Protectionism; Free Trade, Step by Step (2012)

Jacques Delacroix

jdelacroixliberty@gmail.com


Here is a long essay explaining something important that few people understand. The subject of protectionism is important because the concept is intuitively appealing and its implementation a recipe for poverty.

Part One

I hear more and more talk of protectionism, not only on the left where you would expect it, but among conservatives as well. “Protectionism” refers to any government policy intended to impede or slow down imports, merchandise and services produced somewhere else. The main idea behind protectionism is to “protect” the jobs of domestic, local workers. The idea goes like this: Americans need shoes. If you stop foreign shoes from coming into this country, Americans will have to make shoes for Americans. That means more jobs.

That’s an attractive idea and one that’s easy to grasp. Unfortunately, protectionism is actually the royal path to poverty. Even more unfortunately, the reasons are difficult to explain. You have to rely on counter-intuitive explanations to show why protectionism actually makes people poorer. Roughly, the reverse of protectionism is called “free trade.” (What is meant here is free international trade.) International trade simply means trade of merchandise and/or of service that crosses national boundaries: A pound of oranges grown in Mexico and sold in the US is an import.

On a more personal note, I think that the inability to explain why protectionism is bad, to explain the virtues of free trade, is one the signal failures of American academia. Here is something that all scholars agree on, that’s important, that people are unlikely to figure out on their own, and it’s not getting through. I have known reasonable good students who had taken two courses on the topic as undergraduates, one more in an MBA program, and who still did not understand the relevant basic ideas. So, it’s a mission of mine to try and do it. I am going to try to use this blog to explain the economic logic of free trade, one small step at a time.

First of all, let me say that I will not tell you anything controversial among economists. Again, they all subscribe to what I am going to tell you whether they are liberals or conservative.

Here are the first, central ideas. There are several reasons why there is any international trade at all. I want to talk only about the two most important. Feel free to use the Comment mechanism to ask questions about other reasons.

1 There are many trucks, cars and motorcycles in India and almost no petroleum production. Indian economic actors, directly and indirectly, bring foreign oil into India to serve the needs of Indian drivers. This is easy to understand. There is nothing counterintuitive about this. Unfortunately, in most years, this explanation does not account for most international trade. We have to consider the second, difficult explanation. (Incidentally, note that in the example above, it is incorrect to say that “India imports oil.” It’s said all the time as a shortcut but it’s factually wrong. I think it’s also very misleading. More on this latter.)

2 The second main explanation for the existence of international trade is best understood by leaving for a while anything having to do with trade, international or domestic. I ask you to follow me tiny step by step. Any step you don’t understand, stop. People regularly overestimate themselves in this exercise.

I have two jobs. In the my first job, I earn $10 an hour washing dishes. I do it for thirty hours a week, grossing $300. In my second job, I sell junk at the flea market. After taking care of all the costs involved, I earn $30 an hour on the average at this second job. I only go to the flea market on Sundays when the restaurants where I work is closed. I spend six hours there every Sunday. My flea market job thus gets me $180. Altogether, between the two jobs, I earn $480 a week.

I decide to change my work some. I negotiate with my restaurant boss to work there only fifteen hours a week. My total restaurant pay is reduced to $150 as a result. I go to work at the flea market Friday, Saturday and Sunday, a total of 18 hours. That brings my flea market earnings to $540. With this new arrangement, I now earn each week: $150 + 540 = $690.

Now stop everything and consider the following statements:

A I earn much more money now than I used to. I gave myself about a 50% raise, something that does not grow on trees;

B I don’t spend more time at work. (I spend less.)

C I did not get this improvement in my earnings by cheating anyone. It’s unlikely that anyone is poorer as a result of my higher earnings.

D The more money I make, the more stuff I can buy,

All four statements are true. If you don’t believe it, go over the whole exercise more slowly. All the numbers involved are simple and small. You may need a single piece scratch paper and a pencil. If you still don’t agree to all four statements, write me in a Comment.

Once we have this under control, I will move on slowly to another piece of the free trade puzzle.

The summary so far is this:

If I do less of what does not reward me well and I do more of what rewards well, I am better off.

Part Two

This guy Luis who lives across town make his living blowing off leaves and taking garden debris to the dump. On the average, he earns $7 an hour at this occupation. He works forty hours a week for a total weekly pay of $280.

