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.

Whither the national interest?

Back in the dim and distant past of the pre-New Labour era we used to hear a lot about the balance of payments and the national interest. They were central to government policy yet they have now both disappeared from view.

The balance of payments was the difference between the value of stuff we exported and the value of stuff we imported. Figures were broadcast every month for tangibles and invisibles. Very often we were in the red in tangibles (actual things like cars and cabbages) but in the black for invisibles (such as banking and insurance). It mattered because we were competing against other countries and needed to know how we were doing. At least we thought we needed to know, that we don't get any figures these days suggests it might not have been necessary at all.

Except that it was necessary. It was necessary so we could judge whether we were getting things right or wrong. Just as a business needs to know whether it is making a profit or a loss in order to be able to judge its performance and make any necessary changes, so the country needs to know the same if it is to address systemic problems in the economy. Of course the figures have been available, they just haven't been published as widely as they used to be.

The national interest was the overriding concern of government, however dismally any individual government protected it. The UK government held a mandate from the people of the UK and felt it necessary to act in what it perceived to be the best interests of the UK. If France or Germany or, if it comes to that, Swaziland proposed something considered detrimental to this country the government would speak against it. Act against it less often, but speak against it every time. The concept of the national interest recognised that we are in competition with other countries. It also recognises that the first priority of the UK government should be to protect the interests of the people of the UK.

We just don't hear about the national interest these days and we don't hear about how well or badly this country is doing in its economic dealing with other countries. Instead we hear all about global this and European that, as though every other country is governed to protect the interests of international organisations and ideals rather than its own people. It's ok, we needn't worry, the EU or the UN will come to our rescue if something goes wrong. All we need to do it strengthen these bodies and we need never worry about anything again. This strikes me as a peculiar way to go about things and to be fundamentally wrong both in fact and in principle.

It is wrong in fact because many governments are assiduous in protection of what they consider their national interest, the USA and France are perhaps the most obvious examples of this but it goes far wider than that. Do you think the former soviet-bloc countries have joined the EU out of a sense of altruism or to further the political strength of the EU Parliament and Commission? Of course they haven't, they have joined because they see it as potentially beneficial for their people. Beneficial in two ways. First by giving them access to markets across Europe without the handicap or import taxes or restrictions on the right to work, and secondly by giving them access to hand-outs from the EU's pot of gold. If they were to become net contributors they wouldn't give a second's thought to joining the EU. They joined because they considered it in their own national interest to do so.

The reason relying on more and more international bodies to provide protection in times of difficulty is wrong in principle is that standards differ about what is a difficulty and what is the right way out of it. It's easy enough with something like NATO, a military alliance, because dealing with a military threat does not (except in the most esoteric way) involve cultural values and different interpretations of what is a threat and what is beneficial. Once diplomacy fails, either you shoot back or you get massacred; having more people with guns on your side is plainly beneficial. But you can't apply the same universal standard to economic or social matters. What areas of the economy should the government be involved in, what part should government play in sports or the arts, how should health care be funded, how should children be educated? There is simply no single answer on which everyone can agree. What is acceptable to the people of one country can be wholly unacceptable to another because of their differing history and culture.

Once decisions are passed to an international body it can become a supra-national body. Instead of being a meeting point for heads of government to see what common ground they can establish (as is still he case with NATO, for example), the body itself starts to form its own agenda and countries are required to fall into line or suffer sanctions. Instead of EU policy being a summary of those things all the member nations agree on, it is now something the member states are required to comply with whether they agree with it or not. This creates both practical and political problems.

On the practical side we have such things as current EU laws and directives on so-called health and safety. Health and safety is a balancing exercise between risk and reward. You can't just say "you must reduce the risk in this way" if that impacts so much on the reward as to make the whole exercise onerous or pointless. Of course people sometimes fall off ladders or chairs when changing a light bulb but the risk is pretty small, to require the erection of a scaffold tower and for all around them to stop work and stand well clear would be disproportionate to the risk. Did you know you cannot lawfully change a light fitting in your kitchen or bathroom without having the work certified by a properly qualified person? That's all very well for Mr Rich who would hire an electrician to do it anyway, but it's onerous for Mr Poor who saved for weeks to buy a nice light fitting and now has to fork out the same amount again for someone to fit it or check how he has carried out the most simple of jobs. There is no single standard of what is appropriate for everyone in all circumstances. Yet the more powers that are passed from national governments to supra-national bodies the more uniformity will be required and the more cases there will be of central edicts being inappropriate or absurd when put into practice.

