Saturday, October 10, 2009

Should Protectionism Be Embraced to Protect Domestic Industry?

Free trade is a bit like religion. Most people seem to claim to believe in some form of it -- virtually every politician does -- but you wouldn't always know it based on their actions. It seems like most every developed country uses protectionism to at least protect some sacred cow if not as a general policy. The United States provides generous subsidies to promote domestic agriculture. France has managed to "repatriate" some auto jobs by providing incentives for domestic automakers to move some of their production back to the mother country. Ecuador responded to the financial crisis by significantly increasing tariffs on many products. Clearly, a lot of self-described free traders find something seductive about protectionism.

Honestly, there IS something seductive about it, despite the fact that most economists think it is outmoded and perhaps even dangerous. A nation that produces a wide range of goods and has a strong service economy as well has a much more diversified range of employment options. One reason the unemployment picture in the United States looks so bleak is that people who have lost their jobs must in many cases seek out new training to qualify themselves for other jobs. There is a definite shortage of easy to do jobs...the unheralded victim of the economic crisis is the teenage worker who has seen normally despised starter jobs become suddenly quite desirable. Additionally, a country that can produce what it needs is less dependent on trade and better suited to survive a war that might disrupt international shipping. I would argue that having domestic production is indeed very good...perhaps even vitally necessary. I would even go so far as to say a country that doesn't produce a wide variety of goods cannot take full advantage of its citizens' talents. If good shoemakers and good steelworkers become bad teachers and bad salespeople, a labor problem has perhaps been resolved but society can hardly be said to have benefited, and neither has the individual who is stuck in a job he or she hates! With all that said, I still can't embrace the POLICY of protectionism even though I see domestic production as being very desirable.

The most outstanding benefit of free trade has always been that it has reduced costs for the consumer. Most protectionist policies involve either making foreign goods more expensive or domestic goods more cheap -- either way, the consumer suffers because he or she either must pay a higher price for goods or higher taxes to support governmental subsidies. Outright bans on foreign products reduce choice and competition. I can't really see a way the consumer would benefit from protectionism. You could make the old "foreign products are inferior" argument, I suppose; China seems to have made a mission out of trying to strengthen that argument by marketing such winning products as poisoned pet food, toys with lead point, and home-ruining drywall. However, few would call BMWs or Maseratis inferior. Most electronic devices are assembled in Asia and they seem to drive our increasingly technology-centered lives along pretty well. If foreign products were really that bad, people ultimately wouldn't buy them. In fact, they're good enough for the most part and priced attractively...people have found them irresistible. All citizens are consumers, even service workers and the unemployed -- governments which embrace free trade are looking out for the welfare for their people as a whole far better far better than those governments which embrace protectionism.

What has long puzzled me is not why people buy foreign products but rather why more don't CHOOSE to support domestic industry given the larger benefit to the country. As I see it, free trade has the potential to greatly improve the qualify of life for the poor (potential is too weak a word -- it has already done this around the world). They benefit the most from having cheap goods available to purchase. Every penny they can save counts and represents another step out of poverty. For that reason alone, I'd never oppose free trade...protectionism disproportionately hurts the impoverished. The story just isn't the same for people with some money to spare, however. It baffles me how people will willingly overpay on cars, houses, boats, jewelry, and designer clothes yet nonetheless try to skimp on more everyday items. I personally would rather save money by not overpaying on big ticket purchases that are priced more than they are worth but instead pay a bit more for small ticket items in order to support domestic industry...why aren't there more people who think like me? I suspect shopping habits have as much to do with the downfall of domestic manufacturing as anything else. Retailers like Wal-Mart save money before the consumer even sees a product by purchasing goods made in countries where labor is cheaper. Americans who want to support domestic producers may have to shop online to do so -- Still Made in USA is a good Web resource I happen to use (just in case you're interested in getting pressure from this free trader is intended!). Additionally, many shoppers don't look at country of origin labels at all. It always takes me off-guard how people who frequently complain about the downfall of American manufacturing often don't check to see where the products they are buying are actually made. They have, uncannily enough, become part of the very problem they decry!

I think the toughest political question to tackle is not whether to embrace free trade or protectionism, but rather whether free trade should be followed as an absolute policy and all semblances of protectionism should be abandoned. Should, for instance, the United States stop providing subsidies to its farmers? Should it not use foreign aid to support its defense industry? I can see the national security reasons behind such forms of protectionism. Ideally, agriculture at least could be supported without subsidies, but we've already seen consumers can be fairly quick to abandon domestic producers. Should we just accept that the benefits of having strong domestic agricultural and defense industries are worth the price we pay? Rather than eliminate this limited sort of protectionism, I think I'd experiment with reducing the amount of subsidies slowly and cautiously first. We could at least contain costs if we can't eliminate them. Wasteful support of the military industrial complex and grants to owners of farm land that aren't in fact farming clearly aren't fact, they are an example of the inefficiency of protectionism and show why it really isn't a good idea to expand protectionism to other industries.

Before long, I wonder if arguments like those I've just made will even be relevant. While low wages have been a driving force in encouraging outsourcing of labor from rich countries to poor ones, moving overseas has its costs as well. When it comes to manufactured goods, a good portion of that cost is transportation. I anticipate more and more manufacturing will be done almost entirely by machine in the future as technology develops and the capital investment required falls. This will likely lead to more domestic production to save on transportation costs but perhaps not new jobs (well, apart from robot repairmen...or repairmen for the robots that repair other robots). Many would argue that countries that have a weakening manufacturing base have already entered the future, a future where human labor isn't strictly necessary for material production. Ultimately, I think that future does represent at least holds out the promise of more leisure and less drudgery for humanity even though it also raises many questions about the economics of the future. That said, the demise of the human laborer has been often predicted since the Industrial Revolution and so far those predictions have largely failed to materialize.

No comments: