Welfare for the affluent: The economic costs of protectionism

Often touted as the saviour of industry, it results in a stunted economy unable to compete on its own.

KARACHI:

Disagreements among economists are legendary, but they are largely of one mind on the issue of free trade. As long as trade is voluntary, both trading partners unequivocally benefit; otherwise they wouldn’t trade.

Free trade expands consumer choice and gives businesses incentives to improve product quality and to cut costs. By increasing the supply of goods, international competition helps hold down prices and restrains internal monopolies. Pretty much all local manufacturing industries now face some international competition, which helps keep their competitive feet to the fire. Thus, the case for free trade is the case for competition, higher quality goods, economic growth, and lower prices. By contrast, the case for protectionism is the case for monopoly, lower quality goods, economic stagnation, and higher prices. The costs of protectionism to consumers are enormous.

Ethical aspects of free trade

Protectionism is not only economically inefficient, it is also inherently unjust. It is the equivalent of a regressive tax, placing the heaviest burden on those who can least afford it. For example, because of import restraints in the auto industry, cars are more expensive. This imposes a proportionately larger burden on the family that has an income of only Rs35,000 per month than on the family that has an income of, say, Rs135,000 per month. Moreover, the beneficiaries of protectionism are often more affluent than those who bear the costs. Protectionism, in other words, is welfare for the well-to-do.

Why protectionism?

Despite the powerful case for free trade, a lot of developed and developing economies are highly protectionist, and always have been. This is because free trade benefits the general public, whereas protectionism benefits a relatively small group of special interests. The general public is neither well organised nor well informed politically, but the special interests are. Case in point being manufacturing lobbies like the auto and textile sector which never cease to argue the case for protectionism.

For decades monopolists and potential monopolists have crafted myths about free trade and protectionism. The following are just a few examples.

Imports (and trade deficits) are bad; exports (and trade surpluses) are good

The trade deficit has been of concern and should be. But it has wrongly been used as a primary ‘justification’ for protection. The notion that importing more than we export is necessarily bad ignores some elementary economic principles. First, imports are our gain from trade. The more material goods—the more trade—the better. Remember, all trade is mutually beneficial.

Imports are destroying Pakistani jobs

Like all long-lasting myths, this one has a grain of truth. If more Pakistani consumers buy foreign rather than locally-made goods, it may threaten some jobs. But protectionism would only cause even more unemployment.

Free trade creates jobs by reducing prices, leaving more money in the pockets of consumers. Increased consumer spending in turn will stimulate production and employment throughout the economy. Protectionism may temporarily ‘save’ jobs in one industry, but it usually destroys even more jobs elsewhere.

Protection is necessary to counteract ‘dumping’

So-called dumping occurs when foreign manufacturers sell products in the abroad that supposedly are priced below the price at which they are sold in the home market. There are numerous laws that prohibit dumping on the grounds that it is unfair competition. But there are also sound economic reasons for such business practices. Businesses that charge their international competitors with dumping are simply unwilling to charge prices that are as low as their rivals’.

Temporary protection is needed to ‘buy time’ and adjust to the competition

Temporary trade relief is like being a little bit pregnant. The textile industry, for example, was given ‘temporary’ trade relief 25 years ago and is still being ‘relieved.’ By reducing competitive pressures, protectionism tends to stifle innovation. Businesses are less prone to invest in engineering and technology when profits can be earned just as easily by lobbying for protection.

We should restore a ‘level playing field’ by erecting trade barriers against countries that have trade barriers against us

This is a ‘cutting off our nose to spite our face’ strategy. If foreign governments are foolish enough to harm their own citizens by erecting trade barriers, it is unfortunate for those citizens. But there are no sound reasons why local consumers should be penalised for the ill-conceived trade policies of foreign governments.

Dynamic economy

In sum, a dynamic economy is essential for economic growth and job creation, and protectionism only hinders the necessary adaptations to economic change. But every change of this kind will hurt some organised interests; and the preservation of the market order will therefore depend on those interests not being able to prevent what they dislike.

Protectionism may provide some short-term benefits to a small number of special interests, but at much greater costs to the rest of society.

Published in The Express Tribune, October 15^th, 2012.