Luis decides to quit this ill-paid job to go wash dishes in a restaurant for $10 an hour. (Any restaurant, it does not matter which restaurant.) There, he also works forty hours a week. His new pay is $400. Luis gave himself a 40% pay raise. He does not work any longer. His new job is probably not harder than the old one. He did not cheat anyone. He has more money to buy stuff. He is also in a better position to work less, to lay about, go to school or attend to his high-maintenance girlfriend. If he decides to work only 35 hours a week for example at his dish-washing job he will still be ahead: he will learn $350 a week instead of $280 previously.

Stop here and consider the two first steps I described (Part One and Part Two): Both Luis and I improved our earnings, not a little bit, a lot. We don’t work more than we did before. No one got cheated. There is no miracle. Luis and I just switched from work with bad pay to work with better pay. Each of us became more productive. We are both more able than we were before to buy stuff, to laze about, or to improve again our productivity by taking classes, for example.

You may ask who is blowing off the leaves now. Fair question with which I will deal later. If I don’t, remind me. The answer has to do with escalators.

Part 3

Now, forget about Luis and me for the time being.

Just imagine a word where people everywhere are allowed to do what they want with respect to how they spend their resources. The first resource is their time, of course. Some people, not everyone by all means, will try to earn more. Note that I am not saying that everyone will act rationally. Some are too lazy; some are too stupid; some simply like what they are doing at low earnings. That’s fine. It does not undermine the explanation of free trade I am stretching out for you in small steps.

A farmer in Quebec thinks he is not earning enough herding and milking cows. He is thinking he would do better growing bananas. His friends point out that Quebec is not a good place to grow bananas because it’s cold much of the time and winter days are short there. If he is smart, he will follow their advice and look for some other improvement. If he is too dumb or obstinate and he goes on, reality will soon hit him on the head. He will find that he has no income from Canadian bananas most months, or even most years. Or his electricity bills will drown any profit. Either way, the unhappy cow farmer will have to try something else. He may discover that growing big pink organic-certified raspberries for the Montreal market, or for the New York City market, pays better than either cows or bananas. Or he may fail and return to cows. Or, he may become unemployed. The process is messy.

Remember though than when Luis and I switched to other jobs, we experienced big advances in earnings within a credible scenario. Some win some lose. If those who win win more than those who lose lose, the relevant society ends up richer. This statement does not exclude social dislocation, individual misery or a fair amount of personal failure. This admission raises another issue. It’s a value issue. There is no particular reason why I should divulge my preferences about it; expertise does not matter here. I can set it up for you though.

Would you rather be poor or unemployed in a society where almost everyone is poor and many are unemployed or in a prosperous society with low unemployment?

Continuing.

In Germany, there is this young man named Hans. He works at a sandwich shop for a wage slightly above the legal minimum, about $10 / hour. Hans is not miserable or anything because this is Germany where even the poor are not poor. However, he is tired of his monotonous work and he would like to buy a big Honda motorcycle. Hans has a good voice and some imagination. He tries his luck as a rapper. He does not go very far because, in fact, hardly anyone wants to listen to rap in German, not even Germans. Hans swallows his disappointment but he still want the damn motorcycle so he can travel around. So, he finds an entry job in a factory making widgets.

The widget job pays far above the minimum wage, In fact, it pays the US equivalent of $16/hour plus big benefits and long vacations. There is a good reason for this: Germany is a great place to make many kinds of widgets. It’s a compact country where plants are not far from their suppliers and from other plants that are their customers. (That’s true in general: Most manufactured products are sold to manufacturers rather than to end-users.) Germany also benefits from having an excellent educational system for turning out highly qualified workers and low-level supervisors through formal apprenticeships. Hans is not one of those but he benefits from the fact that those highly qualified workers make German manufacturing very productive. They raise his wages.

So, here we are again. Like me and like Luis in the US, like the Canadian farmer, Hans in Germany has improved his earnings. This, by a large amount. He can afford more stuff, including a motorcycle, and even imported organic raspberries, if he happens to like those. If he has never tasted any, he is in a better position to experiment than he used to be. He may try them and like them. He too is now in a better position to sleep late, or to take music classes, or to take other classes to improve his qualification. Hans has cheated no one; he has not harmed anyone at all. Note that he now pays more taxes, in all likelihood. Like Luis’, Hans’ upward move seems to leave a job unfilled. My story does not tell you who is going to make sandwiches now that Hans has left. The answer here has to do with escalators again.

