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The Amazon Theory of Protectionism
For years, Walmart was the model of efficiency for the retail business. The true genius behind the world’s biggest retailer was not the superstore, or the cheap goods from China, but logistics. Walmart established what was perhaps the best distribution network in the history of mankind: an interconnected web of manufacturers (yes, some in the USA), warehouses, and trucks that moved goods from one point to another with astonishing efficiency. Coupled with advances in computer technology that gave them real-time data on stock levels, Walmart pioneered a way to use its trucking network as mobile warehouses, able to restock stores quickly with the goods that were most in demand. This allowed them to reduce their warehouse footprint, expand their retail presence, satisfy their customers, and make billions of dollars.
Then, a small start-up decided to disrupt it all. Amazon is a tech giant of the 21st century and one of the few dot-coms to not only survive the tech bubble, but to dominate its field going forward. Today, its businesses range from basic Internet retail, to back end server infrastructure, to some of the best darn consumer devices money can buy. It’s easy to forget it all started as a bookstore.
How did Amazon come to dominate so many areas of the 21st century economy? The easy answer is that its CEO, Jeff Bezos, is a genius. While this is almost certainly true — Bezos has a masterful grasp of the passions of the American consumer and was among the first to recognize the utility and importance of data collection in the internet retail age — he had some government help along the way. “What?!?” you might exclaim. “Only a liberal would say ‘You didn’t built that’! Amazon is a model of American dynamism and ingenuity. Bezos built that.” I am not here to gainsay Bezos’s genius or business-savvy but rather shed light on how big business can manipulate regulations and taxes to drive out competition. To which, you all respond “Duh, we’re conservatives!”
In its infancy, Amazon was just an online retailer like any other. It had some amazing innovations like their shopping cart, Amazon Marketplace and — most importantly — data collection/analysis, but it faced many of the same challenges other online retailers did. But another major factor in Amazon’s success was its decision to locate all their business operations and warehouses in states with little or no sales tax. This allowed Amazon, already a purveyor of low prices, to skirt things like California’s 9% sales tax, making their already impressive discounts even steeper in much of the country. For years, Amazon fought efforts by various states to impose their sales tax jurisdiction on Amazon, arguing — quite rightly — that since the commerce was happening on servers and shipped from warehouses out of state, places like California had no right to tax the transaction.
This was only the first step in Bezos’s plan for retail domination. He quickly realized that what was holding Amazon back from even further retail expansion was time; more specifically, his customers’ time. More often that not, patience is not a consumer virtue: People want what they want as quickly as possible and you’re local store has a big advantage in this way over an online retailer. To solve the problem, Bezos took a page from the Walmart book and greatly expanded his distribution network, placing a warehouse within two days of almost all major population centers in the United States, which meant abandoning its low-or-no-tax-only policy. Thus, Amazon Prime was born. Now consumers can get most products within 48 hours of placing their order, within 24 hours if they’re willing to pay for it, and — in some cases — the very same day. This presented Amazon with a conundrum: With all of these warehouses in states with sales taxes, it would have to start collecting sales taxes. Suddenly, one of its key advantages disappeared. The solution for Amazon was a complete about face on taxing eCommerce.
Why? First, Amazon recognized that its network — built during the wild west days of sales tax flaunting — put it in a position to dominate the Internet retail market regardless of any new sales tax laws. Second, collecting sales tax across state lines is complicated, much easier for a retail giant like Amazon to do this than a small upstart retailer looking to disrupt Amazon’s core business. In short, Amazon had outgrown the challenges it had overcome in its youth, and was now happy to see them imposed on would-be-challengers. The result has been an overwhelming success for Amazon.
So what does this have to do with protectionism? In much of America, sales taxes function (in practices) as tariffs on out-of-state purchases. Amazon recognized this and stayed out of most high-sales tax states while it was growing. But once its business was established, it quickly threw its muscle behind laws and regulations designed to protect it. A giant like Amazon can easily wade through the chaos of state and local taxes that drown upstarts and sole proprietors. Amazon captured the regulators and turned it to their advantage. Sure, Amazon could have pushed for legislation making all out-of-state Internet retail tax-free — a position it once held — but it had lost any reason to do so.
