Economics Question RE Protectionism

**dalem** · 03 Dec 07,, 23:37

Shek, others-

On the topic of "free trade" vs. "protectionism", I find myself in favor of free trade, but it's almost reflexive. To me the very term implies liberty and robustness and big, smiling people clapping each other on the back while they discuss where to store their growing piles of wheat, cheap electronics, and cash money.

But is protectionism always negative? Could someone break down the basics of the two concepts in Dale-dummy talk for me?

-dale

**GVChamp** · 04 Dec 07,, 00:26

The support of free trade is rooted in the concept that some nations produce some things better than others. If that's the case then, like for every other product produced within nation, we should specialize in what we produce best and other nations should specialize in what they produce, and then we will all be better off.

HOWEVER, there are some caveats:
-To some extent, the ability to produce things better is not natural, but artificially created by governments. These are distortions, and distortions CAN wreak havoc on the economy of a nation and all nations they trade with. China's low currency valued being maintained by massive holdings of Euros and dollars is one such distortion.
-"Free Trade" does not exist. Wealthier nations use their power to constrict the options of poorer nations. They have few options when a Western corporation dumps its goods on their markets, which causes a lot of harm to domestic producers, for example. The WTO, IMO, mitigates this to some extent, and poor nations can still gain a lot from free trade agreements.
-What about non-tariff barriers? Sometimes it can make good sense to subsidize an industry, but that's technically an unfair advantage given to domestic competitors.
-We can accomplish strategic objectives by selective "strategic" trade, IE, not selling advanced weapons to North Korea and Iran.
-Western nations still have large masses of moderately educated individuals (high school and below). Offshoring all their jobs and not worrying about the consequences may not viable, as these people may not have the ability to readjust back into the economy. That's not to say that we shouldn't allow offshoring of jobs; it means that we need to provide transitional help to affected people. And the problem may be a LOT worse in the coming years as technology improves and more jobs become offshorable.
-Not allowing foreign goods because they are unsafe or laced with diseases that may disrupt the ecosystem is a non-tariff barrier (IE, a barrier to free trade that isn't a tax), but it's still rational.
-The massive trade deficits that we have been running for a long time have led to creation of Soverign Wealth Funds. These are investment funds that are owned and operated by foreign nations. If they are smart investors, there's nothing to worry about, but if they start buying up all our defense assets or they are delibatrely starting financial panics, we may end up regretting not being protectionist.

**Shek** · 04 Dec 07,, 01:38

Originally Posted by dalem

Shek, others-

On the topic of "free trade" vs. "protectionism", I find myself in favor of free trade, but it's almost reflexive. To me the very term implies liberty and robustness and big, smiling people clapping each other on the back while they discuss where to store their growing piles of wheat, cheap electronics, and cash money.

But is protectionism always negative? Could someone break down the basics of the two concepts in Dale-dummy talk for me?

-dale

Dale,

Here a few thought experiments over "free trade" that I think are appealing to common sense that come at the topic from the counterfactual angle.

1. What do you do to hurt or punish a country that isn't cooperating on the international scene? You restrict their trade through either sanctions or an embargo. Think North Korea (see picture), Cuba, Iran, etc. Protectionism is essentially a self-imposed restriction on "free trade".

2. What would you think of a family that tries to be self-sufficent (i.e., they don't trade)? In other words, this family grows all their own food, makes all their own clothes, makes their own electronics, makes their own cars, etc. How does your standard of living compare to the standard of living that this family will enjoy? Why does trade make this family better off?

3. Let's think about two countries, Minnesota and Florida. In the country of Minnesota, citrus farmers get sick and tired of the competition from Florida. In reaction, they launch a campaign to "buy Minnesota" and lobby the legislature to tax all citrus products coming into Minnesota from out of country. Part of their campaign points to the horrendous trade deficit Minnesota has with Florida, a deficit that would be nearly eliminated if only citrus imports were drastically reduced. Sensing that it is an emotionally charged issue and seeing the power of the citrus lobby, the legislature adopts a 100% tariff. After the tariff, Minnesota citrus farmers are able to maintain the family citrus farms, not an easy task considering how many resources it takes to maintain large indoor farms to grow citrus in the northern latitudes. Now, imagine if the Minnesotan citrus farmers were given no protection and the citrus farms failed. What would happen to the resources used for the citrus farms? Would they go to more productive uses or less productive uses? Would Minnesota be better off, i.e., would this yield the "creative destruction" process as termed by Schumpeter where the death of an uncompetitive sector allows those resources to be put to better use?

