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A Protectionist Utopia?

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by Pierre Lemieux

If everybody were protected as a producer, nobody would be "protected" as a consumer.

utopia.jpg My previous post argued against the "populist argument" claiming that free trade destroys jobs and thus cannot be beneficial to consumers who have lost their jobs and incomes. The basic answer is that trade does not destroy jobs and, in fact, has little to do with employment.

One could object that this answer does not cover the whole populist argument (as a few commentators did). The broader question may be: Couldn't the individual, who is generally both a producer and a consumer, benefit from price competition on what he buys and, at the same time, get protection against competition in what he produces? Couldn't individuals get both competitive consumer prices and secure jobs against the choices of other consumers (who destroy jobs by switching suppliers)?

The short answer is no. Such a utopian system is impossible. It is impossible for all individuals to simultaneously benefit from price competition as consumers and, as producers, from protection against competition. Price competition requires that firms and workers compete for their markets and their jobs. This competition for the patronage of consumers implies continuous disruption of production. A totally protectionist world cannot enjoy competitive prices because, by definition, people are banned from buying at the lowest prices that can be quoted on the market. If everybody were protected as a producer, nobody would be "protected" as a consumer.

What is feasible, however, is for some groups of individuals to be granted special protectionist measures in their interest while they are still allowed to import what they want without protectionist barriers. This is what special interests obtain. An American sugar producer or solar panel manufacturer is protected by special quotas or tariffs against foreign competitors, but he is still allowed (to a large extent) to make world producers compete for the other goods he consumes, such as cars from Canada or flat screens from Mexico.

We can complicate the argument but it won't change water into wine. One way to make apparent economic sense of the populist argument is to observe that free international trade will not literally benefit all individuals: just as in the case of domestic trade and competition, some individuals will be economically harmed. In other words, more free trade is optimal in the Marshallian sense (maximizing net benefits across all individuals as benefit-cost analysis tries to do), but it is not Pareto-optimal (it is not generally true that it harms nobody at all). Moving from protectionism to free trade is likely to harm some individuals. Most critical comments on my previous posts seemed to take that stand.

This is true enough, but the same reasoning indicates that protectionism is not Paareto-optimal either, for a move towards more protectionism will also harm some individuals. New tariffs on washing machines, as Whirlpool is requesting, harm households. Quotas on sugar harm not only consumers who like sugar, but also the domestic manufacturers of sweets, who have to compete against foreign manufacturers with access to cheaper sugar. And so forth. (The economics student will have noted that, to use the economic concepts correctly, I should have said that a move towards protectionism is not more a "Pareto improvement" than a move towards free trade, but this does not change the argument.)

Moreover, as noted above, protectionism is not even optimal in the Marshallian sense, because more goods and services become available under free trade. In non-technical jargon, the difference between free trade and protectionism is that the former promotes general prosperity, while restrictions to exchange reduce opportunities as the history of underdevelopment suggests.

That free international trade benefits most people, that it increases general prosperity, can be grasped with a reductio ad absurdum. If protectionism were good between countries, it would also be good between states, regions, towns, etc. It would be worth protecting California against Mississippi, if only because wages are 39% lower in Mississippi than in California. "If it could save only one job..." is as bad an argument against international competition as against domestic competition. Protectionist measures do favor some individuals, but it is at the high cost of reducing opportunities for most individuals. And even those who seem to benefit from protectionism, or their children, are likely to lose out in the long run.


Pierre Lemieux is an economist affiliated with the Department of Management Sciences of the Université du Québec en Outaouais. His forthcoming book, to be published by the Mercatus Center at George Mason University, will aim at answering common objections to free trade. Email: PL@pierrelemieux.com.


Comments and Sharing


CATEGORIES: International Trade




COMMENTS (19 to date)
Hazel Meade writes:

Great post.

I do wonder if we could somehow create a pareto-optimal pathway from protectionism to free trade by paying off the losers from trade.

Even if it is "unfair" in some sense that we have to pay them off , as a practical matter, it could get us to the global optima of universal trade liberalization faster.

Pierre Lemieux writes:

@Hazel Meade: Good question! It is, as you suggest, the "somehow" that is most difficult.

Pedro Bento writes:

[Comment removed. Please consult our comment policies and check your email for explanation.--Econlib Ed.]

Thaomas writes:

Of course there is the optimal tariff/export tax argument if a country enjoys some monopoly power in specific imports/exports.

Paying off those harmed by trade liberalization is pretty hard sector by sector or firm by firm. Perhaps a simultaneous liberalization + strengthening of the social safety net would help.

Peter Gerdes writes:

I think many of the places you said Pareto-optimal you meant Pareto improvement.

A state of affairs is Pareto-optimal just if there is no way to make someone better off without making anyone worse off. A Pareto improvement is a change that makes someone better off while making no one worse off.

Pierre Lemieux writes:

@Peter Gerdes: I agree with your critique. It seemed to me more pedagogical to avoid this distinction, and I explained my sleight of hand in a parenthetical sentence: "(The economics student will have noted that, to use the economic concepts correctly, I should have said that a move towards protectionism is not more a 'Pareto improvement' than a move towards free trade, but this does not change the argument.)" But perhaps this treatment was more confusing than pedagogical.

bill writes:

I like Hazel's idea.
Give people a nice check when a factory closes instead of stupid retraining.

john hare writes:

I believe trade can possibly have a loser, or several losers. There are some people that adapt poorly or not at all to change. When they lose a company or a job to trade, they will be visibly harmed. Eventually a domestic supplier would have done the same if they are so inflexible, but the short term visuals don't show that.

