Sunday, 15 December 2013

Free Trade Versus Protectionism

Free Trade Versus Protectionism

I must confess that when I hear a Free Trade argument I tend to agree, but when I hear a Protectionist argument I also tend to agree. Which means that either

1) I'm a jellybrain

or

2) the arguments are presented as ideals.

Unfortunately for me the two are not mutually exclusive. But for my sake I'm going to go with 2) which means that we now need to have a look at both arguments.

Free Trade
The Free Trade argument goes like this, Protectionism protects bad industries, industries that are unprofitable unless given an unfair advantage such as tariff protection. This advantage hurts productive industries as well as everyday consumers and everyone is a consumer. The cost of goods are more expensive which hurts every productive business and every consumer, in short it costs more to live. It would be better if these artificial barriers were removed and everyone operated on a level playing field.

Protectionism
The Protectionist argument goes like this, every Country has an economy and every economy competes with other economies, therefor your Countries economy needs to be given every advantage you can give it. To protect industries, jobs and living standards, trade barriers need to be enforced so that cheap foreign goods cannot destroy the advantageous that have been built up over time.

Near where I live was once the clothing manufacturing capital of Australia. It produced most of the clothing and footwear worn in Australia, it also exported . But in the 1980's the Labor Government reduced tariffs and within 5 years nearly the entire industry was dead. You could argue that Free Trade was right as it proved that the industry was unprofitable without protection. You could argue that Protectionism was right as a viable industry was destroyed by taking Australian jobs and giving them to people in other countries. We gave away our advantage. The argument would be moot if those made unemployed by the factories closing down were employed and those who would now work in those factories had jobs, but sadly that is not the case. The area were these factories closed have high rates of unemployment no matter how the rest of the economy is going.

Earlier this year Ford announced it was ending the production of cars in Australia in a few years time. This week General Motors announced the same and it's expected that Toyota will do the same soon. All three companies have been given very generous subsidies by the Government, no matter which party was in office. Now the Government with a large budget debt has decided to say no and the car companies are leaving. The Free Traders will argue that it costs us alot more money to buy a car than the sticker price on the windowscreen, in fact even if you don't buy a car manufactured in Australia you still get to pay for one, in what way is that fair? Protectionist will counter with the argument that when production ceases all cars will be imported, Australia will get no benefit as all of the skills, jobs and money either come from overseas or are going overseas. There is also no guarantee that prices will go down, only a promise.

In both cases I think the withdrawal of the protection has been too quick. With time many of these companies may have been able to compete, but having the rug pulled from under them left them with too big an obstacle to overcome. A further worry is that foreign owned multi-nations have no incentive to keep facilities in countries that do not offer some kind of incentive. Low wages or Government subsidies. To be sure subsidies are welfare for big business, something I don't like at all as it hurts smaller companies. But the truth is that the idea of a level playing field is a lie, we are not talking about Australian companies competing against Canadian companies or Australian workers and conditions competing with Canadian workers and conditions. Two countries with similar living conditions. We are talking about Australia competing with Thailand and Samoa, amongst others. Many countries have lower levels of living, lower conditions and lower wages. Many countries have subsidies. That is not a level playing field. The policies of Free Trade have in all First World countries brought on permanent mass unemployment. Until the Free Traders find a way to end mass unemployment they have failed.

That doesn't mean that the Protectionist have won. Both have advantages, but from what I have observed, personally and historically is that neither work for long. Both are too rigid in their approach. The Protectionist economy did allow companies to exist that were terrible at what they did, they didn't innovate, they didn't try to be more efficient, they were complacent and the Government encouraged that attitude.  

Maybe it is time to abandon both positions and be more flexible. The "Austrian" economists argued that Communism and all command economies would fail because the economy is too complex to understand well enough to control. I think they are right on this point, but it is possible to encourage and nudge the economy. Just as most countries have floated their currency, why don't we float tariffs? No one would notice a tariff of 1 or 2 percent, but they would if it was 5 or 10 percent. The argument is that tariffs hurt consumers, why not give the money made from the tariff to the consumer in their tax return? The aim of the tariff would be to protect Australian jobs. Companies should also have a floating tax rate, there would be a minimum rate of tax, say 20 percent and then a floating amount up to a maximum of say 40 percent. The amounts can change it is the idea that is important here. The floating amount would reward companies for 3 things, long term employment, new employees and low unemployment. While it might not be possible for many companies to get down to 20 percent, it sure would give an incentive.

