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“Protectionism” is a policy aimed at shielding a country’s domestic industries from foreign competition by handing them subsidies and/or imposing taxes on competing imports. On the face of it, therefore, the aims of protectionism and nationalism are broadly aligned.
Or so you would think.
The irony, however, is that you would be 100 per cent wrong, and the purpose of this modest contribution is to throw some light on this conundrum.
Words of the wise
Before opining on anything controversial in economics, it’s sensible to examine the words of the great 18th and 19th century classical scholars of the “science of political economy”, as its title was designated with surprising acuity. (After all, those wise old owls knew full well that because economics lies at the very heart of how humans co-exist within a society, the subject would never be permitted to retain academic purity, but would fall prey to every self-interested deviation – in a word, politics.)
Adam Smith, David Hume, John Stuart Mill, James Mill and David Ricardo, as well as French economists Jean-Baptiste Say and Frederic Bastiat in the same period, were all fervent advocates of free trade. As explained by the modern Austrian economist, Joseph T. Salerno, they viewed free trade “as one of the most important means for advancing the security, prosperity and cultural achievements of their own nations”. But, as Salerno also notes, they discerned, somewhat paradoxically, that “the economic and cultural flourishing of each nation was inextricably linked with the flourishing of all other nations”.
So who’s right?
Here’s the apparent anomaly: since the good of their own nation was uppermost in their thinking, they were clearly nationalists. Yet they abhorred protectionism, the very policy that would have entrenched the strength of their domestic industries. As Donald Trump’s facile refrain runs, “trade wars are good, and easy to win”.
I am now suggesting that the 18th Century economists’ view is correct, and that of Trump, and the growing number of mercantilist proponents around the globe, is completely wrong. My rationale?
A clue lies in the classical group’s understanding of the principle of comparative advantage, and hence that free trade always delivers more productive use of each nation’s own resources, and those benefits are not contingent on reciprocal concessions by trading partners. The British classical economists, as nationalists, promoted free trade because it improved economic conditions for Great Britain.
But they also pointed out that free trade bestows benefits to all participants. Smith’s advocacy of unilateral free trade is domestically pragmatic rather than globally evangelical – the title of his masterwork is not “Wealth of the World”, but “Wealth of Nations”.
Yet protectionism has resurfaced in strength
Given the palpable benefits of free trade why, today, does the pro-protection lobby of mercantilists continue to gain such traction?
Firstly, although devoid of any rational basis (obvious, considering Trump’s belief in it!), its facile appeal to “common sense” has huge partisan, and hence vote-catching, appeal. Emotive outcries to preserve the jobs of “our boys” or “our girls” – whether in agriculture, research, pharmaceuticals, IT, mining or heavier industries – provide politicians with easy election platforms.
Secondly, it satisfies the instinct for macho-patriotic vengeance or quid pro quo: “If China wants to threaten our steel-mining industry by undercutting our prices via their local subsidies, we’ll impose a tariff on imports from China – not just on steel, on everything! And for good measure we’ll impose a quota system that limits the permissible amount of Chinese goods entering the country. That’ll teach them!”
Thirdly, no one country has a monopoly on idiocy. This fractious disputation gets out of hand when the government of the other country whips up local anger, letting loose a xenophobic display that sets entire populations against each other, surfacing even in areas of erstwhile mutual cooperation, remote from the original dispute. At this point no one’s listening any more. In the dialogue of the deaf final outcomes are unpredictable, and its escalation could easily lead to outright war. It’s happened many times before.
But consider this analogy
Although this genre of self-protective antagonism is essentially enacted between two opposing nations, logically it could foment just as effectively if one of the parties was not a nation at all but, say, a technical invention of artificial intelligence that, just like a cheap import, is capable of reducing the number of jobs currently performed by a human workforce.
In such a case the workers would no doubt petition for production of the hi-tech robotic alternative to be outlawed. Now think about that. What would it achieve? Even if the petition succeeds it would provide nothing more lasting than a short-term palliative. Technical advancement, unlike foreign competition, is both irreversible and unstoppable. Assuming we have a free market and the relevant commercial case is clear, the force of international competition alone will guarantee that the work-transforming gizmo is introduced in our industrial processes, and those precious jobs will be lost.
Corn Laws and the Irish famine
Reverting to the protectionist argument, we know that it is fraught with irrational dogma, and its intractable stasis can persist for year after miserable year, even leading to tragic life-or-death situations, as was indeed the case in 1846 in the thick of the Irish famine, when Robert Peel had no alternative but to scrap import taxes on corn in order to feed the hungry masses.
That saga began after the Napoleonic wars ended in 1815. The agriculturalists were predominant in Parliament and attempted to entrench their wartime economic advantage by passing a new Corn Law designed to keep cereal prices and rents at a high level by imposing protective taxes on all imported grain. Their political influence enabled them to maintain the economic protection they sought, and their anti-social, anti-free market prices persisted for a further 31 years.
By that time people and their leaders had forgotten that the whole damn charade was entirely unnecessary in the first place – a fact that they would have realised only by reading the classical economics texts. What the British classical economists understood is that trade barriers must harm the citizens of any country that imposes them – as most egregiously exemplified by the Corn Laws.
Protectionism equals deprival
They also appreciated that the principle of comparative advantage has universal application and today allows, for example, people in many African countries to produce, with relative ease, cloths assembled from locally sourced natural fibres, dyes and looms, and hence light and colourful garments, at a price far lower than those on display in European shops. But if vested cloth-manufacturing interests in European countries have the ear of officials in government trade departments, tariffs will be imposed on African (and all non-EU) imports at a rate that makes the pricing of the African goods uncompetitive.
Thus (i) citizens of European countries are deprived of the opportunity to buy beautiful, high-quality wares at affordable prices; (ii) African citizens are robbed of the opportunity to sell goods abroad, even to display the quality of their unique craft; and (iii) the EU has “cut off its nose to spite its face”: by effectively barring the import of goods from African countries, Africans cannot earn the foreign exchange required to import EU goods. So much for reciprocity – it works both ways!
Equivalent discrimination could, of course, be effected through subsidy: a particular African government wishes to promote its exports to Europe and to this end grants subsidies to its politically influential garment-making businesses. Although their garments in European stores are now better able to compete, those subsidies can only have been funded by taxes extracted from the country’s entire citizenry. They may be prepared, for a time, to live with this blatant transfer of wealth to the garment-manufacturing sector, but that favouritism will surely run its course and end before there is civil strife.
Let’s get it straight: there is no alternative to unilateral free trade. A modicum of reason shows us that any government can enact it with ease – after all, it requires no counterparty reciprocity to be effective.
© Emile Woolf November 2019 (website)
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