Wednesday, January 28, 2009

Good Versus Bad Protectionism

For the longest time, The United States had a firm commitment to protectionism. Protectionism is a policy under which a country limits imports by different means so that the country consumes primarily its own goods. In the early 20th century, America’s commitment to protectionism was ended, and a commitment to free trade was started instead. Of course, protectionism has its clear advantages. It is clearly better for the U.S. economy on the whole if Americans buy Fords instead of Toyotas, because the money would stay in the U.S. instead of being transferred to Japan. The story, however, is much more complicated than that.

During times of a severe crisis when job losses mount and industries shut their doors, calls for protectionism usually grow louder. That happened during the Great Depression, and it is happening now. Much of Barack Obama’s campaign rhetoric was centered on domestic industry and a return to consumption of domestic goods, and more recently, Timothy Geithner has repeatedly alluded to the fact that China is manipulating its currency to stimulate exports. What Geithner is effectively saying is that China should raise the value of its currency, so that Chinese goods will become more expensive in the U.S., so that Americans will buy American goods instead. So, what are the benefits of free trade, and is there such a thing as “good protectionism”?

Free trade has many advantages. Most importantly, it lowers the price of goods dramatically, and makes goods available everywhere. 20 years ago, the prices of food, furniture, clothes, electronics, appliances and much more were considerably higher than they are today. The globalization of free trade have made these goods much cheaper in the West and provided jobs in the Third World. Today, most types of trade is global, and many countries even import the same goods that they export (this is also called “counter trade”). Globalization has, in short, put millions of people to work, and brought cheaper goods and greater prosperity to everyone.

During a crisis, globalization and free trade do little good. The enormous forces of the global economy cannot be controlled or steered towards a certain goal, such as job creation in the U.S.. Protectionism can do that, but at a cost to the global economy, and global growth. An increased amount of protectionism would likely cause some problems in trade relations around the world, but those problems may not be as large as those that would occur if the unemployment rate were to go up to 15-20%. There are definitely some excesses in global trade that could be addressed, while local goals could be achieved.

Not every country can produce everything, and it would make little sense for advanced, industrialized countries to start producing basic goods again just to create jobs. For the government to sponsor a pencil factory next to a bio-tech lab would be stupid. That would be an example of bad protectionism. We need trade to a large extent, but we don’t need trade for everything, and in some cases, trade can be a liability.

There are certain goods that are not suited for global trade, for various reasons. I’m thinking primarily of food, defense and government contracts. If a country does not have its own food production, it becomes very vulnerable to political insecurity in the world. If a food exporting country has a choice between feeding its starving citizens, or breaking a deal with a food importing country, the former will obviously be chosen.

A country that is dependent on imports for its defense is also very vulnerable to insecurity. Again, if a weapons exporting country is faced with a choice of defending itself or breaking a deal with another country that wants to buy weapons, the former will be chosen.

With respect to government spending in general, it makes little sense not to buy domestically when buying police cars, fire trucks, steel for bridges, energy, and so on. To directly take taxpayer money and transfer it to foreign taxpayers through government imports results in a dramatic hemorrhaging of money for the country’s finances.

The conclusion one can draw from these examples is that there is such a thing as “good protectionism”. If the American government wants to create jobs at home, it should primarily focus on supporting domestic production in food, defense and whatever goods the government purchases. Good protectionism is protectionism that makes economic and philosophical sense.

No country can be legitimately blamed for implementing such policies, so the impact on global trade is minimized using this approach. Focusing on good protectionism can also lower the trade imbalance and strengthen the dollar. When it comes to free trade, the story is very similar to that of public goods and public utilities: there are times when the free market is unmatched in providing what is needed, but there are other times when the free market is completely unsuited to the task at hand.

Share your thoughts in the comment section


Jakw said...

this was very interesting to read-- i'm actually in the process of writing a bill for congress (mock congress) in which I am advocating for increased protectionism to give jobs to americans and save/help certain industries. I would love any input you might have!!

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