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Protectionism in the Modern Era

Protectionism in the Modern Era

There is, and always has been, a consensus among economists that free trade is the best policy, and for much of the latter half of the 20th century, the American public has agreed. The post-Great Depression world had supposedly learned from its mistakes through the misguided policies of the 1930s. Protectionism, even if intended to shield a country from the economic plights of others, had in reality plunged the globe into deeper poverty. Of course, pockets of protectionism have existed throughout the years, but the idea was never mainstream. That is, not until the 2016 presidential race, when candidates from both the left and right had begun preaching limits to international trade and were met with intense passion from the public. If the economic profession agrees that protectionism does not and has never worked, why have the public decided to back protectionism once again?

The economists' perspective

Principally, protectionism is the belief that a country as a whole is harmed by international trade and is helped by barriers to trade. Accordingly, every economy possesses four important components when analyzing the merits of free trade. First, a country will have a relatively abundant amount of resources with which they are more naturally endowed, relative to any trade partner, like capital, high-skilled labor, low-skilled labor, land, etc. Conversely, a country will also have a relatively non-abundant amount of resources, which are not necessarily plenty in that country. Here, think of high-skilled labor in poorer countries, where there is less access to quality education. Third, countries will have industries in which they have comparative advantage in production against a trade partner, meaning it is easier for them to produce a certain good. For example, according to Frank Wolak, the US has a comparative advantage in sustainable technologies. And fourth, countries will non-comparative advantage industries in which it is more difficult for them to produce a different good.

When cross-examining resources and industries, economists agree that most resource owners and most industries end up more prosperous after free trade. Trade barriers, i.e. quotas and tariffs, cause a deadweight loss, a cost to society created by market inefficiency, borne by everyone in the economy. Protectionism is supported by those who lose from trade only in the short run, namely both relatively abundant and relatively non-abundant resource owners in non-comparative advantage industries. Breaking this down even further, relatively non-abundant resource owners are generally not wealthy enough as a group to lobby for trade protection laws. An example in the U.S. is low-skilled labor, such as factory workers. This sector of the economy found its protectionist voice in the 2016 presidential candidates rather than in representatives in Congress. Hence, the protectionism lobby lies primarily with the relatively abundant resource owners in non-comparative advantage industries. The decline of the manufacturing industry which led to the shut down factory buildings, a permanent loss for capital owners, is an example of the latter kind of resource owners. Generally speaking, factory owners will tend to be rich individuals or companies with much bigger wallets to spend on lobbying than factory workers.

Protectionism: a history, 1922-present

Congress under Republican control in the 1920s passed several protectionist laws aimed at defending American farmers. These farmers had seen a boom during World War I in exports to Europe but were experiencing a loss as Europeans recovered after the war. One of the laws, the Fordney-McCumber Tariff Act of 1922, raised tariffs to higher than pre-1913 levels, when a Democrat controlled Congress attempted to reverse the protectionist policies in place.

The rest of the decade proved more prosperous for the agriculture sector than expected, leading to gross overproduction and falling prices. The stock market crash of 1929 spread fears among policymakers and public alike that if America were to not protect its own economic interests, it would sink further into recession. Global trade fell 60% from 1929 to 1932, and the infamous Smoot-Tawley Tariff Act in 1930 was passed. Originally designed to provide further relief for farmers, the act resulted in tariffs on twenty thousand other imports. Economists of the time petitioned the president to veto the bill, saying, “Countries cannot permanently buy from us unless they are permitted to sell to us. And the more we restrict the importation of goods from them by means of even higher tariffs the more we reduce the possibility of our exporting to them.”

Democrats recaptured the House of Representatives in 1930 after protectionism had failed to fulfill its promises, and in 1932, Democrat Franklin Roosevelt was elected president. Together, the Democratic party implemented policies that lowered tariff rates to historic lows. They would stay at those lows for many decades, through World War II, much of the Cold War, and presidential administrations of both parties.

Ronald Reagan’s administration saw a modestly burgeoning belief in protectionism propped up by increasing imports from Asia, and hundreds of bills protecting American industries in electronics, appliances, textiles, clothing, toys, and automobiles were introduced to protect American job loss. In particular, automakers and auto-workers worked together to seek trade protectionism from Japanese car imports. Reagan favored voluntary quota restrictions, but this unexpectedly led Japanese carmakers to export large luxury cars to capture the higher end of the market. This led to those same manufacturers to move their factories to the U.S., legally dodging quotas and permanently crowding the car market for American manufacturers.

