Nov 17 2008

A call FOR protectionism!

FT.com | The Economists’ Forum | The case for forward-looking protectionism in the US

Free trade is an ideal. This is a theme of my IB Economics class which I emphasize repeatedly during year two of the course. Free trade, defined as the exchange of goods, services, resources, and financial assets based on the principle of comparative advantage, results in a more efficient allocation of the world’s resources, an increase in total world output and welfare, and increases the opportunity for growth and development for all countries that prescribe to its principles. This is the ideal, at least.

In the real world, free trade is rarely practiced. Free trade agreements between nations represent managed trade; the selected removal of protections such as tariffs, quotas and subsidies on the exchange of particular goods does not represent free trade, rather managed trade. The problem with free trade in the real world is simply that it has never been truly practiced, therefore the adjustments that both developed and developing countries would have to undergo to adopt widespread free trade would be extremely disruptive both economically and socially. Entire industries would disappear from the developed countries as manufacturing resources were reallocated to low cost countries. Poor countries trying to build their manufacturing industries would lose any competitive advantage offered by protectionism, forcing their “infant industries” to wither and die in the face of global competition from countries that long ago achieved economies of scale in manufacturing. Farmers used to heavy subsidies would see their livelihoods disappear as the world’s food would be sourced from the countries with true comparative advantages in agriculture. Simply stated, the social costs of the widespread adoption of free trade are not politically palatable, thus leaders have only hesitantly pursued this ideal on the world stage.

For decades, America has stood for the ideal of free trade, proselytizing its advantages and urging developing countries to reduce or remove their barriers to the free flow of resources and goods from nation to nation. Today, however, the United States faces the very fate free trade prophesized as its own automobile industries teeters on the edge of collapse. As many as 3 million American jobs stand to be lost if the auto industry goes under. Today, America faces the ultimate test of its will to stand for and defend free trade in the world. Should America erect new barriers to trade, bail out its auto industry, and save this dying sector from collapse to avoid the political hardships its death would incur? Or should America stand for the ideal of market liberalization and allow the auto industry to disolve as the principle of comparative advantage indicates it should?

The question is dire, and it’s one that Barack Obama will be forced to address early in his term as president. Cambridge economcis professor Ha-Joon Chang argues the case for protectionism by America in this time of economic turmoil:

Mr Obama’s trade policy… is already causing controversy. He has vowed to protect American jobs and even argued for re-negotiating the NAFTA. There is already some hand wringing among free-trade economists, worrying that his protectionist policies may destroy the world trading system in the same way the infamous Smoot-Hawley Tariffs of 1930 did after the Great Depression. They counsel that the US should maintain its historical commitment to free trade.

However, contrary to what most people think, the US is the true home of protectionism. Between the 1830s and the 1940s, against superior European competition, the US developed its industries behind literally the highest tariff wall in the world, with the average industrial tariff rate ranging between 35% and 55%. Even the Smoot-Hawley Tariffs were not an aberration – the average US industrial tariff in 1931 was, at 48%, well within the historical range.

Moreover, the theory that justified such protectionism, namely, the ‘infant industry’ argument, had been first developed by none other than the first Treasury Secretary of the US – Alexander Hamilton (that’s the guy you see on the $10 bill). Hamilton argued that producers in relatively backward economies needed to be protected and nurtured through tariffs, subsidies, and other government policies before they mature and can compete with producers from more economically developed countries.

Of course, the protectionism that Mr Obama is advocating is protection to ease the adjustment of mature industries, rather than to promote infant industries. The case for such protectionism is not as overwhelming as that of infant industry protection. However, well-designed and time-bound protection of mature industries can facilitate, rather than hinder, trade adjustment and industrial upgrading. Japan and some European countries in the aftermath of the 1970s Oil Shocks come to mind.

Mr Obama should use protectionism in a similarly forward-looking way. Industries that can be revived through re-tooling of its factories and re-training of its workers should be given protection, but only if they fulfill certain conditions regarding investment and training. Industries that have no future should be given strictly temporary protection to ease phasing-out through orderly liquidation and redundancy.

…Keeping its market open is not enough for the US to play a genuinely positive role in the world trading system. The US should also stop pushing for trade liberalization in developing countries and give them the chance to use (intelligently-designed, of course) infant industry protection, which it invented and benefited so much from. Mr Obama should take a lead in creating a world trading system that allows asymmetric protectionism between the rich countries and the poor countries, with the latter protecting their markets more and gradually opening up in line with their economic development.

All these call for a much more activist role for the US government than it has been the norm. Providing protectionism to facilitate structural changes, and not just to protect existing jobs, would require a much closer coordination between trade policy and those policies to upgrade American industries, such as R&D support and worker training. Redesigning the welfare state as a vehicle to promote skills upgrading and labor mobility would push the US government into an uncharted territory.

