How should we feel when our government representatives retaliate against European soybean subsidies (or South Korean shipbuilding subsidies, or Canadian wheat subsidies, etc.) by imposing punitive tariffs against the offending countries? Should we write our officials letters of support, thanking them for preventing unfair trade? Before you get out your stationary, let's do a simple analysis.

As has already been demonstrated in our analysis of dumping, when foreign countries subsidize their products, they make them cheaper for us to import. Translated, that means we don't have to give up as many of our goods and services in order to get what we want from our foreign trading partners. How could anybody argue that lower prices make consumers worse off? When you go car shopping and see a sticker price of $12,000, do you say to the salesman, "I'll give you $14,000 and not a penny less?"

But when our government tries to prevent foreign governments from subsidizing their exports, we are saying, in effect, "No Francois, you must charge us $5 for that bushel of soybeans, not $3. Oui, $5 and not a penny less!" When foreign governments subsidize their products, it is like a blue-light special at KMart. ("Attention, KMart shoppers, please direct your attention to Aisle 17 where you'll find some very special prices on European soybeans. For the next hour, you can buy two--yes, two--European soybeans for the price of one.")

It's bad enough that the American government doesn't extend an official letter of appreciation to the kindly French taxpayers when they subsidize their agricultural exports to us. (We were raised to write Thank You notes whenever someone sent us a gift.) As if rude manners weren't bad enough, our government adds injury to insult by using bad economics. Let's use our Profit Table to show the effect of a retaliatory tariff on the happiness of American consumers.

Suppose a PUNITIVE TARIFF was imposed on French white wines (which was exactly what happened in this particular case). Now consider an American importer of French wines. Prior to the tariff, this importer could buy a bottle of Chablis from a French wine company for $18. In return, that importer could turn around and sell that wine for $25 in the U.S., generating a nifty $7 profit. Now the U.S. government slaps a $10-a-bottle tariff on all French white wines. The plan works brilliantly. Less Chablis gets shipped to the U.S. This is represented in our Profit Table by the fact that the importer can no longer make a profit on this transaction. Hence the trade does not take place.

What is the impact on America's consumers? Clearly, they have lost out on the happiness they would have received from the French wine. In this instance, that would be a loss of approximately $25 in happiness. There is, however, some corresponding gain. American consumers get to keep $18 of goods and services that would have ended up getting shipped to France. Alas, the gain does not compensate for the loss. By discouraging this trade, the punitive tariff has resulted in a $7 decrease in the happiness of American consumers.

What would happen if, instead, the $10 tariff were placed on the French firm shipping the wine, rather than the American importer? In that case the French would no longer be willing to sell their wine to us for $12. If they were forced to pay the $10 tariff, they would simply charge the American importer $10 more. This would increase the cost to the American importer from $12 to $22. Thus, the American importer would end up paying for the tariff anyway, only indirectly, by having to pay higher wine prices. And the Profit Table would end up being the same as when the American importer directly paid the tariff.²

Finally, note that we get the same result again if the government imposes an IMPORT QUOTA on French Chablis. Suppose the bottle of wine represented in the Profit Table is a bottle of wine that would have been beyond the allowable limit after the U.S. government imposed the quota. Suppose further that the penalty associated with violating the quota was $15. The result, not surprisingly, is the same.

So who exactly gets punished when punitive tariffs are imposed? It's true that the French get hurt. After all, they--like us--derive benefits from this trade. They valued the $20 in American goods and services more than the Chablis they were giving up in return. But clearly, American consumers are also punished. And it is by no means clear that the hurt suffered by Americans will be any less than that suffered by the French.

Picture the following scene. It's a beautiful Christmas morning. Outside, the freshly fallen snow glistens in the sun's early rays. Inside, the happy sounds of children playing with their new toys fills the house. A warm, crackling fire burns on the hearth. And from the living room CD player, the Mormon Tabernacle Choir sings the holiday's favorite hymns. Suddenly, there is a knock at the door. A neighbor has arrived with another gift! The children all gather round in giddy curiosity to see what the special present is.

But before the gift can be opened, the man of the house, in a fit of furious rage, comes storming down the staircase and yells at the neighbor, "Get that gift out of my house!" The children are shocked. The neighbor says, "Merci, Monsieur! It eez a geeft! Weeth love, from me and my familee!" "You miserable bum, you no good son of a French milking maid, who said you could bring that present in this house? Get out. Get out before I throw you out." "But Daddy, Daddy," the children say, "the man was only trying to be nice."

"I'll show you nice," says the father. He reaches back and throws a walloping, roundhouse punch right to the neighbor's jaw. The neighbor reels backwards. And then the father does the craziest thing. He grabs a frying pan from the kitchen and hits himself over the head. Again, he punches the neighbor, grabs the frying pan, and hits himself over the head. Over and over this continues, until the neighbor stumbles out of the house, taking his package with him. Bruised and hurt, the father slumps to the floor. But before he slips into unconsciousness, he turns to his disbelieving children and triumphantly announces, "I guess I showed him."

An unbelievable story you say? Something that would never happen in any normal household you say? You're probably right. And yet this happens everyday in the world of international trade. It's bad enough that our government turns down gifts that could make Americans better off. But just in case one of those pesky foreign countries persists in trying to give us their goods for cheap, our government hits American consumers over the head with a figurative frying pan in its efforts to keep those gifts at bay. It's like cutting off one's nose to spite one's face!

NOTE: When the supply curve of imports is upward sloping, the Profit Table ignores a source of welfare changes. This is the first time in this book that our Profit Table has not captured an important welfare effect! Why did this happen? In the past, price changes did not contribute to changes in social welfare. They simply measured wealth transfers between "consumers" and "producers" (i.e., consumers cum owners or shareholders). However, in international trade, producer's surplus represents the gain to the foreign trading partner. Thus, changes in producer's surplus contribute to American social welfare. As a practical matter, almost all economists agree that this latter effect is relatively small, and that the imposition of tariffs causes a net loss for American social welfare.