Tariffs, Transportation Costs & The Case for Unilateral Free Trade

by | Sep 26, 2022

A policy of unilateral free trade is analytically equivalent in its effects to a fall in inbound transportation costs while outbound transportation costs remain the same.

The existence of tariffs modifies the operation of the principle that the price of a good tends to be the same throughout the world in exactly the same way as does the existence of transportation costs. Namely, it allows the prices of goods to differ between two markets by a wider margin, equivalent to the existence of additional transportation costs—that is, by the sum of transportation costs between the two markets plus the amount of the tariff. Now, only when the price of a good in one market comes to exceed its price in another market by more than the sum of transportation cost plus tariff, does it pay to buy in the cheaper market and sell in the dearer market. This, of course, operates to drive the discrepancy in price to the point where it no longer exceeds the sum of transportation cost plus the tariff.

The fact that tariffs have the same effect on price differentials between markets as do transportation costs, and can be analyzed as the equivalent of additional transportation costs, implies that a country must benefit from a policy of free trade even if it adopts that policy unilaterally, with its citizens having to go on selling their goods in countries that continue to maintain tariff barriers. A policy of unilateral free trade is analytically equivalent in its effects to a fall in inbound transportation costs while outbound transportation costs remain the same.

In the nature of the case, the inhabitants of a territory must benefit from the fact that the cost of transporting goods to them is as low as possible. The fact that it is lower than the cost of transporting goods from them to other areas can make no difference. If, for example, they were fortunate enough to live in a territory toward whose coast the predominant winds blew or the ocean current flowed and which, accordingly, found itself with correspondingly low inbound transportation costs, they would benefit from that fact, even though inbound transportation costs were thereby rendered less than outbound transportation costs.

The fact that it is not equally less costly for their goods to reach others does not take away the advantages to them of others’ goods being able to reach them more cheaply. It would be the height of absurdity on their part to demand that inbound freight be rendered artificially more costly, say, by requiring inbound ships to carry extra ballast, in order to equalize the transportation costs of inbound and outbound freight.

The situation is exactly the same with regard to a policy of unilateral free trade or a country having tariffs lower than the tariffs of the countries with which it trades. To insist that one’s own country have tariffs so long as the countries its citizens sell to have tariffs, or have tariffs that are as high as the tariffs of those countries, is to demand the equivalent of raising inbound transportation charges merely because they happen to be lower than outbound transportation charges.

Adapted from Reisman’s Capitalism: A Treatise on Economics, Chapter 6, The Dependence of the Division of Labor on Capitalism, “Tariffs, Transportation Costs, and the Case for Unilateral Free Trade”

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George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics. See his Amazon.com author's page for additional titles by him. Visit his website capitalism.net and his blog atGeorgeReismansBlog.blogspot.com. Watch his YouTube videos and follow @GGReisman on Twitter.

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