Protectionism or Free Market : The Existential Issue
Protectionism has always been everywhere while free market has always seemed to be an ideal out of reach. Though I might admit the market is somewhat free, protectionism is gaining ground nowadays and its claws are spreading over the world. Free market is attacked from everywhere, « smart protectionism » is the fashionable tendency these days. « Smart protectionism » will protect us from « unfair competition » and « dehumanized laws of economics » and « bring the jobs home ».
I am fascinated by this debate not merely to know what model works, but above all because it tells a lot about the essence of commerce and therefore about the meaning of our global economy. After all, this debate is all about figuring out whether trade is a zero-sum game or a win-win game. It is about figuring out if there is an harmony possible in the global society or if we are doomed to be opposed by conflicting interests. I must admit if the latter is true, the humankind is a desperate case.
I personally think all forms of protectionism are demagogue standpoints stemming from a misconception of what trade is. By opposing those two conceptions of economics, I will argue why the logical gridlock of protectionism is war and poverty, while the more enviable prospect of free trade is global prosperity and peace.
Trade, by definition, is a win-win game
Otherwise it would not occur. That said, I could stop here. It is so obvious that trade based on a voluntary exchange is beneficial for both parties. The basic idea is this : I have something you need, you have something I need, both of us value more what the other has, so we exchange. Therefore, it can not be a zero-sum game, both parties benefit from trade, otherwise they would not trade. Let us remember this fundamental idea because ultimately this is what our whole economic system is (supposed to be) based on. And this is basically everything that must be understood.
Nonetheless, we will not stop here, because it is true that my opponents have sensible arguments I must debunk.
The economy is global, not national
What stems from the definition of trade is that except for common goods (generally sovereign goods) these are the individuals who trade, not the nations. In the end, when I go to Zara to buy a shirt, I trade with the manufacturers, the designers, the raw materials suppliers, the managers who contributed to its conception. It is not France which trade with Spain, Asia and Africa.
The problem is that protectionists, because they are at the head of Nation-States and think they have to do something good for it understand the economy as national, they think France trade with Spain, Asia and Africa, so they put the national welfare at the top of their preoccupations, forgetting they are just a part of the world. They think they must do everything to improve the national economy, while we should do everything to improve the global economy. As a consequence, they damage the global economy and do not see they damage themselves at the same time.
Protectionist are masochists.
An argument protectionists often bring forward is that free trade, though based on voluntary exchange, has bad consequences for the weak and there are always some who lose out. This is a strong argument and we should take it seriously.
However, because protectionists want to protect their workers and fight against unemployment, they forget their citizens are also consumers and harm their purchasing-power. Indeed, we know the consequences of protectionist policies : prices go up. In an article of The Economist titled « Why they’re wrong » we learn from a study of 40 countries that if cross-border trade ended, the richest consumers would lose 28% of their purchasing power, but above all the bottom tenth would lose 63%. A policy aimed at helping the poor would eventually make them worse off. Furthermore, according to Michael Munger in « The Cost of Protectionism », protectionism costs to American consumers a bit more than $1.000 annually for a family of four.
You might say these are just estimations but not facts. Well, that’s true. Let’s provide some facts. For instance, a report (« Une alternative à la PAC ») from the french think-tank Génération Libre showed that the Common Agricultural Policy (CAP) led to an increase in food prices of at least 25%.
And of course the more significant protectionist policies are, the more harm they do. On the contrary, global free trade drives the prices downward. This is a policy which actually favors the penniless.
Protectionists believe the State can control the economy
It can not. Here again it is a misconception. The economy results from the cooperation of millions of individuals in the world. It is just impossible to imagine that a technocrat can handle such a chain of value. As the brilliant French economist Frédéric Bastiat once said, there is what we see and what we do not see. Protectionists think they make smart decisions, but actually the side effects are far more disastrous and they do not own the knowledge to predict them.
A study of the think tank American Entreprise Institute showed the consequences of Obama’s protectionist policy against China. The administration fixed 35% tariffs on Chinese tires to protect american jobs.
However here is the result : the cost is of 900.000$ (paid by the american consumer) for the preservation of ONE job. And of course, those 900.000$ put there, were not put somewhere else so it is estimated to have destroyed 3700 elsewhere.
The State just can not plan the economy. The centralization of the economy, and this is what protectionism is about (even if it is just partly), is doomed to failure because it is impossible for a bureaucrat agency to know better than the market. The bureaucracy is made of technocrats who have just a limited knowledge, while the market is made of individuals with a limited knowledge but who by acting on the market share their knowledge and help the market to make the best use of resources. A couple of guys can not replace such a decentralized system, this is just too complex.
