, the rest of our people descended into the quagmire of poverty and stagnation.

By making trade dependent on tariffs and regulations determined by political whim rather than by the neutral discipline of market forces, we create fertile ground for economic favoritism and corruption.

I hope my friend Bobby Tañada will come around to realizing this.

Together, many years before, we stood shoulder-to-shoulder in the democratic movement fighting dictatorship. We fought the dictatorship not only because it trampled on human rights and denied our people the freedom we deserved.

The civil libertarian aspects constituted only the tip of an unholy iceberg.

More important, we fought the dictatorship because it was a political and economic arrangement that doomed the mass of our people to poverty. Wealth was unevenly distributed because a small class could corner rent from comprehensive state regulations on trade, investment and domestic commerce. Those regulations were inimical to cultivating a broad class of Filipino entrepreneurs and wealth-creators. The cost of doing business here was unduly raised by political unpredictability since success or failure depended on political protection.

Should we be surprised then that our political class is captive to vested interests and our businesses are constrained to "investing" in politicians?

In a word, Bobby, if we want a free society, we must build a broad base of domestic entrepreneurs. That can happen only if we fight for economic freedom – and fight for it with the same passion we both fight for political liberty.