Why Protectionism Won’t Work for America
Though often well-intentioned, protectionism ultimately hurts many of those it is supposed to help.
Given the rising hostility towards free trade these days, you’d think that trade barriers had been falling like dominoes across the globe. Not so.
In June 2016, the World Trade Organization noted that over the preceding six months the world had witnessed one of the highest increases in protectionist measures in recent years. This outstripped removals of trade restrictions in the same period.
Protectionism is clearly on the march. It’s not hard to understand why. The economic change unleashed by free trade is always unsettling for some people, not all of whom are well-positioned to cope. Then there is the fact that free trade’s benefits for millions of Americans, such as falling prices over the long-term, go largely unnoticed by most of us.
These difficulties, however, shouldn’t distract us from a major problem with protectionism — the fact that it doesn’t deliver on its promises. Quite the contrary.
A Good Label for a Bad Cause
The very word “protectionism” is one of its selling points. It implies that those who favor protectionist measures want to shield, guard and defend Americans from forces which undermine their economic welfare. But does protectionism realize these goals?
Generally speaking, the answer is: no.
In the first place, measures to protect particular businesses don’t buffer them from the technological changes that are among the biggest disruptors of the economic status quo. No subsidy from the federal government in 1900 could protect the American horse-and-buggy industry from the birth of the modern car when Karl Benz built the first prototype in Germany in 1885. His technology crossed the Atlantic and Henry Ford eventually developed the Model-T. This created wealth for many, jobs for millions, and greater ease for all.
Technological change has also made parts of America’s economy, such as modern manufacturing, much more productive. That’s partly because machines increasingly perform many of the often highly-repetitive functions once done by humans. For the same reason, manufacturing probably will never again provide the same proportion of jobs for the American economy which it did until the 1970s. The point, however, is that tariffs and subsidies for American manufacturing won’t change that situation because tariffs and subsidies can’t stop technological innovation.
Imposing tariffs on other countries to retaliate for their protectionist measures against American products may well hurt those nations. But it also hurts Americans.
Second, it’s true that imposing tariffs on other countries to retaliate for their protectionist measures against American products may well hurt those nations. But they also hurt Americans.
Between 1981 and 1984, the US imposed import quotas on the car industry. In this case, the import quota sought to limit foreign car imports and thus ostensibly benefit American car manufacturers and workers. Indeed, approximately 22,000 jobs were saved.
Unfortunately, it also resulted in a 41 percent average price increase in the cost of a new American car over that same period. In other words, this protectionist policy encouraged the American car industry to be less efficient. Millions of American consumers picked up the bill.
The problems didn’t end here. The price-increases contributed to lower demand for cars from those same American consumers. That led to fewer sales and subsequent lay-offs of over 50,000 American workers by car manufacturers. As one report retrospectively noted, “Thus, even though 22,000 jobs apparently were saved, the layoffs caused by the price increase actually produced a net loss of 30,000 jobs.”
This is a classic illustration of how the cost of protectionist measures can outweigh any benefits. The same is true of policies that seek to punish American companies who choose to relocate elements of their operations outside America to reduce costs.
The moment America starts to do that, other governments would likely retaliate by punishing any company in their countries who might want to invest in the United States or relocate operations to America. Do we really want Japanese car companies that have created almost 700,000 jobs in America by moving many of their operations and factories to America to transfer their facilities back to Japan?
Such decisions would mean less foreign investment and business activity in the United States. This means less competition, higher prices, less-efficient resource allocation, and lower productivity for the US. In other words, America loses.
There is, however, one group that benefits — albeit temporarily — from tariffs and subsidies: established businesses and those who lobby for them.
The competition created by free trade generally results in one of two responses from affected American businesses. The first response is to try to out-innovate and out-compete foreign competitors.
As a result, some businesses will not only survive but grow and prosper. Consumers benefit from better and cheaper products. Other businesses will, despite their best efforts, fail. This happens every single day. And sometimes the competition that drives an American company out of business comes mainly from other American companies.
Free trade isn’t without its downsides. But that’s not a reason to blind ourselves to protectionism’s many flaws.
The second response for businesses facing foreign competition is to request state assistance. This is usually made in the name of the national interest or American jobs. But it actually has more to do with (1) protecting what industries regard as “their” markets and (2) their inability to make the hard-decisions which are part-and-parcel of business.
An entire industry may even calculate that it’s more cost-effective for them to spend resources on lobbyists to secure some sort of government subsidy. That’s called crony capitalism, which, because of its corrupting effects, is even more reason for America to resist protectionism.
There is an exception: A unprofitable product or business might merit some type of protection because it’s genuinely vital to national security. America is more than just an economy. Protecting national security is a prime responsibility of government. In such cases, the question to ask is whether a tariff or subsidy is the least-costly way of realizing this goal.
Such exceptions, however, can’t be the rule. Certainly free trade isn’t without its downsides. But that’s not a reason to blind ourselves to protectionism’s many flaws. In the long-term, protectionism isn’t in America’s national interest. It won’t make America great. Let’s hope we don’t have to rediscover that truth the hard way.
Samuel Gregg is Research Director at the Acton Institute and author of For God and Profit: How Banking and Finance Can Serve the Common Good (2016).