Context

Consider a country in South America, say Bolivia.  The population is about 12 million, with about a third living in rural areas. GDP per capita in 2025 might be around $4,000 per capita. There is significant inequality, so cities are much wealthier than villages and towns in rural areas. Infrastructure (roads, dams, electricity grid) is good in cities, but poor outside.

Imagine that in 2026 the country has a dozen multinational mining companies operating lucrative lithium mines. The companies turn over 10% of the value of lithium exports as tax to the government. The lithium mines employ many Bolivians (and also many foreign nationals) and indirectly generate much employment (for food provision, transport, port facilities). Government spending on schooling and health services is higher because of the mining revenues. That is, there is a “multiplier effect” from the mines on the local and regional economy.  One might imagine that some economists have estimated the direct and indirect effect of the mines, and find they “contribute” 5% to GDP, per year. Another way of saying this is that if the mines were to suddenly shut down, and produce no income, and all the workers were to be laid off, GDP (including government services) might be expected to decline by 5%. The burden of such a decline would fall heavily on the mine workers and all the workers directly serving the mine operations and the workers. But far away, in the ports, perhaps, companies and workers would also feel the effects. Speaking of the multiplier effect of the mines, it is worth remembering that some of the possible multiplier effect is “diluted” as Bolivian nationals directly and indirectly benefiting from the lithium boom increase their purchases on imported consumption goods (iphones, etc). But they may also import investment goods (especially for housing construction), that generate longer term increases in potential GDP. Economists (and others) can estimate all of these direct and indirect effects, to varying degrees of credibility.

Let us assume there is no significant “voracity effect” or “resource curse” from the boom, where factions within the government compete, often in very wasteful or even destructive ways, to control the increased government revenue, or to extract even more revenue from the lithium mining sector. Let us assume that whatever environmental impacts that might be happening directly or indirectly can be considered separately.

The question

The question before us, after that context, is whether the government of Bolivia should undertake a policy of: “Why don’t we put high tariffs on all imports; that will make Bolivia great again.” The presumption is that some measure, say GDP per capita (that is, average income per person), would be significantly higher, after some period of time, following the policy change.

Preliminary analysis

It can be useful to start with a single industry and a single tariff. Suppose the mining sector uses large-size industrial trucks. These trucks might be manufactured by multinational companies like Caterpillar or John Deere, or other companies. Let us assume they cost $5 million each (they are really big! https://www.caranddriver.com/reviews/a15140071/caterpillar-797-specialty-file/). A large mine perhaps has 10 trucks, and the many mines of Bolivia might together use 100 of these trucks. We imagine the Minister of Industry in Bolivia says to the President, “We can build these trucks here in Bolivia. It is just a giant truck. It cannot be too hard.” The President thinks that a truck factory would create good high-paying jobs in the capital city, and that eventually Bolivia could export the trucks to other countries. The President announces a 100% tariff on the trucks (and maybe also a high tariff on other kinds of trucks). Importing the truck would now cost the mining firm $10m (the $5m purchase price and the $5m tariff paid when the truck is imported into Bolivia, collected at the port.) 

The President also announces that that land and electricity for a truck factory will be provided. A group of Bolivian capitalists decide to set up a new corporation, the Bolivia Truck Co. (Boltru). They pool their capital of $100m, they build a factory, they import machine tools and other equipment and raw materials, and they hire a lot of skilled laborers, and they start their production line. Their plan is to produce 10 trucks a year. After a couple of years, they proudly announce they are producing the target of 10 trucks a year. In a footnote, they note that the trucks cost $7m each to build (all materials, labor, and depreciation of factory and tools) and they sell them to mining companies for $8m (so there is $1m profit per truck, for the factory owners). The factory employs 1,000 skilled workers, earning somewhat higher wages than they did before. Economists have estimated the multiplier effect of the truck factory. The total positive effect on GDP is nowhere near that of the mines themselves, but it is large.

The Bolivian President, one day, says, “That worked great, why don’t we do that for every industry?”

A skeptical economist

In the newspapers, coincidentally, that very day an opinion piece is published by a prominent Bolivian economist. Here is the summary of what she wrote. 

The country’s policymakers seem to have forgotten the basic economic principle of opportunity cost. Consider a farmer who labors year-round to raise chickens, who feeds them, who spends money on medicines, who takes their eggs to market, and who at the end of a year calculates her profits and determines that she made a profit of $3,000 over the whole year. When I look at her calculations, I notice she has not valued her own labor as a cost “Well, I didn’t have to pay for my own labor, did I?” the farmer answers, “So it cost me zero!” That’s when I say, “But your labor had an opportunity cost! You could have worked all year round in your town, which is near your farm, which is close to a large lithium mine, maybe as a cook in a restaurant. Same hours, same quality of life.  And if you had worked as a cook, your income at the end of the year, according to my calculations, would have been $5,000!  You actually lost $2,000 this year relative to what you could have had. You chose a path, ignored the opportunity cost, and so ended up worse than you could have. To calculate the opportunity cost, we must consider a counterfactual, what could have happened if you had chosen a different path relative to what you chose.”

“Obvious,” some people say. But they often fail to apply the same kind of counterfactual, opportunity cost, reasoning to tariffs. Take the case of the truck tariffs. The counterfactual is what would have happened in the absence of the tariff. We just have to do a little bit of reasoning to arrive at several observations. First, in the absence of a tariff the mines would have likely purchased more trucks, and replaced their old trucks, at a higher rate, so they would have produced and exported more lithium. They would have hired more skilled workers. The ports would have had more business. The multiplier effect of the increased mining would have increased other people’s incomes. Instead, that did not happen. Second, when the Bolivian capitalists got together to establish the local factory Boltru, they may have noted that they would build the truck factory instead of building a large eco-tourism hotel in the mountains that was going to attract tourists from all over South America, and even beyond, to enjoy the natural beauty, cuisines, music, and culture of Bolivia. Perhaps the planned hotel would have employed 2,000 workers (chefs, musicians, clerks, fitness coaches, etc.).  The local multiplier effect of the complex would have been large. And the building materials, in the spirit of eco-tourism, were all to be sourced locally. The truck factory, on the other hand, was largely built with imported materials, and all of the machinery in the factory was imported. The opportunity cost of building the truck factory was not building the hotel. Third, the tariff on trucks primary effect is to reduce truck usage. Perhaps what some of the mines did was offer incentives for Bolivians to bring their donkeys and llamas to carry out mined lithium ore. The international photographers loved it, of course: a picturesque caravan of llamas piled high with sacks of lithium, walking out of the hellscape of the mining pit and unloading 10 miles away near the road. But anyone venturing further into the villages around the area would have seen rotting produce: “There are no animals to carry the potatoes and cabbage to the market, so what can we do?” Opportunity cost.