Part 4: The Story of Pierre.

Of course, next door to Hans, in France, there is a guy named Pierre. He is in his mid-forties. He has been working in a government-owned industry for fifteen years. He is comfortable, with a good pension awaiting him, but he is tired of his job because it gives him no chance of ever making it big. Also he is bored with it. Pierre and his brother-in-law, Jean (of course) share an interest in wine; both their grandfathers made wine. Of course, they know there is no shortage of wine in France although there is a chronic shortage of good wines. They consult with me and I point out to them the immense, fast-growing, under-served, and uncritical market of urban China.

Pierre and Jean rake off their savings and lease a cheap piece of land in a part of France not especially suited for good wine grape. They plant some vine there nevertheless. They live off their credit cards for a while and by eating the chicken they raise with glee in a corner of their-vineyard-in-the making. Life is tough. In three years flat, they harvest their first grape. It’s mediocre but abundant. Quickly, they turn it into an equally mediocre white wine. With good advice from me still, they bottle it on their property and they give it a French name that translates into Chinese as a lucky number. As a sub-name, they adopt the caption: “French Birthday Wine,” in English, of course. They find a first distributor that does not pan out. They fire him and sign an agreement with a second distributor who knows reasonably well what he is doing. The first year, their mediocre and moderately-priced French birthday wine does indifferently in China, by Chinese standards that is. They sell only 200,000 bottles. In the third year, they sell 800,000 bottles, still a modest success. But that’s for a net profit of two dollars per bottle. The birthday wine becomes a customary part of celebrations from Canton to Beijing, where lives a population of six hundred millions or more. The brand is easy to remember because of the lucky number. And it’s French wine, after all. Pierre is now prosperous and so is his brother-in-law Jean. (He even pays my commission without any problem.)

France is a good place to make wine and it’s a good place from which to sell wine. That’s not because of soil and climate. Grape grows well under a vast variety of conditions. It’s because of reputation, deserved or not. It’s also because the tacit knowledge that is the basis of wine-making is comparatively easy to pick up there. Digression: You might notice that wines that are successful internationally come mostly from a handful of European countries and from countries where immigrants from the first are numerous. (Australia, Chile, Argentina, California-USA). Where are the Ukrainian wines you might otherwise expect? Or the famous wines from India, a country where huge amounts of grape are grown?

Are you getting tired of reading the same story over and over again? Pierre moved from a position of less remuneration to much greater remuneration. His new income is so much higher than the old that if there had been three “Pierre” in my story, two of whom had failed, there would still be more income generated in France than before any of the “Pierre” did what they did. Pierre is suddenly buying a lot of new stuff, machines, of course but also a new car. He is making so much money he is even thinking of sending his smart second son to study at a pricey MBA program in California.

Again no one was cheated or hurt in the process. Instead, it is likely that many Chinese who used to drink no wine now imbibe mediocre wine on their birthday. Its’ subjective but I think that’s a lifestyle improvement. Again, the issue arises of who is filling Pierre’s old job.

Here is the summary so far:

If allowed to do so, some individuals will try and succeed in improving their income. It does not matter for this reasoning that many will not even try. It’s enough for some to try and succeed for general conditions to improve. There are two reasons for this assertion: First, the richer a person the more taxes he pays, by and large. Taxes go for waste and bureaucracy but also for infrastructure and education. Infrastructure and education benefit all. Second, rich people buy more stuff than poor people. By doing so, they increase employment somewhere. No doubt, they improve employment some close to where they live because many services have to be produced right at home, plumbing, for example. Also, if they buy any stuff near home, someone there has to sell it to them. I said several time that the process is messy. Some try and fail. There are individual costs to failure and also societal costs. More on this soon. Please, someone remind me if I forget to talk about costs soon enough.

Note what’s missing in this story: There is no effort of coordination by any government or by anyone else. In fact, there is no government intervention at all. All this virtuous spiral needs to form and grow is for governments to stay out of the way.

Preview: I have only spoken of individuals because it’s the intuitive way to go. Organizations, including business organizations, act more or less the same way as individuals in this context (not necessarily in others). The main differences is that organizations tend to be more clunky, to act less swiftly and that once they make their moves, their moves have bigger effects, out of proportion to their size. If this is not obvious, I hope someone will write me a Comment about it.

