Simple Arguments Against Protectionism
Economics really is a dismal science, far too often a mixture of politics, confirmation bias, and group think anointed with obscure theoretical mathematics and econometric data snooping. Given that trade rhetoric tipped to the side of embarrassment in the recent election cycle, it's worth going back to basics to make some things clear.
The Protectionist Argument in a Nutshell
The argument is fairly simple and boils down to two main points:
- We are better off when the things we buy are made in the same country.
- Foreign subsidies and currency manipulation artificially lower costs of imports and therefore unfairly compete with domestic production. This is thought to be harmful.
Anecdotes Are Not The Same as Proofs
Pointing to a Rust Belt former manufacturer out of a job because his old plant moved to Mexico or China does not prove that trade is bad for a country. There are costs to allowing people the freedom to purchase whatever they want from whomever, including foreigners whose government might be artificially supporting exports; but these costs need to be better understood especially alongside the benefits.
Human Beings, Math, and Value Judgments
Competition, in general, means that things change and some businesses fail and entire skill sets can become obsolete. To work up to anything like a "proof" one way or another, it's important to remember that human society--the quadrillions of interactions between billions of people--is not governed by clean mathematics; and any policy argument can be decomposed into some people benefiting and some people being harmed. Placing value judgments onto which groups are more important to you lays at the heart of political economy.
Economists and Policymakers Should be More Humble
Economists and policymakers all-too-often declare their hypotheses as facts. Instead of saying "this is a complex issue with multiple opposing stakeholder groups, and I believe this idea to be net beneficial because I value this group more" pundits often relay an emotional anecdote; or in the case of economists, display an abstract math proof under extreme and limiting assumptions, or an average effect over some sample given a set of control variables and econometric methodology.
Human society is much more complex and a healthy dose of humility would go a long way.
Free Trade is Still Likely Best
Trade being beneficial to civilization isn't really in dispute. Support for protectionism typically comes from wanting to help people within a country gain some advantage in trade, often by imposing barriers against people outside the country or subsidizing domestic industry. Even when foreign governments artificially support their industry, we're still likely better off as a country when our government does nothing in response. Here's why:
- Exporters represent a small fraction of our economy, yet we are all consumers.
- Exporters are also importers of inputs to production.
- Foreign support of exporters boosts our purchasing power as consumers.
- Increased purchasing power makes our society wealthier.
- New wealth means more domestic investment and new jobs that would not otherwise exist.
- Trade deficits mean foreigners invest surplus currency back in our country creating new jobs.
- All domestic businesses benefit from lower input costs of imports and from increased purchasing power of domestic consumers.
No one really knows how much exactly everyone benefits from trade, even when it is manipulated by governments. Unfortunately for politics, the losers of some parts of trade are obvious and vocal. The gains from trade are enormous and diffuse throughout society.
Any honest debate about retaliatory trade policy needs to account for the harm such measures have on all of the groups that benefit from trade. The protectionist message is essentially that we'll be better off with higher prices, fewer choices as consumers, and without the jobs and industry that exist because of kinda open trade.
More likely, we'd be better off as a country if workers in displaced industries were simply given unemployment insurance for a period along with relocation packages than to hold the entire country hostage with dumb trade policies.
The Moral Argument
Finally, does anyone really have the moral right to force someone else to buy, or not to buy, something? Are consumers the property of displaced workers or government employees who can force them to buy their goods instead of those produced by others? I think not.
What are your thoughts?
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Rob Viglione is a PhD Candidate in Finance @UofSC with research interests in cryptofinance, asset pricing, and innovation. He is a former physicist, mercenary mathematician, and military officer with experience in satellite radar, space launch vehicles, and combat support intelligence. Currently a Principal at Key Force Consulting, LLC, a start-up consulting group in North Carolina, and Head of U.S. & Canada Ambassadors @BlockPay, Rob holds an MBA in Finance & Marketing and the PMP certification. He is a passionate libertarian who advocates peace, freedom, and respect for individual life.
Agreed. On-shoring jobs after protectionist policies are in place will be a lengthy and expensive process, and consumers will feel the brunt of it.
as will domestic industry that benefits from lower input costs with open trade.