Sunday, 15 March 2009

A thought on protectionism

We are beginning to see more and more references to "protectionism" in discussions of current economic woes. It is condemned from every quarter, but it seems to me that much of this criticism is overreaction caused by lack of clear definition. "Protectionism" is not a single concept or a single policy. The elements often brought under the umbrella description are a mix of legitimate political considerations and economic factors. Although some can be criticised as unnecessary or unfair, I'm not sure they cannot be defended.

At heart, protectionism is about restricting access to markets, yet there are restrictions in place at all times and in all countries. For example, immigration controls restrict access from overseas to domestic employment markets and requirements for formal qualifications restrict access to certain employment markets even for those in the country. Similarly, domestic quality control regulations (whether imposed entirely domestically or by a body such as the EU) protect markets from importers who cannot match the necessary quality threshold. And, of course, import tariffs restrict access by adding to the cost of a potential importer's goods. Tariffs might be imposed by one country against all others or, as with tariffs dictated by the EU, by a bloc of countries. All of these are protectionist measures because they protect domestic markets (narrowly or widely defined) at the expense of foreign businesses.

Each of the restrictions I have mentioned can be imposed for a range of reasons. Indeed, different countries might impose the same restrictions but for different reasons; some cultural, some economic and some political. Moreover, a country might impose the same restriction at different times for different reasons. If we have exhausted our home-grown production of a particular product but there is demand for more, we are likely to welcome supplies from overseas; when circumstances change and demand for the product falls it is perfectly legitimate to expect that demand to be met by domestic production so that the fall in demand does not have a greater impact on UK jobs than it might otherwise have. At another time there might be concern that the quality of that same product available from overseas is so far below the quality of the home-made item that thought might be given to imposing regulations which have the effect of protecting domestic producers at the expense of foreigners. The permutations are endless.

How one approaches protectionism depends, in great part, on how one views the alleged downside. What is the problem with protecting domestic markets from foreign competition? In principle there can be many, of which three stand out. Isolating your market from innovations from overseas can lead to stagnation in the quality of what you produce. We only need to look at the goods produced in the old Soviet bloc for evidence of that. Isolating your market can lead to tit-for-tat measures being taken elsewhere that do you more harm than good through lost income from exports. Isolating your market can also do enormous harm to poorer overseas countries who have grown dependent on being able to sell to you. Each of these factors will weigh differently depending on personal values, but each is capable of being a very strong argument against restricting free trade.

Ironically, many of those who argue strongest against protection of domestic markets tend to also argue strongest against free market theories. These are the one-world hippies who consider it important that the UK buys goods from tin-pot African dictatorships while doing nothing about the dictators. Of almost equal irony is current bleating from the likes of poor Gordon against American threats of protectionism. He covered this in his recent speech to Congress and paused, but applause was there none. In substance he was saying "you should not protect American businesses because it will damage British businesses", yet in saying that he is also saying "I want you to protect British businesses". You see, that is the ultimate irony in all this. We can attach the label "protectionist" or "isolationist" and seek to condemn certain positions taken in other countries, but all it ever amounts to is an argument that they should not take any step to harm us. Condemning protectionism is itself protectionist.

Then there is the purely political angle. I should say, the entirely legitimate purely political angle. It's all very well being avidly free-trade or internationalist, but every government is responsible for the people of the country it governs. That doesn't seem a very modern thing to say. These days we are harangued to be concerned about the EU more than our own country and about the whole world more than the EU, but that is just hot air. The UK government has to answer to the people of the UK, just as the US government has to answer to the people who elected it to office and the same applies in France, South Africa, Iceland, New Zealand and all points in between. It even applies to those countries whose governments have no democratic mandate. The US is adopting a "buy American" policy in its own interest because it fears the short-term damage from buying foreign rather than American. Don't forget that it wasn't so very long ago that "Buy British" was a central policy of UK governments of both parties.

The only legitimate concern for any government introducing protectionist measures is whether they will do more harm than good. They might be beneficial in the short-term but not in the long term, in which case they can be reversed when the time is right. They might not be beneficial at all, in which case that government will have to answer to its people for an error of judgment. I wrote some months ago about the absurdity of our Parliament setting targets for reductions in carbon dioxide emissions when people were at risk of dying from cold (here). That piece was titled "A simple matter of duty". The same title could apply to the correct approach to protectionist measures. It is a matter of duty for government to protect its own people first and worry about our foreign chums second. If that means taking steps that will do others harm but will provide us with a benefit then so be it.

Protectionism is not necessarily bad. It is a matter of balance, usually between short term benefit and long term detriment.


5 comments:

Mark Wadsworth said...

As a rule of thumb, the long term detriment always outweighs a short term benefit.

I'm not convinced that we should ever have protectionism at all (except for minimum safety standards, we don't want kids' toys with lead paint or cars without brakes or bananas full of plague bearing rats, for example).

TheFatBigot said...

That rather depends on who's going to eat the bananas.

Mark Wadsworth said...

Tee hee, I just noticed that you linked to your post of last October saying that e-cigarettes would be banned sooner or later (over at mine of last week) saying that they would be banned.

I idly scrolled down the comments to your post and noticed that in a lucid moment I had suggested that they would be banned - not for the reasons you outlined - but because poor lickle dolphins might choke on them. As it happens I was wrong - they're going to ban them because chi-i-ildren might choke on them, but I'll give myself a bonus point nonetheless.

james c said...

Dear Bigot,

Oh dear, not more garbled economics.

The standard static argument in favour of free trade is that it increases total output.

The dynamic argument is that competition spurs innovation.

The main arguments in favour of protectionism are to build developing industries or slow the decline of inefficient ones.

But the general imposition of tariffs, as the US seem keen on, helps domestic industries at the expense of the consumer.

Garry said...

Let me first state that, once we get past the principle of supply and demand, my knowledge of economics is non existent.

You may not find it surprising then that I can't understand why a nation that imposes strict labour laws and minimum wage legislation on it's own industry, goes ahead and imports products from countries without these restrictions.

Don't get me wrong, I'm all for good working conditions and a living wage, it just seems like hypocrisy to me that we insist that our workforce has good conditions, but don't care about the working conditions of the people we do business with, and secondly, if we are afraid of tit for tat protectionism, surely, by making our own products too expensive to compete on such a skewed playing field, and thus killing off our own industry, aren't we achieving the same net result?