I hope I get some comments on this one, good or bad. I know there are both Free Trade supporters and Protectionists who look in here so please if you have something to say please do so.


Upon Hope Blog - A Traditional Conservative Future

20 comments:

  1. The argument is that tariffs hurt consumers, why not give the money made from the tariff to the consumer in their tax return?

    Seems worth considering to me.

    ReplyDelete
  2. Free trade is a simple concept on paper. Everybody can trade with everybody, with no barriers in the form of tariffs, quotas, or other such measures. Free trade has long been the economic doctrine of individualist liberals and especially of those who dream of a borderless world in which loyalties to groups and conflicts between groups have been eliminated. Protectionism is more complicated. It differs depending upon what a country is protecting. A country could impose a general protective tariff on all imported goods but more often protectionism is imosed to protect specific commodities. In the original free trade battles in the UK, the Tory protectionists supported protection of agricultural commodities against the Whig free traders. The justification for this kind of protectionism is quite different from the justification for the protectionist system proposed by Alexander Hamilton in the United States and later enacted by the Republican governments of the late 19th Century. In that system it was manufactured goods that were protected and, interestingly, the large agricultural interests in the South tended to be free traders. People who are opposed to both liberal individualism and the erasing of national distinctions and absorption of the peoples of the world into one big superstate, as traditionalist conservatives tend to be, have reason to be suspicious of the idea of free trade. That means, however, that we have the difficult task of choosing what kind of protectionism to set against it for different arguments need to be developed for different kinds of protectionism. An economic nationalist position, in which a government decides on a case by case basis whether to impose protective tariffs of not based upon the national interest at the time has merit. The difficulty, of course, is that in a large country with a very diverse economy there is likely to be little agreement as to what is in the national interest to protect. This is when the much more simple free trade position looks most attractive.

    ReplyDelete
    Replies
    1. Dear Mr. Neal

      How would you respond to these arguments.

      That Protectionism is creating a false economy?

      If an industry can exist on it's own why does it need protection?

      If it needs protection, doesn't that mean that the industry is unviable?

      Mark Moncrieff

      Delete
    2. Dear Mr. Moncrieff,

      I apologize for the lateness of this response. I took a break from the internet over Christmas.

      To the first argument, that protection creates a false economy, I would respond by saying that it is questionable whether the concepts of "true" v. "false" economies are valid. The way they are usually defined, a "true" economy is what happens when each individual is free to negotiate his own terms of price with any other individual willing to trade with him. A "false" economy is one in which the outcome of the "true" economy is distorted by government legislation of some sort - price fixing, quotas, sales tax, tariffs, etc. This is a highly circular argument for laissez-faire, because it defines as "true" the laissez-faire economy, which therefore makes everything other than laissez-faire "false". Yet, in the history of the world, pure laissez-faire has almost never, if at all, been practiced. Surely, therefore, it is dubious to define the kind of economy that has only ever existed on paper as the "true" economy? A second part to my response would be to ask whether nations have economic interests or only individuals? If the latter is the case, if the only true economic interests are those of the individual who needs to make a living to the best that he can with his abilities and/or property, then a case can be made for pure laissez-faire. If, however, a community, society, or nation also has economic interests, such as an interest in having a domestic supply of a necessary commodity so as not to be dependent upon foreign sources in case of war or other emergency, then government has every right to take measures to protect the society's interests. If this is the case, clearly the economic interests of the society and the individual need to be balanced. Liberalism is correct, I believe, in asserting that governments are incompetant at looking out for the economic interests of individuals. I think it is fairly obvious that the majority of individuals are far more competant at looking after their own affairs than any administrative body could possibly be at looking out for the individual economic interests of millions, thousands, or even hundreds of people. It does not follow from this that government is incompetant at looking out for the collective economic interests of the nation. Indeed, here the opposite of liberalism can be asserted, that government is the only institution that could possibly look out for those interests. Since the interests of the society and the interests of the individual need to be balanced - it will not due to walk over the individual in the name of the society or to allow the society to suffer in the name of the individual, it would seem that the best policy is to have government look out for the interests of the society, individuals look out for their own interests. The difficulty is in keeping government, which is far more powerful than the individual, from walking over the individual's interests while allowing it the right to protect the interests of the society.

