The Poverty of Protectionism
The renegotiated NAFTA—rechristened USMCA (U.S-Mexico-Canada Agreement) presumably to allow Donald Trump to tell his followers that he has abolished what he had called the “single worst trade deal ever”—illustrates the poverty of protectionism as well as the dilemma of free trade supporters in matters of trade treaties.
The dilemma is that whatever is good in “free trade” agreements is not what they are officially meant to do. They are good to the extent that they liberate importers and lead to lower consumer prices through comparative advantage and specialization. But they are sold as government interventions in favor of domestic producers for whom “concessions” are obtained from foreign governments by taking domestic consumers hostage.
A free trader is tempted to support such agreements for the good they do, not for their bad justifications. But this imbroglio risks entrenching the idea that free trade is a privilege of domestic producers instead of the liberty of both domestic consumers and producers (or their intermediaries) to individually make the best deals they can find. Another danger is to reinforce the idea that free trade requires free trade agreements, while in reality unilateral free trade would produce most of the benefits. In truth, as free trade agreements are now as much about regulation of trade as about free trade, unilateral free trade would potentially be more beneficial.
The new USMCA is a similar but more regulated and less solid framework than NAFTA. Think of the strengthened rules of origin and the minimum wages imposed to Mexicans; and, for the better protection of Leviathan, the scaling back of the investor-state dispute settlement mechanism and the 16-year sunset clause for the treaty. Note that “free trade” has been removed from the name of the agreement. As the title of a post by Stan Veuger of the American Enterprise Institute asked a month ago, “All this for a Mexican minimum wage increase?” We could add: All this for selling more chickens to Canadians? Is this what making America great is about? (Granted that this small liberalization of agriculture will be good for Canadian consumers, as it will protect them from their domestic lobby and their governments.)
In an editorial of today, the Wall Street Journal writes:
The new deal also takes a giant step toward politically managed trade by imposing new rules of origin and labor regulations. …
The new trade deal could have been worse given Mr. Trump’s protectionist beliefs, but that’s about the best we can say for it.
Which leads me to the poverty of protectionism as a doctrine. Protectionism is difficult to defend either from an individualist or from a collectivist viewpoint. From an individualist viewpoint, protectionism prevents individuals from satisfying their own preferences by making their own bargains—which is the essence of the definition of economic efficiency. Protectionism cannot be coherently defended from a collectivist viewpoint either, as it glorifies the use of “our” collective resources for the benefit of foreigners, like using “our” American farms and farmers to feed Canadians.
To be defended in a coherent way, protectionism requires a sort of organicist and authoritarian nationalism; or an autarkic environmentalism; or a moral argument for coercive redistribution to a certain part of the public; or a very thin and naïve theory of the state—in which, for example, angelic politicians and omniscient bureaucrats calculate the “optimal tariff” to selflessly maximize the welfare of the populace. In most cases, the belief in protectionism may flow from a simple ignorance of the economic arguments for free trade.
Oct 2 2018 at 7:53am
To paraphrase Frederic Bastiat, protectionism is a theory of scarcity; that it is from the lack of goods, not abundance of goods, that prosperity arises. Protectionism, at least not in any coherent and robust sense, cannot be defended as a theory of economic growth (or, for that matter, an economic theory as it necessitates redefining key concepts, like “goods”).
Oct 2 2018 at 9:58am
I would agree with that wholeheartedly, but can we at least acknowledge that asymmetrical trade environments exist? More open economies exist in proximity with and trade with other economies that are less open (decidedly less open), using protectionism, currency manipulation or high specific tariffs. I don’t see this as being a problem initially but over time it begins to wear on trust, especially during or after unforeseen setbacks within the marketplace.
The old argument is that economies that need asymmetrical advantage to succeed should simply work harder to be more competitive, fair enough. But what if they don’t? Is there a time limit on how long that should take? Is it the responsibility of the healthier and more productive economy to allow their trading partners protectionist practices forever?
Oct 2 2018 at 11:53am
To the extent that there are asymmetrical trade regimes, the gains flow disproportionately to those more open then those less open. China is not benefitting because of their tariffs; they are benefitting in spite of them. The US is benefitting because of Chinese tariffs, not in spite of them.
Oct 2 2018 at 12:00pm
I should be a bit more specific:
China is benefitting from lowering their tariffs over the past 18 years, not the persistence of certain tariffs. China is further benefitting from a massive re-deployment of their labor and capital due to the opening of their economy and releasing some controls. These are one-time gains, but do account for large growth rates and far easier explain the growth rates than protectionist tariffs and currency manipulation.
Oct 2 2018 at 4:30pm
Excellent article. I was thinking along similar lines recently, that it’s necessary to make truthful arguments rather than politically expedient ones, because in the long run, if you fail to persuade people of the truthful arguments, the gains you get from the politically expedient ones are easily undone. In other words, it’s necessary to make the real case for free trade, even if it is counter-intuitive and difficult, rather than to “sell” people on the idea that trade agreements are government interventions in favor of domestic producers.
Oct 2 2018 at 8:48pm
Well said, Hazel.
Oct 3 2018 at 1:54pm
One simply makes good arguments. I’ll tell my interlocutors that this is only a small step backward for the US with benefits only for Canada through less protection in dairy and poultry sectors.
Elections have consequences. We made a mistake in 2016 and are suffering as a result.
Oct 3 2018 at 2:15pm
What mean “we”, pale face?
Oct 12 2018 at 8:16pm
Good question, Hazel.
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