Protectionists do not foster global wealth
Protectionists harm their own country, but they also make it harder for developing countries to get out of poverty.
Protectionist think trade is a zero-sum game : either you win, or I win, but someone must lose out. They believe if any country in the world is gradually getting rich, this is a threat for them. This mindset prevent many developing countries from trading more and getting richer. For instance the CAP by unfairly protecting our european agriculture prevent African farming from more importantly being imported in Europe. As Ruth Bergan, co-ordinator from the Trade Justice Movement explains, « the biggest problem is that subsidies keep prices artificially low, mainly for grain traders, so developing country farmers cannot compete ». We often wonder how to help poor countries, let’s just trade with them, we would be both better off.
Protectionists are bad diplomats
They fundamentally believe (even though they do not acknowledge it that way) that enriching oneself without impoverishing somebody else is impossible, one always get rich at the expanse of the other. I’m occupying the seat, there is no place for you. One understands such a logic, if pushed too far, can only lead to retaliations and sink humankind into economic war.
Generally, in an economic war we see tariffs, subsidies and prices going up, while everyone’s standard of living is decreasing and economic growth collapsing. The irritation atmosphere is like a bubble ready to burst. This path only leads to war and nothing else.
On the contrary, free trade promotes peace. Because we both know we both benefit from our exchange, putting barriers between us would make both of us worse off. Even though we are self-interested, it is not in my interest to wage a war against you.
In « Peace through Trade of Free Trade? » , Patrick J. McDonald from the University of Texas at Austin analyzed the behavior of every country for the past 40 years and what he found is striking : the more freely a country trades, the fewer wars it gets involved in.
You might answer many wars (if not all) or waged partly for economic reasons. Yes, but generally there are some principles people do not want to respect. Some people do not get free trade is about voluntary exchange and not plunder. They do not get that if they want something they must give something in exchange, or at least get the consent of the person to receive it as a gift, but they can not steal it. Or also some do not get they are winning as well when trading, so they make decisions contrary to their own interest without realizing it.
It is not free trade which leads to war, but the misunderstanding of economics. Otherwise the only reason I see is they are masochists : they like being killed and they like having a worse standard of living.
The problem is the supply side, always
But still, what are we going to do with all these poor persons who lost their jobs? Because those guys are those who lose out, who are not part of the equation. Well, actually they are part of the equation because they are consumers, but as workers they are put in a quite tricky situation.
The fact is they must understand as quickly as possible that if they are not required anymore, they must go somewhere else, somewhere where they will be more useful.
I used the notion of trade all along this essay but there is one point I did not mention.
What if we do not have anything to offer in exchange?
This is the root of the issue. Indeed, first of all to exchange we need something to exchange. Most of the time we use money to buy a good or a service. But how do we get money? Money as Jean Baptiste Say truthfully noticed is just a veil. We get money from the goods we sell. Thus in the end we trade goods with goods. Therefore I think we tend to be protectionist because we think the problem is the other, but the problem is us.
Say’s Law is often interpreted as « the supply creates its own demand », but this is inaccurate. Otherwise we would only have to produce something to get it sold. Actually, the idea is that production comes first, wealth is created by production not consumption. That sounds obvious but when well understood I believe it is genius. Forget about protectionist policies, free trade is good for everyone. But if you want to trade, you need something to offer, you need to focus on the supply side. This is the problem well understood, this is what matters. Every measure hampering production would be a burden to bear when trading with others.
By the way, you see it’s all in your interest to see your neighbours thriving. You basically can not be the only rich on earth, because nobody would be able to buy your products, so you wouldn’t be rich, it makes no sense .
There is one problem remaining : are some countries naturally less likely to be productive? This is a broad issue that could be the topic of a whole article. But to cut short, many studies show that there is a strong correlation between the economic policy of a country, its legal institutions, and its economic success. We must conclude from those studies that prosperity is a choice. Just have a look at Hong Kong that was believed to be a land with no opportunity and no future, it seems to be doing pretty well finally.
To put it in a nutshell, we should focus on what we can produce best and trade it with what other people from other regions produce best. This is good for us, this is good for them. Sometimes it is not easy because it requires reacting quickly and without too much emotion to the transformation of the global economy. But the faster the better.
The political hurdle
The problem is politicians need to be elected, thus they say what voters want to hear, they speak to their instinct, they say what is easy to understand, they say what sounds obvious. But in economics easy answers are not necessarily the right answers. I dream of a politician that one day comes up and speaks to voter’s mind. But this would require a politician who understands economics. Who understands trade is a win-win game, who understands the economy is global and not national, who understands individuals trade and not nations, who understands individuals produce and not States.
FOLLOW POLITICAL ARENAS ON MEDIUM.COM
