III. NATIONAL SECURITY
A third popular argument in support of tariffs is that certain industries, such as steel, are essential for war preparedness. People arguing this route may concede that steel prices will be higher, and the standard of living lower, from a purely economic point of view, but that it's better to lose a few dollars per year and have a guaranteed supply of steel rather than risk losing a war.
This argument fails to appreciate that the free market is entirely capable of handling disruptions in supply. If the protectionist citizen who writes Letters to the Editor is capable of foreseeing an interruption in steel imports during a major war, so too can the tycoons and speculators in the steel industry itself. After all, they stand to make or lose billions of dollars depending on the accuracy of their forecasts.
Consider the worst-case scenario where the U.S. imports all of its steel from foreign countries, and there is a large probability that there will be a major war in one year, and that if this happens every single one of our suppliers will cut off shipment of steel. What will be the market's response? Will steel continue to sell at its usual price, and will people in the steel industry focus merely on tomorrow's stock prices?
Of course not. If the supply of steel should be completely cut off, the market price of steel would skyrocket (assuming the government does not take steps to prevent "gouging" and "profiteering"). Because of this possibility, speculators today will buy and stockpile huge quantities of steel at the current low prices. (After all, even if the war never comes, they can simply resell the steel at its original price, losing only the costs of storage. Steel is not perishable like milk or tomatoes.)
In addition, if the war is expected to drag on for many years, so that at that point a domestic steel industry would be necessary, then it will be presently profitable for entrepreneurs to refit their factories so that a switch to steel production can be effected relatively quickly should war break out. And if, because of this costly refitting, the firms in question can cover their variable costs (though not their total costs) through production of steel, then the possibility of war (and exorbitant steel prices) will spur a domestic steel industry operating at a short-run loss in the hope of making up for its sunk costs once war breaks out.
In short, the profit system will automatically lead private businesspeople to take precisely those farsighted, cautionary measures that the steel tariff allegedly promotes. The difference is, the private actions would only be undertaken if the risks were high enough to make the cautionary measures worth their cost, whereas politicians will enact steel tariffs in the name of defense even if there is no real threat of a complete disruption in imports.
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