These are big challenges. However, the US cannot continue its peculiar mixture of free-trade mythology and uncoordinated, ‘reactive’ protectionism that has served ordinary Americans and the developing nations so poorly.

Mr Obama has turned a new chapter in US history by becoming the country’s first Afro-American president. He will turn a new chapter in world history if he can come up with a forward-looking protectionist strategy that that both protects American jobs better in the long run and help developing countries develop faster.

Discussion Questions:

  1. What is the difference between the protectionism America needs today and the protectionism it used in the late 19th and early 20th centuries?
  2. How could protectionism be used responsibly by developing countries to promote economic growth and development?
  3. Professor Chang argues that responsible protectionism should allow industries with no future to be phased out “through orderly liquidation and redundancy”. What does he mean by this and why is such a policy so hard to accomplish politically?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

113 responses so far

113 Responses to “A call FOR protectionism!”

  1. Talia Greeneon 25 Oct 2011 at 11:13 pm

    1. When America was developing, its protectionist policies were aimed towards allowing its industries to develop – this was “infant industry” protectionism. Now, those already developed industries need further protection so they can advance to be able to compete with other countries. The protectionist policies are aimed at allowing this, not allowing new industries to develop.

    2. The countries could use protectionism to allow new industries to grow and catch up with the rest of the world. As these industries become more developed and competitive, they could lower the amount of protection.

    3. He means that they should be provided with protection and policies that would allow the industries to slowly decline, as opposed to an immediate collapse. This would facilitate the transfer of the industries’ workers into the rest of the economy. It is politically difficult as it means admitting that some industries will fail and some unemployment is inevitable.

  2. Talia Greeneon 25 Oct 2011 at 11:16 pm

    @ jcuervo

    I disagree with your answer to the third question. I think he means that dying industries should not be protected, as they will not be able to compete. He says that industries that are already developed and only need adjusting to be competitive should be protected, but mature industries that will not be able to compete even with a period of protection to adjust should be allowed to end in an orderly fashion.

  3. Ccolbergon 25 Oct 2011 at 11:20 pm

    1. In the late 19th and early 20th centuries, America had extremely high tariffs ranging from 35% to 55%. The theory that justified this protectionism was to protect “infant industries”. This argument is that infant industries need to be protected through tariffs, subsidies, and quotas so that they can grow and thus compete on an international scale. In contrast, the protectionism needed for today is for mature industries. Protectionism is needed to re-energize and revive mature industries.

    2. Developing countries should be able to use protectionism to protect infant industries, like the US did a century ago. This would allow these infant industries to grow and in the end would benefit everyone.

    3. He means that industries that have no future and really cannot be saved should get temporary protection so that when they are eventually abolished it is easier on everyone. This is so hard to accomplish politically because this will lead to a large loss of jobs and will leave many people unemployed. No politician wants to have to deal with this, and so this would not be a popular move for any politician.

  4. Ccolbergon 25 Oct 2011 at 11:23 pm

    @Dogan Ozcan

    I think you had some interesting answers but I think for question 2 you should look at more specifically developing countries as the question asks.

  5. Cleon 26 Oct 2011 at 12:19 am

    What is the difference between the protectionism America needs today and the protectionism it used in the late 19th and early 20th centuries?

    The protectionism used in the 1930s and the 1940s was created amid the great depression, when the production of the country was at a low point. The Agricultural Industry was severely crippled. The us needed to create jobs within the domestic markets at any price. Now, the us is not encountering the same issues, yes the american economy is less than yeasty, but it is great compared to what it was like in the 1930's. The US no longer needs that high tariff barrier that it once needed.

    How could protectionism be used responsibly by developing countries to promote economic growth and development?

    It could use protectionism to slowly phase out failing markets, instead of artificially sustaining those markets. Which is bad for the domestic economy in the long run.

    Professor Chang argues that responsible protectionism should allow industries with no future to be phased out “through orderly liquidation and redundancy”. What does he mean by this and why is such a policy so hard to accomplish politically?

    it is difficult to accomplish politically because politicians are always trying to create jobs, not to loose them. And because the negative repercussions of this policy would be evident much more than the benefits from this policy, its especially bad for political re-election.

  6. abredeeon 05 Dec 2011 at 12:06 am

    I agree with your second argument but it also has the benefit of protecting infant industries.

  7. Cleon 26 Oct 2011 at 12:24 am

    # jcuervo

    i agree with your answer to the second question, but am wondering about the extent to which protectionism should be establish, once protectionism ceases, wont this practice destroy the developing market anyway?

