Skip to comments.Why Protectionism is bad
Posted on 03/09/2004 8:07:50 PM PST by freebacon
See also http://www.freerepublic.com/focus/f-news/1094371/posts - why Free Trade is Good and http://www.freerepublic.com/focus/f-news/1094309/posts Free Market, Outsourcing, Socialism flaws
The fact that trade protection hurts the economy of the country that imposes it is one of the oldest but still most startling insights economics has to offer. The idea dates back to the origin of economic science itself. Adam Smith's The Wealth of Nations, which gave birth to economics, already contained the argument for free trade: by specializing in production instead of producing everything, each nation would profit from free trade. In international economics it is the direct counterpart to the proposition that people within a national economy will all be better off if all people specialize at what they do best instead of trying to be self-sufficient.
It is important to distinguish between the case for free trade for oneself and the case for free trade for all. The former is an argument for free trade to improve one nation's own welfare (the so-called "national-efficiency" argument). The latter is an argument for free trade to improve every trading country's welfare (the so-called "cosmopolitan-efficiency" argument). Underlying both cases is the assumption that prices are determined by free markets. But government may distort market prices by, for example, subsidizing production, as European governments have done in aerospace, electronics, and steel in recent years, and as all industrial countries do in agriculture. Or governments may protect intellectual property inadequately, causing underproduction of new knowledge. In such cases production and trade, guided by distorted prices, will not be efficient.
The cosmopolitan-efficiency case for free trade is relevant to questions such as the design of international trade regimes. For example, the General Agreement on Tariffs and Trade oversees world trade among member nations, just as the International Monetary Fund oversees international macroeconomics and exchange rates. The national-efficiency case for free trade concerns national trade policies; it is, in fact, Adam Smith's case for free trade. Economists typically have the national-efficiency case in mind when they talk of the advantage of free trade and of the folly of protectionism.
This case, as refined greatly by economists in the postwar period, admits two theoretical possibilities in which protection could improve a nation's economic wellbeing. First, as Adam Smith himself noted, a country might be able to use the threat of protection to get other countries to reduce their protection against its exports. Thus, threatened protection could be a tool to pry open foreign markets, like oysters, with "a strong clasp knife," as Lord Randolph Churchill put it in the late nineteenth century. If the protectionist threat worked, then the country using it would gain doubly: from its own free trade and from its trading partners' free trade as well. However, both Smith and later economists in Britain feared that such threats would not work. They feared that the protection imposed as a threat would be permanent and that the threat would not lower the other countries' trade barriers.
The trade policy of the United States today is premised on a different assessment: that indeed U.S. markets can, and should, be closed as a means of opening new markets abroad. This premise underlies sections 301 through 310 of the 1988 Omnibus Trade and Competitiveness Act. These provisions permit, and sometimes even require, the U.S. government to force other countries into accepting new trade obligations by threatening tariff retaliation if they do not. But those "trade obligations" do not always entail freer trade. They can, for instance, take the form of voluntary quotas on exports of certain goods to the United States. Thus, they may simply force weak nations to redirect their trade in ways that strong nations desire, cutting away at the principle that trade should be guided by market prices.
The second exception in which protection could improve a nation's economic well-being is when a country has monopoly power over a good. Since the time of John Stuart Mill, economists have argued that a country that produces a large percentage of the world's output of a good can use an "optimum" tariff to take advantage of its latent monopoly power and, thus, gain more from trade. This is, of course, the same as saying that a monopolist will maximize his profits by raising his price and reducing his output.
Two objections to this second argument immediately come to mind. First, with rare exceptions such as OPEC, few countries seem to have significant monopoly power in enough goods to make this an important, practical exception to the rule of free trade. Second, other countries might retaliate against the optimum tariff. Therefore, the likelihood of successful (i.e., welfare-increasing) exploitation of monopoly power becomes quite dubious. Several economists have recently made their academic reputations by finding theoretical cases in which oligopolistic markets enable governments to use import tariffs to improve national welfare, but even these researchers have advised strongly against protectionist policies.
One may well think that any market failure could be a reason for protection. Economists did fall into this trap until the fifties. Economists now argue, instead, that protection would be an inappropriate way to correct for most market failures. For example, if wages do not adjust quickly enough when demand for an industry's product falls, as was the case with U.S. autoworkers losing out to foreign competition, the appropriate government intervention, if any, should be in the labor market, directly aimed at the source of the problem. Protection would be, at best, an inefficient way of correcting for the market failure.