Part 5: Luis, I, the Bananas of Quebec, Hans, and Pierre

Next step coming soon. I have been unusually busy. It’s all in my head. Stay with me. Don’t forsake me yet.

Part 6: National Specialization, the Virtuous Obverse of Protectionism

Luis, I, the Canadian farmer, Hans, and Pierre have all improved our productivity. We all earn more. We have increased our ability to buy anything at all, stuff, leisure, occupational training, or anything we want. We did this without working more than we used to. We have helped the world become richer. None of us, except maybe Pierre, has achieved any stupendous success. Even Pierre’s bold killing on the Chinese wine market ranks far below other successes we read about in the newspaper everyday. His success barely rates the local newspaper. It’s not Google, or Apple, or Craig’s List or even Fred’s List. It’s pretty conventional stuff.

We have all done this without cheating, without despoiling anyone, without doing any damage to anybody. Now think of what we have not done: I have not improved my technical ability; it’s doubtful whether Luis has done anything of the sort. In fact, it would not be absurd to argue that blowing leaves is more skillful than washing dishes. Same for the Quebec farmer. Hans may have augmented his training; he did it on the job if he did it at all, at the expense of his manufacturing employer. Pierre knows more than he did when he was still at his hum-drum government job. He learned what he learned under his own power, on his own dime, at no perceptible cost to anyone else. Here is the main factor that accounts for our joint improved production:

I, Luis, the Quebec farmer, Hans, and Pierre all stopped doing some or all of what we were doing badly and we switched to what we were doing a little, or much better. (“A little better” would be good enough.) All our moves were virtuous by conventional standards because we cut down on wasting our main resource, our time.

Now, what is true for this handful of people can be equally true for all kinds of economic actors, including business organizations. Do you agree? It’s a “Yes” or a “No.”

What’s is true of work time, is equally true of any other resource that goes into the production of goods. Again, it’s a “Yes” or “No,”

I mean by “good,” merchandise, services and anything else you can think of that people produce and that is useful to someone. Resources that go into production include money. The short version is this:

If you stop wasting you will end up richer and no one will, end up poorer. If you are richer you can buy more of what makes other people richer.

Do you agree with this triple statement. Again, it’s a “Yes,” or a “No.”

As you have probably noticed, if some people somewhere switch like I did, and Luis, and Hans, etc… at some point, some degree of what will approximate national specialization in production will emerge. Note the cautious language. (For the technically minded among you – if you are not, skip – “national specialization” is a gross approximation. It will be more a degree of real national specialization and/or (plus/or) natural regional differences. German apprenticeship education is a “national” feature; it’s the result of a narrowly national pedagogical tradition. The inclemency of Quebec ‘s climate to bananas is a regional thing. (It’s shared by the American state of Maine, for example.) I do not refer here to some sweeping movement of rationalization but to gradual, tiny, piece-meal steps in a certain direction.

Here is what will happen, in accordance to my story.

Fewer residents of the US will be washing dishes, and blowing off leaves, both generally low-paid jobs everywhere. As a result Americans together have become more productive and therefore richer. That’s true even if my actions and Luis’ are imperceptible. There is a possibility that some dishes will go unwashed. More on this latter. (I know I keep promising but I can’t risk losing the main thread of my main story.) By the way, Luis is an illegal immigrant. Don’t tell me you did not see that one coming!

The Canadian farmer is making more money growing raspberries than he was dairying. Canadians together are producing more organic raspberries, a high value product, but less milk, a low value product. In good logic, this is true even if a single Canadian makes the move. They have avoided -for the time being – the pitfall of growing bananas in the cold. Canadians collectively are richer than they were before, even if by a speck.

Technical note: Observe that whatever I mean by national specialization can be defined in the negative as validly as in the positive. “No bananas are produced in Canada” is exactly as much a statement about national specializations as “ Many manufactured products are made in Germany.”

Thanks to Hans’ move, more high-value manufactured products come out of German factories. Germans are richer but there may be a mini-shortage of sandwich-makers there. I will take care of this matter later, as I said.