  8. HEppleron 26 Oct 2011 at 4:05 am

    @ Caroline Mooney I agree with your response to the first question. I feel that if the industry is mature and unable to compete then there is no comparative advantage and resources could be used in a better manner.

  9. Merve Akpinaron 28 Oct 2011 at 8:19 pm

    What is the difference between the protectionism America needs today and the protectionism it used in the late 19th and early 20th centuries?

    When we look at the America in 19th and early 20th centuries we may not see a super power which captains world. We may see a country which tries to establish its economy and a new system. That is why their protectionism was a struggle for being super power. However today America is a super power and their protectionism is to stay as a super power.

    How could protectionism be used responsibly by developing countries to promote economic growth and development?

    The infant industry argument is a way to protect new industries from foreign competition until they are large enough to compete in international trade. So, it is a perfect system for developing country. It gives a chance to new companies to make them developed.

    Professor Chang argues that responsible protectionism should allow industries with no future to be phased out “through orderly liquidation and redundancy”. What does he mean by this and why is such a policy so hard to accomplish politically?

    Professor Chang argues that responsible protectionism should allow industries with no future to be phased out “through orderly liquidation and redundancy”. It means that the industries which have no future can be easily driven a competitor out of business. But that is hard to apply because a lot of will be unemployed. Apart from these it will be successful policy in long run.

  10. Merve Akpinaron 28 Oct 2011 at 8:22 pm

    @Cle

    Hi Cle I liked your interpretation about the first question since you have mentioned the great depression. I want to ask a question about the Wall Street Crash: does it also affect the policy in that time?

  11. Suyeon Soon 19 Nov 2011 at 5:02 pm

    1. As it is clearly stated in the article, in the late 19th and early 20th centuries, America was not a developed nation as it does right now, so it used protectionism to protect its ‘infant industries’ from ‘superior European goods.’ But in nowadays, America uses protectionism to keep superior position in the domestic market by excluding cheap foreign goods from the market.

    2.In developing countries, protectionism helps a lot to protect infant industries from foreign goods that has comparative advantage. Since developing nations don’t have adequate infrastructure, industry, and resources compare to developed nations, their cost of production is much higher and the quality of goods is lower. For example, to produce clothes in Africa almost all the works would be done by hands, the quality of goods will be low, and the production won’t be that good. However, in America, since they use machines to produce clothes, massive amounts of clothes would be produced and the quality would be much better than that of clothes produced in Africa. In this situation, if two clothes compete in the market, it is obvious that African goods won’t success. Therefore, by using barriers like tariff and quota, developing nation limits amount of imports so it can earn time to develop and protect its industries.

    3. Limiting protectionism gradually will stimulate reclining businesses to go back to the right track because it motivates those businesses to invest and improve by increasing competition in the market gradually. It is obvious that if barriers are removed at once, those industries will not be able to survive in the competition. Therefore, by gradually removing barriers, those industries can have time to modernize. However, it will be hard to do this politically due to its cost. It is obvious that unemployment will increase due to increased competition and lost of market share. This makes politicians look bad and might affect next election. Therefore, although it is really effective way to revive reclining industries, it is hard to think that politicians will promote this policy.

  12. Suyeon Soon 19 Nov 2011 at 5:05 pm

    @Dilan
    I agree with most of your views in your comments. Especially for third comment, I think your explanation of competition and survival of industry is really interesting.

  13. abredeeon 05 Dec 2011 at 12:04 am

    1.) What is the difference between the protectionism America needs today and the protectionism it used in the late 19th and early 20th centuries?

    The protectionism the US needs now is very different from what it needed in the late 19th, and early 20th century. Back in history most of USA´s industries were infant industries and needed to be protected. However, nowadays that there industries are well established protectionist measures protect the workers of the industries.

    2.) How could protectionism be used responsibly by developing countries to promote economic growth and development?

    Protectionism can protect infant industries and help countries to grow and develop economically. This is particularly important in a world where some countries are more developed than others and have advantages in production due to economies of scale for instance. The US exemplifies how a country can move from developing to developed by using protectionist measures.

    3.) Professor Chang argues that responsible protectionism should allow industries with no future to be phased out “through orderly liquidation and redundancy”. What does he mean by this and why is such a policy so hard to accomplish politically?
    If comparative advantage has moved on implementing protectionist measures may be disadvantageous to the economy in the long term. Professor Chang argues that industries with no more comparative advantage should be left to slowly die, but protectionist measures should be taken in the short run to create less of a shock in unemployment. This is hard to accomplish politically because many people( workers, industries) do not want the industry to die out at all and thus the politicians would be moving against the public.