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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
a) Define “established”.
b) You create an incentive for businesses to intentionally remain just below the officially-defined “established” rate in order to keep the tariff in play.
Has Amazon ever turned a profit?
Yes and no. Yes in that they do actually make money, but no in that Bezos plows most earning back into new ventures that then take awhile to themselves show a profit.
Bezos has always maintained that his model for Amazon is shareholder capital appreciation and not profit and dividends.
Great post and fantastic discussion. It points out the enormous need for a complete overhaul of the tax code, especially the corporate tax code. If you want to free up literally billions of investment capital, go to a territorial system and lower the rates drastically (Who actually pays corporate taxes? That’s right; you and I do, in the form of higher prices).
The so-called Fair Tax has a lot of appeal, but it isn’t politically doable, and might backfire (unless we repeal the 16th Amendment). I think a version of the flat tax is probably best, including, yes, getting rid of the home mortgage deduction (now, watch the Realtor lobby go absolutely bonkers).
This isn’t an academic discussion by any means; we wonder why economic growth has felt like it’s on life support, when we have screwed up our tax and regulatory environment so badly. When Canada has ranked higher than the US for at least the last few years in economic freedom, something is rotten in the state of Washington.
Small business owners like me sure as heck pay them directly. I just worked out that my personal Tax Freedom day is somewhere in July this year!
We do indeed. And in the state of CA we also pay city and debt reduction taxes as well.
Jamie this was a great piece. Thanks for the information. Definitely worthy of front page treatment.
Great post, Jamie. Hope it gets promoted.
“Complexity of collecting sales tax across state lines”…it’s actually worse than that, many states have sales taxes that vary from county to county. And counties don’t always neatly break on a zip code basis, either.
Fortunately, entrepreneurship has come to the rescue, and there is at least one company which has made a business out of selling ‘plug-ins’ that calculate sales tax for online stores.
https://www.avalara.com/
There has been a *lot* of money invested in this company, which gives some idea of the complexity of the compliance problem with these laws/regulations.
Free delivery of any of the fine line of GBU products. Amazing what a little investment in a loss leader will yield.
“Gotten”. The Anglosphere should at least be united on a language, if not a lamb.
we need tariffs on Chinese imports to starve their military buildup, or gain some kind of geo-political quid-pro-quo.
You know the Chinese military is still in no way equipped to defeat ours right? Also if you know of a better way of turning enemies into friends than Trade I’d like to hear it.
ET, you might be interested to learn that I know the fellow who came out with ‘Flutie Flakes’. Grew up with him, in fact. Works out of the Pittsburgh area now.
Nuke them, then help rebuild their infrastructure? Rather extreme, I’ll grant you, but it worked once before!
China could “defeat” our military by succeeding in taking Taiwan today, let alone in ten years. You’re idealism on trade creating frenemies just knows no bounds. Like France trading with Hitler Germany made a big difference.
I see. I didn’t catch your plans to deal with the ~300+ nuclear bombs that China has. They were again…?
You didn’t see my tongue planted firmly in my cheek?
And yet China has not taken Taiwan – I wonder why? Could it be because much of the Chinese economy is dependent on Taiwan businessmen running factories in their country?
If you believe that every “enemy” is Hitler then of course you’re going to want to fight them at every turn. I tend to think that every situation and country is different. I’m pretty comfortable relying on the thousands of years of history showing trade making enemies into friends versus one lunatic dictator in the 1930s.
Would you call arguing for fair trade agreements that are as good for our country as they are for our trading partners the same as arguing in favor of higher taxes? In some cases, no doubt, the cost of some goods may be a little higher for the US consumer. Would that trade off be acceptable if it allowed certain US industries to continue to flourish with thousands of good manufacturing jobs?
For years I owned a “brick and mortar” business employing local citizens. Why was it fair for Congress to make it illegal for States to impose sales taxes on merchandise sold on the internet destined for their States’ citizens, when my business had to charge the tax for the same purchase, same product? I was at an 8%, on average, price disadvantage the minute I opened my door every day. Keep in mind, localities use citizen approved sales taxes to provide local infrastructure amongst other amenities, and they are approved by the very same people who are using the internet to avoid paying those taxes. Amazon is a “prime” example, even though they are a great business. They do not need the extra tax free help.
The answers are obvious to anyone willing to look at reality, not live in his dreamworld. China’s military is growing relative to ours, so it will be in a better position to take Taiwan in a few years than now – it will succeed at lower cost. Unless of course we put a crimp in their build-up.
And “If you believe that every “enemy” is Hitler” reminds me why I discontinued being a Libertarian these many years now. Infantile.
Part of the issue with free trade is that there is always someone willing to do things cheaper. China basically flips the bird to any issues of pollution, worker safety, IP rights, or most of the other things that most Americans value. Have you seen the skies in Shanghai?
I get that the regulatory state is too big. Unless people are getting killed or maimed or cancer, it’s not worth intervening. However, corporations will take advantage of any laxity in oversight. Every company I have worked for would happily toss all worker safety and pollution control measures out the door if it were not for outside influence. And in the Third World, they do just that.
In essence, the fear behind popular support of protectionism is that the standards of living in the world will be averaged out, with all that entails. Great for Nigeria, not so great for the US.
Yes US steel was still enjoying infant industry protection just before most of it went bankrupt, precisely because it had enjoyed such monopoly status for so long.
Yes, but which language? :)
In the received English of the Southern UK the past participle of “to get” is “got”. “Gotten” is either considered a American solecism, or recognised as a surviving archaic form.
No.
Who in your mind is possesed of sufficient knowledge about market conditions, emerging technologies, consumer preferences and labor patterns to set such a policy? Which industries in your mind deserve protection? Which industries don’t? Which jobs are “good” manufacturing jobs and which aren’t? Are manufacturing jobs even “good”? How do we determine this?
In fact the exact opposite happened. Businesses like Amazon innovated around the geographical jurisdictions of sales taxes and then had them imposed upon them by an act of congress. What you are in fact complaining about is innovation and progress.
Yes you were, but the jurisdictions that did not impose such a sales tax received the benefit of Amazon’s innovation. New jobs. Increased revenue from corporate taxes etc. Why should the government force Amazon – a company that innovated around established law – to subsidize your business?
Heathen.
Listen to CNN international some time. You’ll come away convinced that the past paerticiple of “to get” is “gort”, as in “Ar’ve gort ter git ‘owm!”
And I’ve decided that I like my “paerticiple” so much, I’ll just leave it be. Now that’s a word!
This is a feature of capitalism not a bug. Its called comparative advantage. That America imposes regulations that make it noncompetitive is not China’s fault. That American citizens demand a higher standard of living is also not China’s fault. Why should the laws of economics bend to the will of American’s just because they want them to?
And yet since the great push for Free Trade in the post WW2 era American prosperity has only risen.