The political problem arises from the inevitable democratic deficit of these bodies not being answerable directly to the people their decisions affect. This breeds mistrust because people don't remember the things the body got right only the things they got wrong. An ever-growing list of perceived errors combined with no effective means of changing the membership or policies of the body, can result in widespread discontent. Think back to 1979 and 1997. In each of those years a stale government was ousted and the result was that the very people who felt most let-down by the old were invigorated by the new. Yet how much actually changed about overall government policy on the 4th of May 1979 and the 2nd of May 1997? Twenty percent, ten percent, five percent? Maybe not even five percent. What changed was the general emphasis of policy much more than its details and, most importantly, all the failings of the old governors were sent out of the door and the new lot started with a clean slate. Between 1979 and 1997 the Conservative's slate filled with chalk dust, bits of fluff and dried chewing gum, and between 1997 and today Labour's slate has undergone the same transition. The mere fact that we voted to change our governing party gave continuing legitimacy to the whole system. Without the possibility of such change it is inevitable that legitimacy will disappear, thereby negating the only thing any government can rely on as its ultimate authority.

The aftermaths of the 1979 and 1997 general elections also show that there can be a radical change in certain basic aspects of policy to correct systemic problems encountered with the established way of doing things. Mrs Thatcher's central message in 1979 was that the old way of doing things wasn't working. The country was bankrupt and she argued for business and industry to be allowed to show what it could do without some of the centrally-imposed constraints which had become the norm. Not everyone agreed with her. It was essentially a matter of opinion not fact, but enough agreed with her to allow her to be given a chance to put her ideas into practice. Something else was tried because the former consensus no longer held sway. A similar change occurred after the 1997 election. Mr Blair argued that The State was doing too little and could do more to improve peoples lives. Sufficient agreed with him for his ideas to be put into practice. The system allowed new ideas to be put into practice because the old ones were no longer perceived as appropriate to modern life. Today there seems to be a sizeable body of public opinion that a change is needed again and an opportunity to vote for change will arise within the next fourteen months. We learn what works and what does not work by trying new things and seeing what effect they have. Even if 95% of policy remains essentially the same from one government to the next, the other five percent can make a huge difference - perhaps beneficial, perhaps not, that's a matter of opinion; there is always another election coming along for those who make a case against the incumbents.

How do you change the policies of a supra-national organisation when the existing ones do not suit the people of a particular country? The answer, of course, is that you can't. It is inevitably one-size-fits-all, like-it-or-lump-it; uniformity is seen as a benefit in its own right regardless of its practical effects. We often hear government ministers saying they are merely implementing EU policy when something daft or unpopular is brought in, as though that is an excuse. To my mind it shows the great problem with removing powers from Westminster and giving them to Brussels. Not only is there no way of giving EU government new legitimacy when it has lost our confidence but there is no effective way of changing EU policies that don't work.

Through all of this, we little people are concerned with how things affect our lives. Those who live in a village are concerned about how political decisions will affect their village, townsfolk and city dwellers ask the same about their town or city, they all do the same again when county-wide issues arise and we all do it on matters that affect the whole country. The national interest is not a political fiction, it is a reflection of the real concerns of the little people. When a factory closes in Birmingham there is a problem for those who lose their jobs and for those whose businesses and jobs depend on the Birmingham factory (such as shops close to the factory who relied on trade from the workers as they arrived and left each day). It is also a problem for the UK as a whole because increased domestic unemployment reduces UK tax revenue and increases the claims made on UK taxpayers. It has no effect whatsoever in Paris, Frankfurt or Warsaw, and the governments of France, Germany and Poland are too busy trying to protect their own people to worry about it.

Even though we are trapped within the money-sucking vampire known as the EU, we still have a national interest and there are still a few ways in which it can be promoted. Currently, all over Europe, national interests are being asserted afresh from the bottom-up. More of the same centralised power cannot answer these interests because British, French, German, Polish and all other EU manufacturers and other businesses are not playing for the same team, they are in direct competition. Our countries as economic units are also in direct competition.

I hope we hear a lot more about the UK national interest in the run-up to the next election. It is far too important to be left in the hands of the EU or the UN. We are best at deciding what is right for us. We might not be very good at it, but we still do a far better job than any unaccountable body concerned more with its own power than with improving life for us.

No protection from poor Gordon

Poor Gordon has found a new topic to talk about, protectionism. As we know, it is necessary to be very careful when reading anything coming from our Prime Minister and to put it in context. So first we must ask whether he was talking sense about other things before we look at his main theme.

The report of his latest offering tells us he spoke about the recession first and gave us this pearl of wisdom: "I have utter confidence in our ability to come through this." I'm just a simple fellow so I have probably missed something here, nonetheless it seems to me that there are only three possibilities: (1) the UK slips into a permanent economic coma, (2) the country ceases to exist and (3) at some stage the recession will end. The first option is impossible in practice. The second can only occur in the event of a massive nuclear strike or the physical destruction of the land by even more fanciful means. So that leaves us with only a sure-fire, odds-on certainty: at some time and after a degree of pain not yet known the UK economy will stop shrinking. I suppose we should be reassured that our incompetent and mentally unstable political leader is not so completely detached from reality that he has failed to grasp this simple fact. More troubling is that his language suggests one or both of the other theoretical possibilities might occur. If he really does think that, his continued presence in Downing Street is even more worrying than we have previously realised.