Many economists also believe that even if protection were appropriate in theory, it would be "captured" in practice by special interests who would misuse it to pursue their own interests instead of letting it be used for the national interest. One clear cost of protection is that the country imposing it forces its consumers to forgo cheap imports. But another important cost of protection may well be the lobbying costs incurred by those seeking protection. These lobbying activities, now extensively studied by economists, are variously described as rent-seeking or directly unproductive profit-seeking activities. They are unproductive because they produce profit or income for those who lobby without creating valuable output for the rest of society.
Protectionism arises in ingenious ways. As free trade advocates squelch it in one place, it pops up in another. Protectionists seem to always be one step ahead of free traders in creating new ways to protect against foreign competitors.
One way is by replacing restrictions on imports with what are euphemistically called "voluntary" export restrictions (VERs) or "orderly" market arrangements (OMAs). Instead of the importing country restricting imports with quotas or tariffs, the exporting country restricts exports. The protectionist effect is still the same. The real difference, which makes exporting nations prefer restrictions on exports to restrictions on imports, is that the VERs enable the exporters to charge higher prices and thus collect for themselves the higher prices caused by protection.
That has been the case with Japan's voluntary quotas on exports of cars to the United States. The United States could have kept Japanese car imports in check by slapping a tariff on them. That would raise the price, so that consumers would buy fewer. Instead, Japan limits the number of cars shipped to the United States. Since supply is lower than it would be in the absence of the quotas, Japanese car makers can charge higher prices and still sell all their exports to the United States. The accrual of the resulting extra profits from the voluntary export restraint may also have helped the Japanese auto producers to find the funds to make investments that made them yet more competitive!
The growth of VERs in the eighties is a disturbing development for a second reason as well. They selectively target suppliers (in this case Japan) instead of letting the market decide who will lose when trade must be restricted. As an alternative, the United States could have provided just as much protection for domestic automakers by putting a quota or tariff on all foreign cars, letting consumers decide whether they wanted to buy fewer Japanese cars or fewer European ones. With VERs, in other words, politics replaces economic efficiency as the criterion determining who trades what.
Protectionism recently has come in another, more insidious form than VERs. Economists call the new form "administered protection." Nearly all industrialized countries today have what are called "fair trade" laws. The stated purpose of these laws is twofold: to ensure that foreign nations do not subsidize exports (which would distort market incentives and hence destroy efficient allocation of activity among the world's nations) and to guarantee that foreign firms do not dump their exports in a predatory fashion. Nations, therefore, provide for procedures under which, when subsidization or dumping is found to occur, a countervailing duty (CVD) against foreign subsidy or an antidumping (AD) duty can be levied. These two "fair trade" mechanisms are meant to complement free trade.
In practice, however, when protectionist pressures rise, "fair trade" is misused to work against free trade. Thus, CVD and AD actions often are started against successful foreign firms simply to harass them and coerce them into accepting VERs. Practices which are thoroughly normal at home are proscribed as predatory when foreign firms engage in them. As one trade analyst put it, "If the same anti-dumping laws applied to U.S. companies, every after-Christmas sale in the country would be banned."
Much economic analysis shows that in the eighties "fair trade" mechanisms turned increasingly into protectionist instruments used unfairly against foreign competition. U.S. rice producers got a countervailing duty imposed on rice from Thailand, for example, by establishing that the Thai government was subsidizing rice exports by less than 1 percentand ignoring the fact that Thailand also slapped a 5 percent tax on exports. We usually think a foreign firm is dumping when it sells at a lower price in our market than in its own. But the U.S. government took an antidumping action against Poland's exports of golf carts even though no golf carts were sold in Poland.
Therefore, economists have thought increasingly about how these "fair trade" mechanisms can be redesigned so as to insulate them from being "captured" and misused by special interests. Ideas include the creation of binational, as against purely national, adjudication procedures that would ensure greater impartiality, as in the U.S.-Canada Free Trade Agreement. Also, greater use of GATT dispute-settlement procedures, and readier acceptance of their outcomes, has been recommended.