      As to the other two arguments, I would answer that I can see the possibility of an industry being both unviable and necessary - in which case it needs protection. Suppose, for example, that the production of steel was economically unviable in a country because it would always be cheaper for that country to import steel than to produce its own. If, however, the country is dependent upon steel for its basic industries and economy, it can be worth it to protect an unviable domestic steel industry, as protection against the possibility of foreign supply becoming insecure or unavailable.

      Gerry T. Neal

      Delete
    3. Mr. Neal

      You make a very good argument in regards to the charge of making a false economy. I must admit I had not seen that flaw in their argument before. But once you pointed it out it became clear.

      In your opinion does Protectionism need to be constant or can it change over time, for example giving protection to one sector and then over time take that protection away or must it be protected for all time once it has been granted protection?

      Mark Moncrieff

      Delete
    4. Mr. Moncrieff,

      In my opinion protection should change as the need for it changes. This can mean slowly weaning an industry that no longer needs protection off of it. It can also mean imposing protection when a new need arises where previously there was none.

      Gerry T. Neal

      Delete
  3. I take the free trade position. I would only say that protectionism is a typical example of the "broken window fallacy" - that you can't create wealth by destroying resources. The wealth that is wasted by consumers on paying higher prices in protected industries could be put to more productive and efficient use elsewhere in the economy. Protectionism also hurts those industries that rely on imported materials. So protectionism destroys jobs too, in ones and twos across the whole economy, when wealth is directed away from productive parts of the economy to the inefficient protected industries.

    It is about specialisation and the division of labour. It may be that economic reality means that Australia cannot be a net producer of cars or manufactured goods. Maybe. If so, no tariff wall, however high, will change that. We would be acually harming our economy to attempt to do so through tariffs and subsidies, by directing capital away from industries where it will be more efficient and create real, lasting employment (as opposed to artificially-sustained employment). We should be deregulating our economy, reducing taxes and non-wage labour costs, slashing red and green tape, freeing the energy market and generally removing burdens on business, as well as giving our youth a world-class education, to speed up the process of economic restructuring, to ensure the pain carries on for no longer than necessary.

    ReplyDelete
    Replies
    1. Dear Mr. Panther

      How would you respond to these argument?

      No country with Free Trade has full employment, why not?

      How can a First World country compete against Third World labour?

      How does a country with no little or no manufacturing base create wealth or permanent employment?

      Mark Moncrieff

      Delete
    2. No country with Free Trade has full employment, why not?

      Not true. I just went on Wikipedia and found out that one of the most free-trading countries in the world, Singapore, has an unemployment rate of 1.9%, and a GDP per capita of over $62,000. Switzerland, another highly free-trading nation (a member of EFTA no less), has an unemployment rate of 3.1%. I could also point to Hong Kong (3.3%). Incidentally, these three are all very free economies with minimal state intervention.

      How can a First World country compete against Third World labour?

      In some cases, we simply can't. But that's not the point. Free trade may kill jobs in the Australian domestic auto industry, but it frees up labour and capital to be directed into what we can do best (most profitably) compared to other countries. This is the economic principle of comparative advantage; it's too difficult to explain in a comment thread, but I've conveniently found a video that explains it well: http://www.youtube.com/watch?v=Vvfzaq72wd0

      Basically, if Australia specialises in what we can do most profitably (relative to other countries), rather than directing resources into industries where they will be consumed inefficiently, we will be wealthier for it. But free trade needs to be accompanied by wholesale liberalisation of the internal economy, like I mentioned in my above post, to attract investment and relieve burdens on business growth.

      How does a country with no little or no manufacturing base create wealth or permanent employment?

      Like I said above, even if Australia can't make cars or DVDs or textiles as profitably as China, we necessarily have a comparative advantage over China in other industries or even in manufacturing work requiring the education or skills advantage that Australians have over Chinese, and we will be richer for it rather than kidding ourselves that we can stave off Chinese supremacy in car-making (or whatever) by wasting resources in an unviable industry.

      In any case, I think we are going to see a revolution in manufacturing that will render the threat of low-wage labout moot, in the form of 3-D printing. The technology is only in its infancy, but the people who write in the finance and business pages are very excited about it, because it could mean that one day every household could be its own manufacturer, its own factory, by owning a 3-D printer. I would definitely keep an eye on 3-D printing to see what happens.

