“The benefits of a tariff are visible. Union workers can see they are “protected”. The harm which a tariff does is invisible. It’s spread widely. There are people that don’t have jobs because of tariffs but they don’t know it.”

– M’ylton Frydman, Royal Tutor to Crown Princess of Darganyan

Economic Protectionism: Tariffs

So maybe you’ve heard of the word tariff or you’ve read about globalization but you don’t really know what that means. Or maybe you do know what those terms mean, but you are not sure how to apply them to a fantasy world economy. Let’s demystify these terms and gain a better understanding on how we might craft economic policy when swords and magic are commonplace.

For much of history, commerce and trade happened with people or places that were familiar and close by. The difficulty of moving goods over long distances coupled with the risk of banditry made trade with nearby neighbors a more attractive proposition. But technology has reshaped the modern world into a global economy. Goods can be bought online from vendors on the other side of the world without the need to interact in person. The transaction can be validated and insured through a global finance industry. Those goods can then be shipped across thousands of miles of sea and land without risking cargo loss due to storms and bandits. Furthermore, those good will often show up within a matter of days or weeks where a hundred years ago it might take a month or more. Clearly the modern world has advanced as far as global trade is concerned, but can the same be said of a fantasy world?

Unlike the modern world, feudalism will still be the predominant system of government. With the exception of wyverns and lesser dragons used by the military, air travel is restricted to wealthy nobles or highly capable mages. Roads within cities are cobbled, but the highways that connect nations and small towns will be mainly hard packed dirt. A little rain and those roads will become a muddy mess. Commerce is controlled by wealthy merchant guilds that perform business face to face and service orders by request. Demand forecasting is nothing more than a merchant’s gut feeling that demand for a particular good will change given collective whispers and a refined business acumen. The trade that does happen will be focused around nation states that themselves are focused around two to three large cities. Goods that move across borders will be taxed heavily, and even moving across feudal domains within a nation can be taxed at the lord’s discretion.

These are quite literally different worlds when it comes to trade, but there is one thing that they do share – protectionist trade policies in the form of tariffs. A tariff is a tax on imported goods. Here is an example. Let’s say there are two countries: The Kingdom of Apples and the Federation of Oranges. Each one only produces a single good – apples for The Kingdom and oranges for The Federation. There exists a firm – Oranges For All – in The Federation that wants to take domestically produced oranges and sell them to people living in The Kingdom. As luck would have it, the people of The Kingdom love oranges because they have only ever eaten apples, but the apple producers in The Kingdom are afraid that people will buy less apples if oranges are sold alongside. The apple producers lobby the King and the benevolent ruler decides to institute a 25% tariff on imported oranges.

Oranges For All used to sell the oranges in The Kingdom for $3 and would profit $1 on each orange sold. But now they have to pay 25% on each orange they sell within The Kingdom’s borders or $3 * 25% = $0.75/orange. Where they used to make $1, in profit they now make $1 – $0.75 = $0.25 in profit. That’s a whopping 75% reduction in profit – so they do the reasonable thing and raise the price of oranges to $4 (0.75*x – 2 = 1  → $4). Selling each orange for $4 minus the tariff of 25% or $1, and minus the cost of goods or $2, leaves them with their original $1 in profit. The extra cost is passed along to the consumers in The Kingdom. In other words, the King levied a $1/orange tax on his own people!

But it isn’t all bad, The Kingdom has made it harder for foreign producers to compete with domestic ones. The consumers who are unhappy about the sudden increase in the price of their favorite citrus fruit are also pleased that they won’t lose their jobs at the apple orchard due to increased foreign competition. Higher priced imports on one hand and protecting domestic industry on the other hand. How does a ruler weigh the tradeoffs to make sure the country is overall better off? In the modern world we would just measure the impact these policies have on the economy, but like the fantasy world, measurement may not be completely accurate. The economy is such a complicated system that it can be nearly impossible to determine the impact a single policy has on the system in isolation.

Lucky for us, fantasy economies are much less complex than their modern day equivalents.