ECONOMIC INTELLIGENCE THE REAL TOLL OF TARIFFS
By Louis S. Richman

(FORTUNE Magazine) – The world is becoming accustomed to seeing Third World countries launch their economies into soaring growth by lowering trade barriers. But conventional economic theory does a poor job of explaining why their takeoffs are so dramatic. A recent study by economist Paul M. Romer of the University of California at Berkeley now offers a clarifying new insight into the process. According to accepted wisdom, a tariff results in only a small loss of economic growth. By slapping a tax on imported goods, the government of a country raises their cost to domestic consumers, but that loss is mostly offset by the revenue the government reaps from the import duty. Romer, however, sees worse effects: Trade restrictions block a potentially vast range of entirely new goods and production processes. That's because the barriers depress the introduction of new foreign products that could spur local support businesses, which in turn could cause other businesses to be created. New computer imports, for example, might spark development of a local software industry. How much might trade barriers cost a developing country in terms of lost economic growth? Hypothesizing that a government imposes a 10% across-the- board duty on all imports, Romer calculates that the cumulative forgone investment and profits from the new economic activity they block could run as high as 20% of GDP. Says he: ''Protectionism is insidious because it leaves no trace of what might have been.''