Increasingly, domestic producers have labeled as "unfair trade" a variety of foreign policies and institutions. Thus, those who find Japanese commercial success hard to take have objected to its retail distribution system, its spending on infrastructure, and even its work habits. Opponents of the U.S.-Mexico Free Trade Agreement have claimed that free trade between the two nations cannot be undertaken because of differences in Mexico's environmental and labor standards. The litany of objections to gainful, free trade from these alleged sources of "unfair trade" (or its evocative synonym, "the absence of level playing fields") is endless. Here lies a new and powerful source of attack on the principles of free trade.
So you think protectionism is bad. How about telling the truth: free-tradism is global socialism.
So... let me get this straight. The system of no government interference (free trade) is the socialist system, and the system of taxes and government subsidies (proectionism) is the capitalist system?
Actually no it isn't. You must read the WTO charter, NAFTA, GATT and the FTAA. They clearly posit socialist policies withing their trade agreements.
Well, since these treaties are ostensibly chalk-full of socialist policies, perhaps you wouldn't mind kindly citing such a passage for verification?
In order for Brazil to sign the FTAA, they are demanding that the US create a program to end global hunger, and also to give free US taxpayer dollars to that country for "infrastructure development". That is not "free trade".
In order for Venezuela to sign the FTAA they are demanding tht the US create a program of redistribution of US taxpayer dollars called "structural convergence". Than is not "free trade" but our salivating little trade minister will give any concession in order to make the FTAA happen.
In order for Mexico to sign the FTAA the US must allow open migration of Mexican nationals, social security for illegal immigrants and lower fees for sending remittances outside of the country. The president just met with Vicente Fox this weekend and agreed to all their "conditions" on "free trade".
Conditional trade is not free trade. In an environment of free trade all such trade deals as you've mentioned would be impossible. Another reason to adopt free trade.
The idea of "infrastructure development" evolved directly from the WTO who says "rich" countries must pay to bring teh standard of living of "poor" countries, or "least developed countries" like china, up. That is not "free trade".
Since when does the WTO say that? Source?
In fact, there is no "free trade" only managed trade by the global socialists who run the WTO and the UN.
Well, if there isn't any free trade then what are you criticizing it for? Let's get rid of the "managed global socialist" trade and establish free trade in its stead.
Marx was in agreement with Adam Smith on the consequences of free trade.
Well, if we look at the passages that you cited, I am having some trouble seeing where Smith said anything along the lines of "[free trade] breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution." Care to point that out to me?
As I just posted, Adam Smith agreed with it.
I doubt Adam Smith had any take at all on Marxism, seeing as he predated it.
Marx's proposed alternative may have been an abomination, But that doesn't discredit his analysis of the consequences of unrestricted free trade.
Ahh, just because Marx wasn't completely and utterly wrong in all the rest of his philosophy doesn't mean that we should question this part.
Even David Ricardo asserted that such policies would drive labor to the subsistance level.
No, David Ricardo said that population growth coupled with increasing rent costs would do that. He was, in fact, a free trade advocate. He even lobbied against the Corn Laws.
If those insitutions removed socialism, would you oppose free trade?
You spend your time in a conservative website quoting Marx (a known liar), and defending Lindbergh (a known Nazi).
Your heroes are Henry Ford and Pat Buchanan, both renown antisemites, with Pat being America's best known Hitler apologist. Rock on Willie!
Bush signed off on steel tariffs. He is hardly what I would call an exemplary free-trade advocate.
Politicians, especially on the international scene,will never allow "free trade" to exist because they are making out like bandits with all the tax dollar giveaways to coerce them into signing "free trade' agreements. So arguing for "free trade" is an exercise in futility.
Then, naturally, so is arguing against it.
I'm not sure why you're saying "horse puckey" when, based on the rest of your reply, I suspect we'd generally be in agreement on this issue. For instance, while you've neglected the economic impact of our bloated regulatory bureaucracy, I do agree that a shift in our tax policy is in order. The federal government should implement a relatively low, flat-rate "revenue tariff" on ALL imported goods while simultaneously reducing the corporate income tax to promote domestic industries and production.
Huh? Who are they producing for? Once you pass your tariff other countries are going to pass retaliatory tariffs and you can say bye-bye to your exports.
The personal income tax isn't a "barrier" to trade, but it is a shackle placed on our own domestic work force.
It's a barrier in as much as it increases the cost of goods.
That is not an answer to the question I asked. Let me try again: "If those insitutions removed socialism, would you oppose free trade?" Free trade means the removal of government erected barriers to trade. For it or against it?
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