As GV Champ illustrated in his other post, there may be legitimate reasons from an economic standpoint to prevent some trade (and from a strategic standpoint as well), but most restrictions proposed by politicians are for votes, not for the overall benefit of the country's economy.

**dalem** · 04 Dec 07,, 02:13

See, that all makes sense to me. I was listening to my 15 minutes of Air America (Tom Hartman) today and he and his callers were demonizing NAFTA and "free trade" (again). Now I can believe that any arrangement, treaty, or implementation will have errors, even glaring ones. But I fail to see, still, how it's AXIOMATICALLY BAD for us to trade relatively openly with other nations.

And although I can understand the appeal of being "completely independent", the reality is of course different. Somebody somewhere grows the best coffee beans, makes the best cars, fires the best bricks, has the cheapest skilled labor. Why would I deliberately shut myself off completely from access to those resources?

-dale

**Shek** · 04 Dec 07,, 02:31

Originally Posted by dalem

See, that all makes sense to me. I was listening to my 15 minutes of Air America (Tom Hartman) today and he and his callers were demonizing NAFTA and "free trade" (again). Now I can believe that any arrangement, treaty, or implementation will have errors, even glaring ones. But I fail to see, still, how it's AXIOMATICALLY BAD for us to trade relatively openly with other nations.

And although I can understand the appeal of being "completely independent", the reality is of course different. Somebody somewhere grows the best coffee beans, makes the best cars, fires the best bricks, has the cheapest skilled labor. Why would I deliberately shut myself off completely from access to those resources?

-dale

Dale,

Opening up trade to be more free does create losers (although this is potentially a pejorative label, as it doesn't consign one to being a loser for the rest of their lives - losing one job may provide an opportunity for someone to find an even better job, although that's a dicey proposition). However, the gains outweigh the losses.

Unfortunately, when you do have a very visible trade deal, the handful of losers with concentrated losses (i.e. 100 factory workers put out of $45K/year jobs) tend to make for better news stories than the millions of consumers who no longer have to pay a "tax" on inefficiently but domestically produced item, whose "tax" is only a handful of dollars.

So, while freer trade isn't all roses, I'm sure that the folks you heard lamenting about NAFTA really don't have anything more to stand on than their own opinion.

**dalem** · 04 Dec 07,, 03:48

Shek-

I had assumed that it was merely the "Hey, this theory is crapping on ME!" chorus but I wanted to explore a bit.

-dale

**GVChamp** · 04 Dec 07,, 04:51

Well, the dramatic changes of globalization (though the dramatic changes would've happened to some extent anyways, since so much of it is technology-driven) can make free trade a pretty bad deal for a large chunk of people if government policy is shaped incorrectly. That's an academic question, IMO, since our policy is not structured in a way to limit the number of jobs or the free flow of labor terribly bad.

A nation like France, though...they might not benefit as much, since their labor market takes so long to adjust.

**astralis** · 04 Dec 07,, 05:17

dalem,

But is protectionism always negative? Could someone break down the basics of the two concepts in Dale-dummy talk for me?

-dale

protectionism is necessary in a few, very specific fields such as defense. for one, we're not thinking of outsourcing F-22 design/production plants very soon.

furthermore, there are some other minor problems with free trade. safety issues, for instance: food may be cheaper in china, but there are possible food adulteration issues (hidden costs) that might not be visible just by looking at the price tag.

also, the negative impacts of protectionism is reduced in impact if the other markets are (relatively more) closed. if you support free trade while the other market puts in protectionist tariffs, then you are effectively being played for a sucker, which is why trade negotiations take so damn long- even ignoring political concerns.

however, these issues are all relatively minor. protectionism has its benefits, but they are far, far overshadowed by the benefits of free trade.