The exact same thing happens with international trade. However necessary or well-intentioned tariffs may be, they are inevitably captured by industry. Given the opportunity, government bureaucrats and their cronies in business will decide what goods matter, what companies matter, and what jobs matter. And, as should come as no surprise, they’ll put their own interests over the rest of ours whenever they come in conflict.
That’s always what happens when you try to rig a system, even on behalf of the little guy. I tend to think that the collective intelligence of 300 million people is better at deciding these things than a small cabal of connected businessman and politicians. But that’s just me.
Published in Culture, Domestic Policy
Good article. I hope it is considered for the Main Feed.
I agree that tariffs as long term solutions are negative.
How then do we address the issue of other nations’ tariffs on our goods?
Thanks.
I don’t really worry about other nations putting tariffs on imports. Not only is this not something we can control, but those countries are essentially impoverishing their own citizens to benefit their connected corporations. We must remember that wealth is not money, it is the things we acquire with our labor.
My solution would be to expand our network of free trade agreements. Behemoths like TPP may seem like a bad idea on their face – opaque legislation usually is. But the result is that I can buy Australian lamb (the best lamb!) at my local Costco for cheaper than my parents can buy it in Sydney at the local market (economies of scale for the win!).
Really good sound article, and clever use of protectionism in both instances. Another thought which Walmart capitalized on–monopsony power–does Amazon also gain this leverage? Do they make giant purchases and own inventory across the board?
Great article. But you go horribly wrong here:
Everyone knows the best lamb comes from the Shaky Isles.
Great article Jamie, but Colorado lamb is better.
I bet to differ, sir! Kiwi lambs were bred for their wool production not meat quality. Aussie lambs are cross bread with American lambs from Colorado to provide superior quantity and flavor.
Kiwi lamb is the cheap stuff you serve at banquet parties. Aussie lamb is the stuff you savor with good friends and a nice bottle of Hunter Shiraz.
Agree, but the issue as raised during this election is barrier to our manufactured goods and the impact it has on our workforce.
I would repeal our regulatory state and corporate tax code before considering the behemoth trade pacts.
Exchange rates may have something to do with that as well.
When will be grilling said lamb on the outdoor kitchen of justice?
Hey! This is only comment 8.
Ricochet threads do not devolve into arguments over wine and food until the 6th page, not the 6th comment.
Back on point folks. Focus.
Tariffs aren’t much of an issue for us because we can trade them away one way or another, but cultural and administrative restrictions are problems at least in the short run. Japan and China are prime examples of this and they are very difficult to negotiate away because the process takes us deeply into sensitive cultural and political issues and they are better at defending themselves than we are at peeling them away. But ultimately it costs them more and us less. We have to focus on the things that make us less competitive and even more important that make adjustment slow and getting slower.
Not all issues raised have immediate or easy solutions.
Absolutely. In fact I made this point on another thread
My dad and I tested it two weeks ago with a lamb rack or two, although the pork roast turned out much better.
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My invitation must’ve got lost in the mail.
The ideal tariff is one that can be imposed and removed quickly by knowledgeable technocrats as conditions change. To help fledgling businesses get off the ground, for example, a tariff would be imposed to limit their foreign competition. Then, once the businesses are established, the tariff would be removed to keep them from becoming lazy and sclerotic behind their protective wall. Similarly, tariffs could be erected and removed to punish or reward the behavior of our trading partners.
There are a number of problems with this ideal, however. First, no one has enough knowledge of world markets to determine when to impose or lift a tariff. Second, tariff beneficiaries fight like hell to keep them in place. And they have far more incentive to lobby Congress than do consumers who, individually, pay far less due to the tariff than do its beneficiaries gain. Third, the power to impose tariffs attracts lobbyists like honey attracts flies. Sooner or later, the power will be abused for political purposes. Fourth, imposing a tariff angers trading partners who may retaliate.
Fifth, and most important, tariffs are a form of wealth redistribution. They take money from American consumers in the form of higher prices and give it to businesses. What is the moral case for imposing a regressive tax that helps relatively wealthy people at the expense of relatively poor people?
Thought experiment.
Given that our imposing tariffs is a tax on our consumers. What if we imposed tariffs and eliminated the income tax?