Finally, thanks to Pierre’s ballsy enterprise, the propensity of the French to sell wine has increased, of course. What is more important, even more hot air is coming out of France for a price. Let me be clear, the three main categories of high-value products coming out of France toward other destination in the past thirty years do not include wine as such. They are railroad equipment, aircraft (Airbus, military jets) and hot air (Evian water, Louis Vuitton luggage, much unwearable high fashion, movies that no one understands, etc).

We are not going to worry about the government job Pierre left behind. Do you agree?

The world is definitely richer than before as a result of what I call crudely ”national specialization.” No one is worse off except, possibly as noted above in connection with unwashed dishes in America and a shortage of sandwiches in Germany.

National specialization is a relative term. It’s difficult to discern in large and developed countries. Americans make all kinds of stuff but not, as you know, television sets, flashlights, or much clothing. They turn out stupendous quantities of soybeans and cotton. American movies account for more than half the motion pictures profits in the world. The degree of national specialization of the US ( of American economic actors together) is not very high. (It’s much too low for my taste.)

In smaller or in less developed countries, the level of national specialization can be striking. The economic producers of the Ivory Coast, a small country on the west coast of Africa, produce cocoa and coffee plus some chickens for their pots and not much else. They don’t grow the wheat that goes into the French bread they eat every day, for example.

Should they? (This is a real question, a kind of ungraded quiz.)

Part 7: Economies of Scale and Economies of Scope, Bane of Protectionism.

Because, we are all richer, Luis, I , the Quebec farmer and Pierre are in a better position to buy German manufactured goods than we were before. In Pierre’s case, that could be a Mercedes (although what he really wants is a specific Japanese car). In the Canadian farmer’s case, it could also be a Mercedes, or a BMW motorcycle. In Luis’s case and in mine, it would be a small piece of either a Mercedes or a BMW motorcycle. All the same, it’s a start.

I, and Luis, and Hans, and Pierre are all more likely to buy a basket or two of organic raspberries than we were before.

If Pierre follows through with his intention to send his son to a pricey MBA program in the US, it could be in my area. The son will go to restaurants once in a while, on his newly rich father’s dime, of course. More dishes for Luis to wash.

It’s not obvious that my main occupation, selling at the flea market will improve at all, except through Luis, of course. Remember he earns more money. He might spend some of it buying a ten-dollar used bike from me at the flea market. Pierre’s son, studying for an American MBA, might buy a used desk from me at the flea market, making me richer.

Now, we need to make a small, very modest technical switch. Here is a generalization that is more often valid than not: The more you make or sell of something the lower the cost of making it or of selling it. A lower cost of something is equivalent to a pay raise for the consumer, or for the producer, or for both. The technical terms here are “economy of scale “ (production) and “economy of scope” (marketing defined broadly).

As Hans and his colleagues turn out more widgets, Pierre makes more wine, and the Canadian grows more raspberries, the cost of all will decline and someone will be richer. To be richer means being able to buy more. Lower prices are equivalent to pay raises. Your own experience will tell you that very often, that the someone who will be richer will be the consumer.

In my story, some people in the world got a de facto pay raise because a handful of economic actors took simple, reasonable steps of doing less of what they did badly and to do more of what they did well. If many economic actors take the same step and are allowed to do so without restriction, the collective gains become immense

Prosperity has increased in the absence of concerted effort. Above all, some people have a better standard of living, including more choice, without government intervention. What I have just illustrated is known in economics as the Principle of Comparative Advantage. It’s what economists do not explain well, I claim. This principle accounts for most of free trade, depending on the year. I have to give you this qualification because whether it does or not, on a given year, depends on the price of petroleum products. Trade in petroleum products is only a special case but a very large one.

Here are the necessary, unavoidable implications of this story: First, anything anyone does to impede and restrict either the switch from bad to less bad work, from good to better work, impoverishes everyone. Second, anything that limits the economies of scale or scope of producers everywhere impoverishes everyone.

The only class of actors in a position to do either on a consistent basis are governments, especially national governments. Barriers to entry into an occupation or an economic sector, over-regulation of economic activity, debilitating taxation, are examples of the first vice. Tariffs (special taxes on imports and sometimes on exports), import quotas, restrictions on international transportation, are examples of the second. Those are not exceptional instances of nefarious government activity; they are all around us all the time and taken for granted by many citizens and legislators. We think it’s normal for government to makes us poorer than we need be!