So, we know his comments on protectionism are made against the background of him appearing to believe the UK economy might shrink to nothing or we might all be blown to smithereens in the not too distant. I shouldn't be too cruel. Poor Gordon has absolutely no ability at all to speak off the cuff and make himself clear. His brain just doesn't work like that. One might think it a vital skill for every Prime Minister but we are way beyond the stage of having to wonder whether he is up to the job, for a long time now the only question has been how much more damage he can do.

What is it, then, that he fears from protectionism. Fortunately he has not yet explained his views, so I'll see if I can help him.

As always, we must start by defining our terms. To me, protectionism means closing or restricting our domestic markets to imports in order to prevent domestic producers from losing out to more efficient foreign businesses. There are three main reasons why protectionism is usually a bad thing.

First, isolating any business from competition removes incentive to be efficient. Why improve what you are doing when there is no one else to woo your customers? This point cannot be taken too far because removing or limiting foreign competition will not remove domestic competition among rival businesses. However, a dramatic change in the level of competition by removing all but domestic businesses from the game can lead to informal cartels between the remaining players who know they can all do very nicely without risking their future by trying to knock the others out of business.

Secondly, protectionism stifles innovation. Why is it that you rarely see a big fat television in the shops these days when just two or three years ago flat-panel versions were the exception rather than the rule? It's obvious, our oriental friends developed flat-panel technology and customers like them. Just as the tiny tellies of the 1960s gave way to 26 inch screens by the 1980s, so cathode ray tubes have had to give way. And it only happened because innovations in one country were sold to customers in another.

Thirdly, closing markets to imports hits the poorest countries hardest. Kenyan farmers don't grow runner beans for the fun of it, they do so to earn money from wealthier countries whose citizens are prepared to pay for out-of-season produce. It helps us because we get the vegetables we want when we want them and it helps them to earn a living far higher than they could achieve from supplying their home market only. We won't pay our own farmers a premium price for winter cabbage because it is not a premium product in winter, but we will pay a premium price for fresh runner beans in January.

These three reasons illustrate two fundamental truths. Competition improves the goods available to us and, therefore, improves our quality of life. And, just as importantly, money makes the world go around. Protectionism acts against both those truths.

Yet we engage in protectionism in some fields because it is necessary to do so to avoid risk. I mentioned this subject three weeks ago. Some things are so important that we must ensure a domestic supply simply so that we cannot be blackmailed or bullied by overseas suppliers. Perhaps we could get electricity more cheaply if we bought it from France rather than generating it ourselves, but we would then be dependent on the goodwill of others and a regular supply of electricity is too important to rest on something so flimsy. Not many products fall into this category, it might be that electricity is the only one. It doesn't matter for the purposes of this missive whether it is one or fifty, where a product or commodity it sufficiently important we must engage in protectionism even if it results in somewhat higher prices and somewhat stifled innovation.

And then there is practical politics. Government is not all about long-term economic systems, it is also about acting (if you can) to deal with the short-term predicaments of real people. Principle sometimes has to give way temporarily in order to avoid the appearance of a government acting deliberately against the interests of the people it is meant to serve.

At the moment strikes are taking place at oil refineries because cheap labour is being imported from overseas, most notably Italy and Portugal. Were we ever to have a Prime Minister foolish enough to call for "British jobs for British workers", he might find egg on his face when British workers face losing their jobs and demonstrate holding placards quoting his words back at him. Had such a hypothetical moron of a Prime Minister kept his mouth shut, the same British workers would probably have been on strike for the very same reason and he would not get as much of the blame. Thank goodness no Prime Minister would be so stupid.

The substance lying behind such actions as these strikes is, I think, slightly different than just "British jobs for British workers". I believe the substance is "times are hard, why can't we be protected?" Protection comes in the form of British jobs for British workers, but they are arguing for protection now rather than for a long-term policy of excluding willing and skilled immigrants from earning a living in this country. Of course this issue is complicated by EU laws on the free movement of worker and by the intransigence of trade unions who would rather see their members out of work than taking a short-term cut in income. No government could be blamed for submitting to practical political pressures and introducing protective measures for the benefit of its citizens during harsh economic times. Any such move must be limited both in scope and time in order to avoid long-term damage to business, but there is more to keeping a country settled and content than just the interests of business.

We will see a degree of protectionism in the labour market in countries all over the world as the current recession really bites. Only the EU countries will be unable to make this important political move. The likely result is unrest across the EU to an even greater extent than at present - wholly unnecessary unrest and resentment that each national government has not looked after its own people. How much blame will be directed at the EU remains to be seen, I suspect national governments will get most of it. One can only hope it will cause many to ask whether it is sensible to hamper the ability of national governments to protect their citizens during a crisis. Any such protectionist measures will necessarily be short-term because the harm of long-term protectionism is so great. Nonetheless, some short-term protectionist measures can be appropriate in order to contain a risk of civil unrest.

My fear is that poor Gordon will argue against protectionism for the wrong reasons and will argue for yet further power to be transferred from national governments to supra-national bodies. The decisions that affect our lives will then be made with less reference to the practical needs and desires of we little people and more reference to the abstract aims of the unaccountable internationalist elites.

I hope I am wrong. Experience tells us he will be.