Would the added purchasing power or capital offset the negative effects of the tariffs?
Would it induce our trading partners to lower their tariffs?
For middle and high income earners maybe, but not for the poor. The poor already pay no taxes.
Does anyone else find it amazing that we have to argue against tax increases in a GOP primary? Great post. Any Trump sympathizers care to argue in favor of higher taxes on imports?
Agree, but isn’t that a flaw in our tax code and something inherently non-conservative that we have a large portion, arguably a majority, of the population not paying federal income tax and in fact many receiving a welfare credit via the IRS.
Isn’t this something we should seek to address?
Of course, but you don’t always get to choose the field on which you do battle.
Since I believe taxes are theft, it’s hard for me to get riled up about some people not paying taxes (as long as they aren’t receiving a net payment from the theft of others over the course of their entire lives). No one should have to pay taxes. I can’t really argue for someone that’s not paying taxes to start.
I miss the days that Amazon didn’t do Ohio’s theft for them…
I’m with you, Mike, the point here is that Amazon utilized taxes and regulation to their benefit once they had achieved dominance. Its more of a cautionary tale against government interference in the market than it is an attempt to shame Amazon into paying taxes.
Good post. Best lamb is from Jamison Farm Lamb, Latrobe PA. Had it for Easter. Shipped from online. Almost wrote a post about it , it was so good.
Yep, I understand that. It is a good post.
You speak economics well. In the immortal words of Inigo Montoya, who are you?
Just a guy whose Dad gave him a copy of this on his way to college.
Great book!
I simply tend to prefer bilateral agreements to giant multilateral ones.
One of the reasons I’m sympathetic to the British Brexit campaign is because it would mean that Canada could negotiate a free trade agreement directly with the UK rather than having to go through the EU (in which case we wouldn’t be allowed to grant the UK any privileges not also enjoyed by, say, Greece or Portugal).
Considering that we share the same freaking head of state with the UK, this bothers me. As long as the UK is part of the EU, the Commonwealth is utterly meaningless.
On balance, I’m generally in favour of the TPP, but it’s size and multilateral nature also makes me sympathetic to skeptics.
Don’t get me started on on Ohio’s “Fair Use” tariffs – on the books since the 1930s but only recently enforced. In theory, ANYTHING you buy out of state garners an import duty when brought to Ohio. PA has no sales tax on clothing, and according to Ohio law, if I buy a shirt in PA while traveling, I should declare it on my annual state tax return.
I brought this whole mess up myself 4 years ago:
http://ricochet.com/archives/re-the-marketplace-fairness-act-a-rebuttal/
Excellent point and because I own a sports retail business, it is even more critical to be able to react on a dime. We had a difficult time in the beginning trying to explain to our vendors that you can NOT book NFL, MLB, or NHL product eight months in advance! We have managed to get two of the three sports licensees to change their manufacturing procedures, but the company that owns the right to produce NFL still doesn’t get it. Result? Our NFL biz is half what it should be and the company was out of Broncos gear months before the Super Bowl. I almost had to be restrained in chains. :)
Again, very astute observation.
I hate the internet sales taxes, but I can’t argue with the logic; we prefer consumption taxes to other forms- visible, flat, etc. And if all the state-based brick-and-mortar businesses are at a disadvantage versus pre-sales tax Amazon, plus all the state’s revenue is going away to the on-line, it really isn’t good for the body politic.
Irritating, yes- but you can’t wish away every tax. Better to accept the logical ones and then push your state legislators to control spending.
Going back to the tariffs that funded government prior to the income tax makes more sense than it did then. Everyone was on a gold standard, and trade adjusted to gold prices. As you know, the Bretton Woods System, which for all intents and purposes still exists without the fiction of gold, the US can’t devalue so a uniform tariff would be the equivalent of a devaluation and would shift the tax burden to consumption by consumers and business. A good tax, but our Congress would vary rates, pick winners and losers, and probably not end the income or corporate profits taxes. Cruz tax proposal comes close to this by taxing imports and remitting taxes to exporters. I figure he’s calling it a business tax rather than the VAT that it is, so Congress wouldn’t try to vary the rates which of course undercuts the efficiency of a uniform VAT.