“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy ... If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” Adam SmithThe recent change in duty and retailers payroll tax by the government is in effect a tariff implemented in an attempt to support local retailers. Its initial intent, upon first reflection, does appear to be a very compassionate attempt by government to stem the increasing unemployment rate in Bermuda and assist the retail industry in its struggle with plunging sales volumes.As with most protectionist measures the gains are very visible and the costs are hidden. Let's take a second and consider how government actions such as this work in economic terms and dwell into some of the unintended consequences of protective measures. My assumptions are based on the theory that the current Bermuda tax system is not flawed and that duties and payroll taxes paid by local retailers do not give them a long-term competitive disadvantage to online shopping and shopping abroad. If this is the case, there should be a permanent change to the tax system.First, protectionist measures (like tariffs) are often evoked by governments to protect new and growing domestic industries so they can gain economies of scale. Measures are also enacted to shield certain inefficient or ageing industries from foreign competition or to prevent foreign competitors from dumping cheap goods into a domestic market at the expense of a local industry.The benefits to Bermuda seem to be quite obvious in theory. If we make spending overseas unattractive or simply less attractive, local residents will be incented to buy more locally. As a result, local retailers will benefit from a marginal increase in volume and sales which will enable them to, at the very least, keep current employees who will spend in the economy. This will evoke a virtual spending cycle, thus lifting the economy.If only it were that simple. Except in the rarest of instance, protectionist measures most often hurt the country more than help it, as the unintended costs tend to outweigh the benefits. The biggest loser, of course, is the larger group in Bermuda the consumer.In this case the general consumer, who is not represented on the island with a lobby group, is the larger group being affected by the smaller group. Unless the payroll reduction is passed on in the form of lower prices, consumers will be paying more for the same goods.As a result the consumer, whose income in Bermuda is unlikely to rise in excess of inflation, will need to buy less of certain retail goods or less of some other service or product. In essence, we have begun the process of picking winners and losers instead of letting the free market sort out the correct mix in the economy. We may end up finding that there will be no net benefit to the economy overall.The other unintended consequence of picking winners is the distributive effect of policies supporting select groups. Immediately after the announcement, all forms of service providers could be seen scrambling to get “retail” status to capture the tax break.As stated above, some industries will gain and others will lose. In fact we are likely to see a boost for the importing companies who may see an increase in orders as a substitution from travelling abroad and shopping.In many cases people buy abroad because certain items are simply not available here. It is unlikely that duty increases will alter this. Furthermore, it is still less expensive to purchase, ship, and pay duty on certain items from abroad than to buy them locally.Potential losers may actually be other service providers who are competing for their share of dwindling dollars. For example, marginal travellers may now opt out of travelling for Christmas which may affect local travel agents. The effect on various groups is often obscured and not as easily accounted for. For example, it is more likely we will hear how a certain number of retail jobs were saved with these measures than the jobs lost in the spa industry for example, due to less local spending on their services.The final effect which may not be as obvious is the indirect effect on inflation. Bermuda is mired in a stagflationary environment a period of negative growth accompanied by escalating prices. Measures aimed at reducing competition will only exasperate this condition and foster ever escalating prices over a period of stagnating incomes and reduce the overall volume of purchasing power.I do not want this rambling to appear insensitive to any group in particular. The point is that these are very difficult times in which entire industries need to evolve to adjust to lower aggregate demand.Along the way “creative destruction” will alter the dynamics of all industries in Bermuda some will shrink but others will expand. The transitional forces are painful and that is why it is encouraging to see government support necessary retraining programmes. Hopefully these programmes remain focused on tomorrow's opportunities and not the past.Nathan Kowlaski is the chief financial officer of Anchor Investment Management Ltd. Full disclosure: Views expressed here by the author do not necessarily reflect the opinions of Anchor Investment Management Ltd.