Dear readers! In this small article, my goal is to expose you to the main arguments used by the advocates of protectionist policies and try to assess the validity of those arguments from an economic perspective. Given the weight attributed to international trade in the news, amongst others, the new free trade agreement between Canada, Mexico and the US and Trump’s rigid protectionism, I thought it would be a great idea to explore 3 of the myths related to free trade and protectionism. Hope you enjoy!
Argument #1: “We should protect growing industries from foreign competition until they are big enough to compete in a global scale!”
You will often encounter this argument given that it is one of the most popular, with roots dating back to the 18th century! Known as the “infant industry argument”, it states that a country should shield industries that have huge potential in order for them to acquire economies of scale and be “big” enough to compete internationally. The logic of this argument is actually coherent in economic terms. However, the issue arises when we consider applying it in policy-making. First, how do we distinguish industries that have potential from industries that that are deemed to fail? Sometimes, drawing the line is not so straightforward. For example, Brazil once protected its computer industry from foreign competition based on the rationale that Brazilian computers would later on become successful internationally. However, until this day, this has never happened. In addition, even if the government correctly identifies industries with high potential future growth, there is always the possibility that the protectionist measures will remain even if the industry is ready to compete internationally…
Argument #2: “By buying products from low-wage low-conditions countries, we are exploiting their workers. We should stop!”
This argument is often presented in an emotional way by appealing to our sense of morality. It is true that in some countries, work conditions are less than ideal and that a lot of people suffer from them. However, this argument is flawed because it fails to consider the alternative. In particular, we have two options: the first one is to buy goods from these low-wage countries, thereby fostering growth in their export sectors. The alternative is to stop buying from these countries, which will lead to a vicious circle of poverty: if we stop buying from low-wage countries, we are hindering their growth, thereby reducing the real wage of the workers in these countries leading to an endless poverty loop. As such, it is always important to consider the alternatives using economic reasoning.
Argument #3: “Let’s protect domestic employment by shielding our economy!”
This is a mainstream argument used by most politicians and leaders in different countries. Why not protect our own people rather than allowing foreign companies to disrupt the national landscape? Actually, I believe that this is one of the worst arguments against free trade because it artificially shields the economy in the short run without considering the disastrous impacts in the long run. In particular, shielding an economy from foreign competitions may lead to increased employment in the short run because consumers will likely substitute foreign consumption for domestic consumption. However, in the long-run:
Domestic firms will become more and more complacent: in the absence of competition, many firms may not try to be as efficient as they can be, thereby leading to X-inefficiencies (producing above the average total cost) and artificially high prices.
Consumers will suffer from higher prices and more importantly, lower choice. Thus, consumer welfare is directly damaged.
Implementing protectionist is likely to have negative impacts on foreign relations. Countries that have been subject to these protectionist measures may retaliate by implementing their own protectionist measures, thereby leading to an endless trade war greatly damaging the export sector of both countries.
Source (Picture): Texas Monthly