I am reading a book that argues that the costs of economic protection in the form of tariffs and other barriers to trade almost always outweigh the benefits by a wide margin since they help to prop up vested interests at the expense of consumers, especially the poor. I am only halfway through the book, so I don’t know if the author will clarify what he means by almost, but about the only example that I could think of were export restrictions on secret military technology (like stealth, for example). Are there other examples? What are the costs and what are the benefits of those examples?
It depends on what you mean as cost and benefit. The economic cost may be higher than the benefit, but then, what happens if the disaster scenario does take place? A certain amount of security is worth a lot of money.
The book that I am reading points out that countries which had high barriers to trade which were on roughly equal footing at one point with countries which had low barriers to trade have seen their economies worsen or remain stagnant. Countries which had low barriers to trade have seen their economies grow.
What is the background of the author of your reference?
Protectionism has been used with excellent results in Asia to protect nascent local industries until they were developed enough to compete on the international market.
I suspect it could be useful during a period of restructuration of an industry too. At least if other countries don’t retaliate.
Sure: consider it insurance. Your people may grumble over a tax increase, but they’ll riot if they’re starving. Equally, you may want to subsidise a steel foundry, despite it being cheaper to import because your source may be cut off and you’ll suddenly find yourself without. Yes, it costs, and you actually hope that there’s no benefit, but you’re covered if you need it.
I’m not sure I was clear. I meant that if you use protectionism to make sure that your industry, while remaining non-competitive, won’t go down the toilets, it’s not efficient in the grand scheme of things because you could import the goods at a lower price and use your resources to produce something else on a market where you’re competitive.
But I suppose that if you used protectionism temporarily to protect your industry while you’re modernizing it and making it competitive, it could work. The cost of doing so (whatever your protected industry is producing cost more than it should) might well be lower than the cost of switching completely to another industry (building new factories, training workers in a completely different field or have them unemployed, gaining markets, etc…).
One issue that the book points out is that being able to attach the label “strategic” to an industry is very open to abuse. One egregious example is French yoghurt maker Danone being considered “strategic”.
Because the fact that it doesn’t have one right know doesn’t mean that it won’t have one in the future.
For instance, your only competitive product is cacao. Theoretically, you should produce only cacao, even if your country is poor, because you would be worst off by producing also, say, computers. But you might think in the long term. Right now, your computers don’t have a comparative advantage because they’re crap, you don’t produce enough of them, etc…
But if you implement a protectionist policy, people in your country will buy local computers, so you’ll be producing more of them and it will result in an economy of scale. Also, those people working in the computer industry will, in time, be able to build computers who aren’t crap anymore. And your country being poor, the labour cost will probably be low. At some point, your computers will have a comparative advantage, and then you’ll have a new competitive industry with probably a higher margin than cacao.
I guess I can see that case where you have an industry in a protected environment which is not internationally competitive would be driven off the market by cheaper imports if the barriers were suddenly removed. But how do you decide when enough is enough? Clearly, if a comparative advantage is developed, you could do away with barriers then, but how long should you wait around for that to happen, especially in an environment that is taking away some of the incentive to innovate? Surely the vested interests will lobby and/or bribe the powers that be to prevent this.
I don’t know if this is true, but apparently, before trade liberalization efforts in the 90s (?), India had a domestic auto industry that was about as exciting as Soviet Russia’s which had the same issues, i.e. overpriced gas-guzzling cars that came in only three styles and had long waiting lists. These companies failed following trade liberalization, yet Tata motors sprang up after. Do I have that right?
One would hope, but why should the computers get any cheaper or better? And if they do, what would be the incentive to remove the protections? I understand that Japanese cameras cost five times as much in Tokyo as they do in New York. Is that true?
From 1945 to about 1980 Japan imposed 50% tariffs on imported cars. This was done to lock imports out of the market,and allow Japanese manufacturers to emerge. Now Japan has a very powerful automobile industry, and enjoys trade surplusses in auto and parts exports. Was this a bad thing?
Because as long as there’s no protectionism, computers will be imported, so you won’t develop a large scale industry, won’t have trained workers, etc… Or simply, no computer industry at all will appear. With protectionism, you allow this industry to develop, and hopefully to become competitive.
In all likelihood, pressures from other countries. And anyway, at this point, your industry has a competitive advantage, people are accustomed to your local brands, etc… So, they won’t buy foreign imports, and there’s no much incentive in keeping these protections.
I want to see local industry protected because it is local industry. That’s the point that the pro-globalization crowd just doesn’t seem to understand. We who generally oppose globalization and support small-scale business do not view small-scale business as the means by which some other end is achieved. We view small-scale business as the end to be achieved.
Our basic stance is that people are happier when they have freedom. Freedom means being in charge of one’s own destiny. Hence, if all else is equal, a person who owns a business is happier than one who’s employed. A person who’s employed in a small business is happier than one who’s employed in a huge business.
Why? Because a business owner is in charge of his or her own life. There’s no risk that he’ll spontaneously be fired at the whim of someone higher up. Likewise an employee at a small business can expect some form of personal relationship with the owner, and thus some measure of control. But a single employee in a company that employs a million cannot expect anything. He or she is nameless and faceless, as far as the executive are concerned. They’ll feel no guilt about ruining the employee’s life while pursuing profits.
Is it true that trade barriers incur costs that outweigh the benefits? In the financial sense it is probably true in some cases. However, decisions about trade barriers don’t only affect finances. They also affect human dignity, mutual respect, the sense of community, security, fulfillment, and a great deal more. Personally I’d happily sacrifice some of my earnings in exchange for those other things.
This general approach to economics was laid out much better in the book Small is Beautiful.