Rocks In The Harbor: Beveridge And Robinson

For teachers of economics, one familiar metaphor about tariffs is “rocks in the harbor.” Companies and countries go to considerable trouble and expense to build docks and interconnected transportation structures, and even dredge the harbor to assure smooth transit for vessels. Having done all that, it would seem peculiarly illogical to then dump rocks into the harbor, raising the costs of trade and offsetting the previous investments.

The metaphor seems to have originated with William Beveridge (of the eponymous “Beveridge curve”), in a 1931 book entitled Tariffs: The Case Examined. Beveridge sets up. Note that this book is written as the Great Depression starts to bite, and as nations start to raise trade barriers in the hope that it will buffer their national economies against the Depression. Beveridge puts the connection between tariffs and rocks-in-the-harbor this way (p. 110):

Gain through freeing imports from taxation does not depend on other other countries doing the same. For other countries to tax our exports to them is an injury to us and an obstacle to trade. For us to tax their imports to us is not a correction of that injury; it is just a separate additional obstacle to trade. By allowing free imports we allow competition to determine what goods we can get most cheaply by making them ourselves and what goods we can get most cheaply by [making] something else to sell abroad in exchange for them. If other countries are taxing what we sell to them, the resulting distribution of our capital and labour among various industries will not be quite the same and not quite so profitable as if other countries also allowed free imports. But it will be more profitable than if, by taxing imports ourselves, we force ourselves to do and make things for which we were less fitted rather than things for which we were most fitted. If one country has good harbours while all the rest have bad ones, it will not realise the advantages of his good harbours so fully as if all the rest had good ones also. But it will realise some advantage; it will be better off than if it, too, sank rocks all around its coasts.

The origin of the rocks-in-the-harbor analogy is often attributed to Joan Robinson in her chapter in “Beggar-My-Neighbour Remedies for Unemployment” in her 1937 book, Essays in the Theory of Employment. This misattribution is odd, given that Robinson literally footnotes the 1931 Beveridge book as the source. But what is perhaps more interesting is that while Robinson is actually skeptical of the rocks-in-the-harbor analogy, especially in the case where other countries are putting rocks in their own harbors. Again, it’s useful to remember that she is writing in 1937, in the aftermath of a vicious circle of trade restrictionism around the world during the Great Depression, which was not a primary cause of the Depression, but didn’t help matters, either. Robinson writes:

In times of general unemployment a game of beggar-my-neighbour is played between the nations, each one endeavouring to throw a larger share of the burden uponthe others. As soon as one succeeds in increasing its trade balance at the expense of the rest, others retaliate, and the total volume of international trade sinks continuously, relatively to the total volume of world activity. Political, strategic and sentimental considerations add fuel to the fire, and the flames of economic nationalism blaze ever higher and higher. In the process not only is the efficiency of world production impaired by the sacrifice of international division of labour, but the total of world activity is also likely to be reduced.

Are tariffs a useful answer? Robinson strongly suggests, with a bit of hedging, that if other countries are imposing tariffs, it is useful to respond with tariffs to sustain domestic employment. She writes:

Indeed it is obvious to common sense that a tax upon imported goods will lead to an increase in the output of rival home-produced goods, just as a tax upon any commodity will stimulate the output of substitutes for it. The popular view that free trade is all very well so long as all nations are free-traders, but that when other nations erect tariffs we must erect tariffs too, is countered by theargument that it would be just as sensible to drop rocks into our harbours because other nations have rocky coasts. [Beveridge is footnoted here.] This argument, once more, is unexceptionable on its own ground. The tariffs of foreign nations (except in so far as they can be modified by bargaining) are simply a fact of nature from the point of view of the home authorities, and the maximum of specialisation that is possible in face them still yields the maximum of efficiency. But whenthe game of beggar-my-neighbour has been played for one or two rounds, and foreign nations have stimulated their exports and cut down their imports by every device in their power, the burden of unemployment upon any country which refuses to join in the game will become intolerable and the demand for some form of retaliation irresistible. The popular view that tariffs must be answered by tariffs has therefore much practical force, though the question still remains open from which suit in any given circumstances it is wisest to play a card.

Robinson elides the distinction between economic and political forces here. When she writes that the demand for tariff retaliation will be “irresistible,” she seems to be hinting that it is irresistable by politicians. But the argument that politicians may be prodded into poor policy choices is not an economic counterargument. When she writes that the “popular view that tariffs must be answered by tariffs has therefore much practical force,” that word “practical” again seems to suggest political necessity rather than making an economic case, and she leaves behind a careful “the question remains open” clause at the end of the paragraph. In the rest of the essay, Robinson works through the various arguments about elasticities, exchange rates, and nominal wages that need to hold for retaliatory tariffs to make economic sense, and argues that “there are circumstances in which a limited indulgence in them cannot be regarded as a crime.”

Here, I have no wish to engage Robinson’s arguments directly, but it does seem worth noting that the current US experience with trade and trade deficits is rather different from what Robinson was envisioning. For example, her discussion is implicitly about trade in goods; it is not about the global supply chains that involve imports of inputs to make products (about half of all US imports), many of which go into products that are then exported. She is writing at a time when a goal of fixed exchange is assumed. She is writing under an assumption that trade surpluses are necessarily beneficial for an economy, and closely linked to higher employment, but the global economy in the last half-century has observed a pattern where economies like Japan and Germany have had high trade surpluses together with slow growth and at times high unemployment, w hile the US economy has had high trade deficits while growing faster and maintaining relatively low unemployment rates.

Beveridge’s phrasing of rocks-in-the-harbor remains, for me, a useful tool of pedagogy. Robinson’s response, although hedged and now inevitably dated, offers a useful reminder that economic analysis needs to be argued through details of analysis, and that metaphors are not enough.