Before anyone sends me a censorious comment, I want to say that I realize there are circumstances when maximum production is not the only valid government objective. There are legitimate reasons to depart from the strict market economic policies that flow from my story in seven parts (so far). I am just intent on making everyone agree that such departures are always costly, no exception!

My narrative leaves out a couple of problems, important problems. Two main problems:

Who is going to blow leaves in the US when Luis quits doing it altogether ? How about the half of the dishes I won’t wash anymore because I have increased my flea market presence? Well, of course, Luis is now washing twice more dishes that I did before. Same question: Who is going to make sandwiches in Germany after Hans moves on?

As I have not found it necessary to tell you, some of the shifts in activity I describe may entail some people losing their jobs. For one thing, as a result of Hans’ enhanced productivity, some manufactured gadgets from Germany will beat in price for quality the similar gadgets made in Canada, in France, in the US, even in China. Read this again. I am not denying it.

Part 8: The Escalators

In the story in seven episodes some of you had the patience to read, I kept pushing aside the question of what happens to the work done by those who move upward. If you will recall, I abandoned half of my dish-washing work, Luis stopped blowing leaves and carting away garden leavings, and Hans quit his sandwich-making job. Of course, those are bottom jobs garnering the lowest pay. So, the easiest and most general answer is that people and organizations move upward is they are allowed to do so. Both individuals and organizations become more productive. Under even moderately competitive conditions, this means that they earn more money.

The question arises toward the bottom of the pyramid of productivity, as in my story. I mentioned briefly that the answer has to do with escalators. There are four answers to this question that are not mutually exclusive. I mean by this that you can witness all four solutions being implemented in the same national society at the same time. I take them up in turn.

1 Some of the lowly jobs remain undone. This is so rare that it’s difficult to come up with examples that are not so exotic as to be distracting.

2 Within almost all national societies, a combination of unemployment and of under-employment is the rule. In poor societies, many people don’t work much because there is no work for them. (That’s one of the main sources of underdevelopment: people don’t work much.) In rich societies, there is a reliable rate of unemployment in the potential labor force. some of which is voluntary. In such societies, there is also massive under-employment of young people, of older people and of women. When dishwashers are leaf-blowers are hard to come by, wages rise and some of the unemployed and some of the under-unemployed become motivated to do them. That’s true in both rich and poor societies.

3 If the shortage of dishwashers and of leaf-blowers becomes severe enough, history tells us, the miracle of mechanization revs up. Within a short time of a labor shortage of olive pickers in the northern Mediterranean countries, someone invented and effective olive-tree shaking machine. It is driven by a single person and replaces the work of about half a dozen hand pickers. Here is another telling anecdote. Everyone knows that the French love dogs better than they love children, with the kind of results for the sidewalks you might expect. I have seen with my own eyes, within a few years, small armies of low-skill African immigrants armed with twig brooms disappear from the streets of Paris. They were replaced by extraordinary, powerful motorcycles with booms extending ten feet on each side. The booms support both powerful jets and rotary brushes. The uniformed city employees who drive them on the sidewalks have the serious mien and they show the pride of sea-captains. Incidentally, workers who control machinery usually earn more money that those who rely on primitive hand-tools.

4 There are huge reserves of able-bodied men and women in the less developed countries ready to jump at the opportunity to wash dishes in my stead and to take over Luis’ leaf blowing. (That’s how Luis came to California in the first place.) Of course, immigration is often controversial, for a variety of reasons, but in pure economic terms, the case for the free movement of labor is bullet-proof. And, yes, ideally, the reserve of third world labor is ultimately finite but I am not going to worry about this for the next hundred years.

All in all, the answer to the question of who will do the work of those who move upward, is that there are several escalators that take care of almost all of this problem.

Part 9: Protectionism and Job Loss

When economic actors, people and organizations, switch from doing what they don’t do very well to what they do better, production increases everywhere, the pie gets bigger. There is no injustice involved, just a general rise in the standard of living.

For such virtuous change to achieve maximum effect, there must be economies of scope and scale. It’s not always obvious in big countries such as the US which has a large internal market (many people most of whom are rich by world standards.) It’s pretty clear when you think of small prosperous countries such as Switzerland. How efficient would Nestlé be if it made chocolate only for eight million Swiss rather than for hundreds of millions of consumers worldwide? And would the smelters of Luxembourg do a good job making steel only for the half-million Luxembourgers?

