3.5.4.2 Protectionism

(This is a current page, from the Patterns of Power Edition 3 book contents.  An archived copy of this page is held at http://www.patternsofpower.org/edition03/3542.htm)

Populist politicians (6.3.2.5) tend to play to people’s misinformed perceptions of free trade rather than to explain its benefits.  For example, on 17 September 2012 the BBC published a report, entitled Protectionism: Is it on the way back?, which drew attention to France:

“The recent French presidential election saw both the successful challenger, Francois Hollande, and the defeated incumbent, Nicolas Sarkozy, stepping up their protectionist rhetoric in an effort to woo the 80% of voters who are anti-globalisation.”

American politicians also succumb to populism, particularly in election years, despite the long-term damage that this inflicts on their own country and on the whole world.  On 22 February 2014, The Economist published an article entitled American trade policy: How to make the world $600 billion poorer; it criticised politicians for opposing free trade and included this assessment:

“Reasonable estimates say that the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP) could boost the world’s annual output by $600 billion—equivalent to adding another Saudi Arabia.  Some $200 billion of that would accrue to America.”

Wealthy countries often feel the need for protectionism, usually with the aim of saving a domestic industry (3.3.7.1).  They can apply tariffs to imports, so that a domestic industry has a competitive advantage, but other countries might then retaliate with their own tariffs.  The best-known example was in the 1930s – as described in an article on 29 February 2012, entitled The Smoot-Hawley Tariff and the Great Depression.  The article argued that:

“While economic historians generally believe the tariff was misguided and may have aggravated the economic crisis, the consensus appears to relegate it to a minor status relative to other forces.  We [Theodore Phalan, Thomas Rustici and Deema Yazigi] believe many modern economists are wrong because flawed modeling leads to two systematic understatements of the tariff’s negative effects.”

Alternatively, countries can subsidise their own industries.  New tariffs and subsidies should not now be introduced without World Trade Organisation (WTO) agreement – but countries defend their existing arrangements in the negotiations there.

It seems politically attractive to support protectionism, but it should not be forgotten that protecting one group of workers results in increased costs for everyone else in a country that applies tariffs; Leland B. Yeager explained this, in a section entitled Saving an Industry, in section 4 of Free Trade: America’s Opportunity.  It is a form of redistribution of wealth that reduces the total wealth available because it sacrifices the benefits of free trade that were described in the previous sub-section (3.5.4.1).  It is a Political decision with Economic consequences.  An honest politician would reveal the costs to the rest of the population at the same time as claiming credit for protecting a particular group.

The EU’s ‘single market’ is a negotiated free-trade area which has enabled its companies to operate on a larger scale, so that their prices are lower and they can compete with American companies.  Despite having made an early start, though, there are many practical barriers to trade in the EU; on 12 October 2012, The Economist published an article entitled Coming off the rails, which listed several impediments to cross-border trade in the EU – including different railway gauges.

The EU subsidises agriculture with its Common Agricultural Policy (CAP) which it describes as a “partnership between Europe and Farmers”.  Its aims include a desire to be self-sufficient in food (having experienced shortages during the world wars) and a desire to protect the countryside and its way of life from change.  The result, though, is that Europeans pay more than necessary for their food and the CAP is politically contentious.  On 1 July 2013, the BBC published an article describing the CAP, some criticisms of it and some possible reforms – Q&A: Reform of EU farm policy.

Another type of argument against free trade comes from those who advocate trying to protect new industries in developing countries until they are strong enough to compete without assistance.  This argument reappears in a later section, on helping developing countries (3.5.8.3), but there are counter-arguments.  John Elliott’s article in Fortune magazine on 19 October 2007, entitled Manufacturing Takes Off, pointed out that protection didn’t work for India:

“What they [Nehru and Indira Gandhi] unwittingly created was an inward-looking, highly protected, and inefficient economy that did little for the poor, negated private-sector entrepreneurship, allowed public-sector inefficiency, and guaranteed infrastructure decay.”

The article focused on India’s rapid economic progress since Manmohan Singh liberalised its economy in the mid-1990s.

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