Thursday, 16 February 2017

25 reasons why economic protectionism is taken seriously when it's actually a form of economic suicide

 

Guest poster Mark Perry takes on the idiotic movement worldwide to make people poorer by ‘protecting’ them from foreign goods.

It’s a scientifically and mathematically provable fact that all tariffs, at any time and in any country, will harm economic growth, eliminate net jobs, destroy prosperity, and lower the standard of living of the protectionist country because tariffs are guaranteed by the ironclad laws of economics to generate costs to consumers that outweigh the benefits to producers, i.e. tariffs will always impose deadweight losses on the protectionist country (see the diagram here, and “An economic analysis of protectionism clearly shows that Trump’s tariffs would make us poorer, not greater”). That is, the reality that tariffs always inflict great economic damage and leave society worse off is not a debatable outcome, rather it’s a provable fact, like the law of gravity.

Protectionism2But there’s more! There is also no shortage at all of empirical evidence showing that protectionism and tariffs always generate costs to consumers that are far in excess of the benefits to producers (i.e. deadweight costs) see my blog posts here, here and here.

The Justification

So why is protectionism being taken so seriously, and given so much credibility, when it’s actually a job-destroying, prosperity-destroying form of economic suicide and an economic death wish? Protectionism will not make America great again, or anywhere at all great.

Here are my top 25 reasons that explain why protectionism is taken so seriously, despite the fact that it’s guaranteed to impoverish people and destroy jobs. It’s very much a case of the seen and the unseen:

  1. The false belief that trade is a zero-sum game (win-lose), when in fact it’s win-win.
  2. The costs of protectionism to consumers are mostly hidden.
  3. The benefits of protectionism to producers are easily identifiable and visible.
  4. The jobs saved by protectionism are observable and visible.
  5. The jobs lost from protectionism are not easily observable or visible.
  6. The benefits of protectionism to individual producers are very high (e.g. $300,000 annual increase in revenues per sugar farm from trade barriers for foreign sugar).
  7. The costs of protectionism to individual consumers is very low (e.g. $5-10 per year in higher sugar prices per person due to sugar tariffs), although the costs in the aggregate of protectionism are very high.
  8. The costs of protectionism to consumers are delayed over many years.
  9. The benefits of protectionism to producers are immediate.
  10. Producers seeking the benefits of protectionism are concentrated and well-organized.
  11. Consumers paying the costs of protectionism are dispersed and disorganized.
  12. There is a huge political payoff to politicians from protectionism in the form of votes, political support, and financial contributions from protected domestic firms and industries.
  13. There is a huge political cost to politicians who attempt to remove or lower trade barriers in the form of lost votes, support and financial contributions from previously protected domestic producers.
  14. The pathological, but false obsession that exports are good.
  15. The pathological, but false obsession that imports are bad.
  16. The fact that most workers work for a company producing a single product or group of similar products (e.g. cars, steel, textiles, appliances) and are therefore favourably disposed to supporting protectionist trade policies that benefit their employer and industry.
  17. The fact that consumers purchase hundreds, if not thousands of individual products, goods and services, and are therefore unlikely to be fully aware of the negative effects of protectionism or be motivated to fight protectionism.
  18. Many people think that exporting their country’s products is patriotic.
  19. Many people think that importing foreign products is unpatriotic.
  20. The false belief that trade deficits are a sign of economic weakness.
  21. The false belief that trade surpluses are a sign of economic strength.
  22. The fact that protectionism is guaranteed to create economic deadweight losses is not easily understood, nor are those losses easily observable or measurable.
  23. The general lack of economic literacy among the general public.
  24. The general lack of economic literacy among politicians, or their intentional disregard for the economics of protectionism in favour of enacting public policies that help them get re-elected.
  25. The failure to recognise that most imports are inputs purchased by local firms that allow them to be as competitive as possible when selling their outputs in global markets.

Bottom Line

Protectionism1Taken together, the 25 reasons above help us understand the popularity of protectionism, despite the fact that it’s guaranteed to inflict great economic harm. Protectionism is popular primarily not for economic reasons, but for political reasons. To paraphrase Thomas Sowell, the first lesson of international economics is that free trade makes us better off and protectionism makes us worse off.

The first lesson of politics when it comes to international trade however is to ignore the first lesson of international economics, and impose protectionist trade policies when they further the political interests of short-sighted elected officials. When politicians can count on the economic illiteracy of the general public and their blind patriotism to “Buy American,” the political payoffs from protectionism are too tempting to ignore despite the reality that it’s a form of economic suicide.

And because the benefits of tariffs to producers (and jobs created or saved) are concentrated, immediate and visible, while the costs to consumers (and jobs lost) are diffused, delayed and invisible, it’s pretty easy to understand why protectionism is popular, even though the economic costs far outweigh the economic benefits (i.e. deadweight losses result) and it’s therefore ultimately a form of self-inflicted economic poison.

8 comments:


  1. .. and do these prognostications factor in potential savings to be had by the simplification of tax systems, reductions in welfare payments etc?

    ReplyDelete
  2. Has Vanuatu committed economic suicide?

    ReplyDelete
  3. "It’s a scientifically and mathematically provable fact that all tariffs, AT ANY TIME AND IN ANY COUNTRY, will harm economic growth..." (caps mine)

    1/ So, have import tariffs hurt the economy of Vanuatu?

    2/ Don't any mutual benefits depend on the degree to which the trade is "free"?

    3/ Is it possible that 12000 pages of rules (as in the TPPA)might contaminate this theoretical purity of "trade"?

    4/ Doesn't mutually beneficial trade require a comparative advantage for both parties?

    Will the moderator delete this comment as well? :)

    Tim

    ReplyDelete
  4. We're all going to die a terrible death from ignoring the bible .

    ReplyDelete
  5. We're all going to die a terrible death from ignoring the bible .

    ReplyDelete
  6. Ah, Vanuatu. I love the place, especially Santo. I'm not sure that you can apply this debate to Vanuatu in the same way that you can attempt to apply it to NZ as they are early in a development cycle. Liberterian theory may try a one size fits all approach but I'm not sure that works unless everything its being applied to is consistent. Vanuatu offers enough of what I like to remain tempting irrespective of its local rules. That won't be the case for everyone but that's life.

    3:16

    ReplyDelete
  7. South Korea run a protectionist economy from the time it was the poorest country in the world (1960) pretty much through with its GDP per capita has overtaken NZ.

    There are no absolutes with human action a libertarian should know that. Chung-hee Park knew that at least.

    ReplyDelete

1. Commenters are welcome and invited.
2. All comments are moderated. Off-topic grandstanding, spam, and gibberish will be ignored. Tu quoque will be moderated.
3. Read the post before you comment. Challenge facts, but don't simply ignore them.
4. Use a name. If it's important enough to say, it's important enough to put a name to.
5. Above all: Act with honour. Say what you mean, and mean what you say.