The end of the 1980s and 1990s saw a rise in free trade agreements, such as the Canada-U.S. Free Trade Agreement in 1987 and North American Free Trade Agreement (NAFTA) in 1994. These agreements were championed by Democrats attempting to capture moderate voters and Republicans dedicated to reducing barriers to commerce. Consequently, free trade had become an essential feature of 20th century American politics.

Protectionism: 21st Century

One great issue of the protectionist debate of 2016 is the abundance of misleading rhetoric that exists in evaluations of globalization and international trade. For example, Thom Hartmann in the Huffington Post concluded that “globalization is the villain here, and one that needs to be taken in hand and brought under control quickly if we don’t want to see virtually the nations of the world end up subservient to corporate control.” He floated numbers around on manufacturing, highlighting that in the 1950s, manufacturing accounted for 28% of GDP and has declined to a measly 10% in 2010. He argued a viewpoint that less manufacturing meant there was also less wealth creation. Hartmann is not technically wrong. However, his argument would have been more legitimate had he not used the definition of wealth derived from Adam Smith’s the Wealth of Nations and ignored the rest of Smith’s writing on international trade: it was positive sum and importing goods was always beneficial to the importing and exporting countries. Hartmann chose his evidence selectively and blatantly ignored evidence in the same text of the opposing view to mislead his readers. And because the Wealth of Nations may not be a mainstream read for Huffington Post’s audience, readers will proceed to take the article at face value and absorb his bias unwittingly.

A study by the Pew Research Center in 2012 began its report with, “Since 2000, the middle class has shrunk in size, fallen backward in income and wealth, and shed some—but by no means all—of its characteristic faith in the future.” That study also showed that 85% of middle-class adults said it was more difficult to maintain their standard of living today than a decade ago, and 39% people blamed foreign competition. But from what information did this 39% found their distaste?

Misinformation has generated misunderstanding for the average American about who they are competing against. Economists agree that it is not trade and foreign competition but technology that has taken much of the jobs from American workers. Productivity in the 21st century has skyrocketed to new levels: self-checkout kiosks have replaced cashiers, automated machinery can now do the work of dozens of factory workers, and the Internet has made entire industries, like travel agencies and bookmakers, obsolete in less than two decades. Former CEO of McDonald’s USA Ed Rensi admitted to Fox Business Network, “If you look at the robotic devices that are coming into the restaurant industry, it's cheaper to buy a $35,000 robotic arm than it is to hire an employee who's inefficient (and) making $15 an hour bagging french fries." But workers in America are not the only ones losing out to robots. In May, Foxconn Technology, a supplier for Apple and Samsung, replaced around 60,000 workers with robots in one factory in China alone. In the end, Rosenthal highlights that “many economists are skeptical that politicians, regardless of party affiliation, can accelerate what's already going on through changes to tariffs, trade pacts and such,” reiterating that protectionism is not the answer to the job loss the world’s low-skilled labor is experiencing. Trade barriers will have little to say about technological leaps forward but will also still hurt companies and countries that rely on cheaper labor to operate and survive.

Globalization, admittedly, has relocated certain jobs abroad, but not at the extent in which Bernie Sanders and Donald Trump suggested in their presidential campaigns. Major emerging markets now produce historically U.S.-dominated goods and did take incomes out of the pockets of some middle class Americans. The result included jobs shifting towards industries that were growing more slowly than others creating the infamous income and employment inequality Sanders preached. There were more opportunities for high-skilled workers and fewer for low-skilled workers leading to the stagnation in middle-class income.

The key here that economists cannot stress enough are side payments, a kind of reimbursement the government can provide to workers and capital owners in industries (the non-comparative advantage industries mentioned earlier) that lose in trade. One type of government program that rarely sees media spotlight are education programs, which allow low-skilled laborers to have the ability to transform themselves into high-skilled laborers, keeping them competitive in the high-skilled labor market of a developed economy. Another program that exists but also has little media pizzazz is the Earned Income Tax Credit, a program in which the government provides a tax credit if an individual’s income falls below a certain level. But the individual must continue working to be eligible for the program. This allows employment to stay afloat but also prevents individuals from resorting to social welfare and keeps the overall market wage low.

Despite these promising programs, the media and politicians are always in need of a political soundbite. Education programs and tax credits do not strike as much of an emotional chord as protectionism does with the middle class. The word “protect” makes them feel less forgotten but that is still not the reality of the policy. It will not protect them from their perceived slump as they believe but will doubtlessly inflict damage on the rest of the domestic and international economy in ways they could never have predicted.

- Kathy Dimaya

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