      Delete
    3. Mr. Panther

      You've made some good points, but I still have concerns.

      Full employment, I'm afraid I didn't define myself properly. When I was growing up people talked about how much better it was during the 1950's, 60's and even the 70's compared to the 1980's and 90's. One reason was full employment and to them it meant that if you wanted a job you could get one. Maybe not every month but most months. Today Full Employment is defined as below 4%. That means that Australia can have Full employment and still have more than 400,000 unemployed, clearly that ridiculous

      Comparative Advantage Theory says Australia is good at growing food and mining, no arguments there. But neither industry needs many workers. So the rest of the economy is the service industry. I do wonder if this is really an efficient economy?

      Maybe I'm too timid but 3D printers would really transform the economy, I see alot of problems with that.

      Mark Moncrieff


      Delete
    4. I think most economists define full employment as under 3% unemployment. Back in the '50s and '60s, the so-called Golden Age of Capitalism, unemployment averaged around 2%. Needless to say that it's unreasonable to expect 0% unemployment all the time, the "creative destruction" of the market economy means there is always at least some unemployment, and the manic-depressive cycle of perpetual boom and bust is obviously damaging to long-term employment (which is a completely different issue altogether). But like I said, the capitalist country with the lowest unemployment - Singapore - also happens to be most free-trading, so free trade doesn't necessarily have to mean sacrificing the possibility of high or full employment.

      Whatever helps grow our economy and bring money into the country works. Mining, making things and growing food and livestock are more manly industries than services, but if services is more profitable for Australia, who are we to complain. But I don't think a services-heavy economy is necessarily a foregone conclusion ... I can't go into too much detail here, so I might actually do a post on the topic when I can post again.

      Delete
    5. Mr. Panther

      I look forward to your post!

      However I would like to point out that in 1950's and 1960's long term unemployment was termed as being of 3 months or longer. Today long term unemployment is regarded as 12 months. 3 months unemployment isn't so bad, 12 months and longer is hard going.

      So it is not just the unemployment rate but the length of unemployment, something rarely discussed now days as Governments find it too embarrassing.

      Mark Moncrieff

      Delete
  4. "but it frees up labour and capital to be directed into what we can do best (most profitably) compared to other countries."

    That sounds great in theory. The problem is that the Third World can do everything cheaper than we can. Note that I didn't say better, just cheaper. So now almost everything we buy is made in countries like China. The stuff is rubbish but it's dirt cheap. Manufacturers who make high quality goods are destroyed by imports of cheap but shoddy goods.

    ReplyDelete
  5. Dear Mr. Doom

    You are so correct and by the time we figure it out the quality manufacturers have gone out of business and we are left with only the cheap inferior Third World product.

    Mark Moncrieff

    ReplyDelete
  6. A bit late to the party, I suppose, but it seems to me Protectionism is least effective, and most ridiculous, when talking about the primary sector of the economy. The fact of the matter is that every country has limited natural resources, and so not trading to make up for natural deficiencies only harms people. This is why the Corn Laws in Britain were a disaster.

    On the other hand, for the secondary and tertiary sectors of the economy, protection can be much more effective and useful when targeted. When looking at economic history since the Industrial Revolution, countries that chose a few industries for special protection often end up being the leader of those industries. Also, it is hard for countries to get up off the ground in industry without protection. Using protectionism in these targeted manners can be useful for the country, so long as it doesn't go overboard.

    ReplyDelete
  7. Dear Nate

    Better late then never!

    I had to go away and think about what you wrote. In general I think your correct. But when it comes to specifics, it gets more complex.

    Each country has it's own supply of natural resources and agricultural resources. Different countries may want to allow access to their resources differently. But your argument treats each country the same, when there respective resources are different. Surely it is up to each country to determine whether someone is freely traded or restricted.

    Mark Moncrieff

    ReplyDelete
  8. "Better late then never!"

    I hope it still hold true. Considering you put this post in highlist on the sidebar and the current debate on protectionism versus free trade in the news; I hope my comment will be relevant. We share similar view and I wonder if you know/what you think of Ian Fletcher argument against comparative advantage theory (which was posted previously in the comment). Many links, sorry, but I think they deal well with all the question which have been asked.

