Protectionism is No Treat: The Hidden Costs of Trade Barriers
Why does the Spangler Candy Company make its famous Dum Dum Lollipops in Bryan, Ohio, and its candy canes down in Juarez, Mexico? The answer to that question has a lot to teach us about the hidden costs of protectionist policies. It starts with the influence of the American Sugar Lobby, which contributes millions of dollars to the political campaigns of both Democrats and Republicans. In return for that support, politicians of both parties have agreed to protect the American sugar industry from foreign competition. That is why sugar prices in the U.S. are more than double what they are in the rest of the world. This is obviously good for American sugar producers, but what about the rest of us?
The Spangler Company used to make both its Dum Dums and its candy canes in Ohio. But sugar is a key input in the production of each. So when the cost of sugar goes up, it has to either raise the prices of its products or shift production elsewhere. They did raise the price of Dum Dums, because this iconic lollipop has high brand recognition and many loyal customers willing to pay extra for them. But their candy canes don’t have the same brand recognition; if Spangler attempted to raise their price, consumers would just switch to another brand. The stark choice facing the Spangler Company was either to move its candy cane production to Mexico or stop making them. Either way, the Americans who used to make candy canes are out of a job. Other producers have responded to the high price of American sugar by finding substitutes, as when Coca-Cola changed its ingredients from sugar to high fructose corn syrup. That’s why Mexican Coke and American Coke taste a little different. Ironically, government efforts to keep American sugar prices high have the effect of lowering the demand for American sugar. Over time, that means more and more government intervention is required to maintain the same level of support.
You might think that the way to prevent job losses at Spangler is just to offer protection to them as well; why not help all American workers by raising tariffs on everything? But this would be disastrous for the U.S. just as it has been for every country that has ever tried it. A recent study by the International Monetary Fund estimated that a 1% increase in trade openness resulted in an increase of anywhere from 2-5% in per capita income. A reduction in trade openness would have the opposite effect (especially when other nations retaliate, as they often do). That happened in the 1930s when the U.S. increased tariffs to protect its own jobs. Other countries responded by higher tariffs of their own. Exports fell dramatically in all countries, and the result was lower employment and wages all around.
To better understand the impact of trade on living standards, consider what would happen to you personally if you limited the number of people you were willing to trade with. I know I benefit greatly from the unique skills, interests or opportunities of people that are different than me; and you do too. The differences between us make us useful to one another. Trade is a great way to make yourself better off by making someone else better off. That is why when two people voluntarily agree to an exchange, they both typically say, “Thank you.” Instead of producing everything myself, my goal is to specialize in producing something that other people want and that I’m relatively good at. Living in a world without this kind of cooperation could hardly be called living at all; obtaining the basic goods necessary for survival would be a challenge. What is true for individuals is true for nations as a whole; specialization based on comparative advantage reduces costs and raises productivity for both trading partners, increasing the quantity of goods available to each.
Given the strength of the economic arguments in favor of free trade, you might think that countries would seek to reduce trade barriers. But for political reasons, this is often easier said than done. The benefits of trade barriers tend to be concentrated on a small subset of workers, while the costs are more dispersed among everyone else. These special interest groups that benefit from trade barriers are more motivated and politically organized on this issue than the rest of the population. Meanwhile, the average voter is often unaware of the policy, and certainly isn’t going to base their vote on it. But we need to recognize these policies are almost always more about redistributing wealth, not creating it. And it is a rather inefficient way to redistribute wealth. For example, economists at the Federal Reserve estimates the recent increase in the tariff on washing machines cost consumers more than $800,000 per job saved.
That is not to say that we should ignore the suffering of people struggling with lengthy periods of unemployment or disregard the impact on communities when a major employer leaves town. The economic and psychological impact is large and often long lasting. But this would be true regardless of the reason for the disruption; changing tastes and technological innovation implies the people of today do not want the economy of the past. This applies to coal mining towns affected by the shift to renewables or the town that loses a typewriter factory due to the introduction of the PC, or to the brick-and-mortar retailers affected by the increase in online shopping. The pace of economic change has accelerated, and we need to strengthen the institutions that help people cope with it. There are important policy reforms that could remove barriers to entrepreneurship and job creation, improve education, and provide a more effective safety net. We shouldn’t attempt to freeze the economy in its current form as an heirloom to be passed down to future generations. No, what we want to pass on to them is what we received from past generations: a dynamic entrepreneurial economy where increasing prosperity and economic opportunity make it possible for them to be better off than ourselves.
About this Piece
This piece, which was published in the April 2025 edition of Northwood’s signature publication, When Free to Choose, is the subject of the latest lesson in Northwood’s complimentary online course, The Philosophy of Free Enterprise. The course is open to anyone interested in learning about the importance of business in society, the ethical foundations of the capitalist system, the meaning of free enterprise and the ways in which it benefits us, limited government and the rule of law, and the differences between capitalism and other economic systems. To access the course, visit https://elearning.easygenerator.com/148a08a9-02b3-4341-bcbb-041a6c63dd71/#/login. Click here to receive When Free to Choose in your inbox every month! To contact Dr. Matcheck, email matcheck@northwood.edu.