So, it stands to reason that any barrier to import limits severely the benefits of switching from mediocre to good or from good to excellent. But, the basic rule of international trade is reciprocity. (It’s a little more complicated than this in everyday life but the complications do not affect the basic soundness of my reasoning.) Countries’ governments say to each other: “ If you impede the entry on your territory of stuff made by my economic actors, I will impede access of my territory of stuff made by yours.” This is no bluff. So-called “trade wars” erupt frequently, involving different kinds of tit-for-tat. The most notable thing about every round of tit-for-tat is that it impoverishes everyone. See above.

Trade barriers, different ways of impeding access, come and go. Although it’s difficult to find a coherent argument in favor of any trade barrier, governments will often yield to interest groups and provide “protection” from imports for this or that good. They do so usually not because of some abstraction such as the “national interest,” but because of political necessity or to distribute political favors. Two interesting remarks about this poisonous practice. First, more democratic governments should be expected to be more likely to yield such favors. Second, by “protecting” domestic producers, they also lower the standard of living of domestic consumers. Naturally, the two categories of consumers and domestic producers overlap somewhat which only underscores the absurdity of protectionism. Incidentally, developing and enforcing trade barriers requires a large technical and inspection apparatus. The more trade barriers, the larger the government relative to the national economy.

All this being said, it’s clear that the removal of trade barriers will cause job losses in the affected sectors of the economy. It’s also obvious that some of those who lose their jobs will not find equivalent or better jobs. Here, individual fates diverge in small but humanly significant ways from collective well-being.

Let’s take the case of Canadian vintners. Yes, they exist. Would I make up anything so absurd? Do I have sufficient imagination? As you might imagine, Canadian wine-producing firms exist inside a network of government protectionist measures. If they were left to their own devices, most would soon be swept away by the wines of thousands of producers from twenty different places, from California to South Africa. Now, imagine that the Canadian vintners lose their muscle with the Canadian federal government and that all the protective measures are withdrawn within one year.

Under such a scenario, two things would happen. First, as I have explained step by step, many Canadian resources, including labor would eventually be switched to more productive endeavors. Because of this switch, Canadians in general but also the whole world would be a tad richer. But no one would expect the switch to be instantaneous. There would be some social dislocation, for sure.

The second consequences would be, starkly, that some people working in wineries and in wine-related businesses would lose their jobs. The fifty-five year old wine-maker of a small British Columbia winery with thirty years experience in the same winery would almost certainly have to retire. It’s extremely unlikely that he would qualify for one of the many advanced jobs open in the new, and now marginally more productive Canadian economy. An old wine-maker will not become say, a software writer, under almost any imaginable circumstance. Instead, the middle-aged wine maker will either become unemployed or he will have to take one of the lower-end jobs freed by the escalators described before.

Free trade, and opposition to protectionism have acquired a bad name, I think in part because of economists’ reluctance to face squarely this particular human implication of such policies.

I defend free trade while recognizing the wine-maker’s painful problem by pointing to the overall, collective consequences of protectionism: It’s always an economic disaster. We know this from two different sets of observations, First, other things being equal, countries that follow national policies of free trade grow faster than those that don’t. That’s true equally for poor countries and for rich countries. Similarly, when countries that have implemented protectionist policies open up even a little, they experience a quick surge in their GDP. Second, there is no part of the world where unemployment figures track free trade’s ups and downs. As an example, the sudden upsurge of unemployment in the US 2007-2009 had nothing to do with any increase in imports. This tells me that the sad middle-aged Canadian vintner’s case does not account for much of unemployment.

Other things being equal, I think it’s better to be unemployed in a relatively more prosperous country that in a poor one. The benefits are more generous, and the next job opportunities richer and more varied. Training programs are also more common and more accessible in richer than in poorer countries. And capital to start one’s own business is normally cheaper and more accessible, the more prosperous the country. I will go further: Economically, it’s better to be unemployed in a rich country than employed in a poor country. (I understand there are non-economic downsides to unemployment. This is another topic I can’t deal with here. A single thread, the economic thread, is difficult enough to follow.)

In conclusion to this whole series on free trade and protectionism in nine small steps: protectionism remains the royal road to collective poverty and it does not do much for anyone, not even for those who stand to lose their jobs when national borders open.

Please keep it civil

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s