    His explantion of Ricardo theory of comparative advantage : http://www.huffingtonpost.com/ian-fletcher/the-famous-and-almost-nev_b_845930.html

    His refutation of the theory : http://www.huffingtonpost.com/ian-fletcher/the-theory-thats-killing-_b_846452.html

    Hs treatment of trade deficit : http://www.huffingtonpost.com/ian-fletcher/americas-trade-deficit-is_b_823785.html

    He also deal with the historical cases :

    UK protectionism in the 15th-117th century : http://www.huffingtonpost.com/ian-fletcher/in-praise-of-mercantilism_b_828555.html

    US protectionism : http://www.huffingtonpost.com/ian-fletcher/america-was-founded-as-a_b_713521.html

    US and UK free trade history and results : http://www.huffingtonpost.com/ian-fletcher/america-aping-britains-hi_b_735967.html

    ReplyDelete
    Replies
    1. Dear Killyedfael

      Welcome to the party!

      I had never heard of Ian Fletcher before you posted your links. I went away and read all of the articles and I have to say I think he's right.

      Although I do think countries with roughly similar standards of living can have Free Trade. I do not know his opinion on that.

      Thank you for the links, I will have to keep an eye on him.

      Mark Moncrieff

      Delete
  9. I think it is an interesting question which made me think deeper about protectionism.

    The (boring) economics side would be : look at the whole : similar degree of industrialization, industrial policies, regulation (de facto or by design trade barrier), ease of doing business, the character of the people. Given that if they have similar living standard it should be fairly close.

    More interesting is if we look at how USA manage the differences within itself. USA succeed to have the legitimacy and power to help (with or without succes) its poor region. Belgium is relatively paralized in its French/Flemish economics differences.

    But there were strong regional (city?) differences in the past. I remember defense of regional protectionism. I defend subsidiarity. Protectionism might have a place in such protection. Or it might be replaced by other tools. (tariff, subsidies, or other tools to help local food, local architecture with local material, adapted to local culture, weather, people or just to create a local character, to be different).

    I think the answer lies in the balance between universal and particular. Between unity and diversity. Some things need to be similar. Some differences need to be protected and nourish.

    http://www.traditioninaction.org/OrganicSociety/A_029_ClosedEconomy.html

    ReplyDelete
  10. I would like to add my 2 cents. To understand supporters of free trade, one must understand the theory of comparative advantages.
    Lets say country A can produce an apple for 1$, and a chicken for 2$. Country B can produce an apple for 3$ and a chicken for 4$. On first sight it seems country B has no hope, right? Whatever it produces it will not sell to country A, there is no possible competition. But, here's the "trick": country B should produce that item that has a comparative advantage relative to country A: since contry B produces Apples at 3 times the price of country A, and chicken at only 2, it should produce chickens and sell them for 2$. Apparently it will get a loss, but with those 2$ it can buy 2 apples, while with the 4$ of its internal price it would get only 1 + 1/3 of an apple. The end result will be, for country B, more apples than what it would get alone. Yeah for free trade!!!

    Except, thats the theory. And in practice, it doesnt work. Chicken producers in country B will get out of business immediately even if they existed, because country A is, without tariffs, selling both apples and chickens there already - and in return wants, maybe, gold or oil or whatever. This reality is why free trade between advanced countries and poor countries can destroy the latter: they cant compete, so beside selling their natural resources they are screwed with free trade. We see that in Africa. Of course, since it is a logical consequence and not ideology, it also works perfectly AGAINST rich countries when they are the ones with a disadvantage - for example, in low tech products from china. China wants to sell all the products it has an advantage on, the more the better, while will buy only a limited number of products from the west.

    What is the lesson to take from this mess? Maybe i could have explained it better, but if one understood the reality behind the pretty fairytale of the comparative advvantage theory, the truth become obvious: its all about your competitiveness. If your industries are competitive you promote free trade because you will have a surplus. If they are not, you better raise tariffs or you will suffer a deficit. So, free trade or protectionism can be the right choice depending on your industries. On a national scale, of course, there are different industries - some are competitive and sell, others would get crushed. In that point, you get an idea of your general situation out of your trade balance: if it is positive, more free trade. If its not, tariffs, to be raised until there is at least a balance.

    ReplyDelete