I am in favor of trade and competition. That doesn't follow that I think there can be no bad outcomes for anyone ever.

Corey writes:

If big corporations would pay a fair 8-9% tax and their CEO's would pay a fair tax versus no tax we wouldn't be having this conversation.

Don Boudreaux writes:

john hare (and others): One must be careful to not confuse "loss" with "cost." (If I may.)

Thomas Sewell writes:

There's a simple solution to all this, and it doesn't even require any rights violations or massive government action nor enforcement.

Each individual may declare they are totally protectionist for any set of products they prefer and for any reason they prefer. This has the benefit of just requiring individuals to enforce their own preferences, but only on themselves. They can take this action right now, whenever they want, limiting their own steel purchases, sugar purchases, anything at all they want to place a personal tariff or even complete prohibition on.

That way, their preferences as producers and consumers are totally honored, while not infringing on other people's preferences as producers and consumers.

Wait, you mean to say some individuals wish to proclaim to other people what their purchasing preferences are required to be? What they are allowed to purchase or sell, under penalty of prison, or worse? How can that possibly be considered moral....

Mark writes:

Part of the problem here is that there it is no more rational to make the beneficiaries of international trade compensate the putative 'losers' than to make a new employee compensate the old employee he replaces. Political borders don't change anything here. And once every former employee is entitled to a fraction of every new employee's income, the incentive to keep one's job or find a new one would decline rapidly.

I think the main issue here is psychological rather than economic: a laid off factory worker likely thinks it's beneath him to work at a fast food restaurant, so he keeps looking for factory work. Incidentally, existent compensatory programs like unemployment payments, welfare, Medicaid, disability, etc. encourage unemployment among such workers by making it cheaper to stay unemployed for the sake of one's dignity (that is, not having to get a job one thinks below one's status). I also see no reason why, once we increase this compensation, they won't still oppose trade liberalization.

john hare writes:

@Don,
There are some people that are only equipped to roll the dice once. They would have lost in any other game as well. It remains that the visible reason for their loss is trade. You may be looking at a longer time frame than many of the people you are discussing the issue with. We used to have to carry spare tires and know how to change them. Modern tires are so good that we often never have a flat. A flat every hundred thousand miles though is a problem at the moment even if it used to be every hundred miles.

What I think I am trying to say is that almost anything will create someone that can be called a loser. Trade being a massive net gain does not mean that there can be no harm to anyone ever under any conditions.

Don Boudreaux writes:

Mr. Hare: Any sound, scientific assessment of trade must look beyond the present - both backwards into the past and forwards into the future. And it is also true, as you suggest, that many people assess trade only by what they see happen in the here and now (and then, by the way, only to a small subset of people - usually themselves). But the economist's role is not to reassure such people that their perspective is the correct one. It's not the economist's job to accept a false scientific premise (namely here, that trade is to be judged only by its effects on a particular subset of persons in the present) because large numbers of people refuse to reject that premise. The economist's job on this front is to give, as best as he or she can, a full account of trade. Central to this job is the task of informing people of the many ways that they gain from trade without their realizing it.

In fact in reality, everyone rolls the dice many times; never just once. The "dice game" in my post refers not only to jobs;it refers to the total effects of trade: jobs and access to consumer goods. Everyone today in modern society has been enriched countless times - and to an extent that most people remain unaware of - by instances of international trade.

john hare writes:

One of the problems is that you are arguing the points with people that have a vested interest in spreading FUD (Fear Uncertainty Doubt) to further their own interests. That you are correct can be counteracted by picking nits in your points. Political or agenda driven gain by showing the limited short term effects on individuals can be convincing against your statement that no one is harmed.

You are not always in the company of economists, or people that understand economics. Stating that no one is harmed by flat tires is countered by a visual of someone stranded in a storm at night in the middle of nowhere. Stating that no one is harmed by seaborne transport is countered by a picture of the Titanic. And so on when you are opposed to people that are more interested in their own interests regardless of the long term effects or damage to others. The massive gains from trade, seaborne transport, and modern tires is undeniable and obvious to us. The discussion can still go the other way when you leave yourself open to misunderstanding.

It would be nice to limit the discussion to those that understand the issues and have integrity. That's not the case if I understand your target audience correctly.

Jon Murphy writes:

@john hare:

That you are correct can be counteracted by picking nits in your points.

Coming up with various stories is not nitpicking. It's coming up with stories. And, for every story, the response is the same: free trade reduces the likelihood of such a negative event from occurring. Sticking with your tire example, if tires go flat every 100,000 miles instead of every 1,000, then that dramatically lowers the likelihood of a tire going flat on a stormy night.

As jobs become more and more diverse, as specialization of labor increases everyone's wealth, then the likelihood that losing one's job means s/he is poverty-stricken now falls for the reasons Don mentions above. Plus, a diverse labor market means that there are more options available to get work should one lose one's job.

A way to think about it is like this: some folks like to say that workers who lose their jobs due to trade should be able to get re-training at the expense of the state. Ignoring the desirability of such a policy, the mere option that such re-training exists is because of trade, the very thing these folks want to block in the first place. Specialization of labor via trade means that there are now kinds of people who can specialize in education, helping the people who want re-training.

You say that some of these folks have vested interests in spreading FUD. That is true. All the more reason to speak out, to counter their FUD. To remain silent, or to alter the message to capitalize on such FUD, is to capitulate the high ground.

john hare writes:

@Jon Murphy

My regret, and apology to everyone here, is that I have trouble clearly expressing this very important point. It is not capitulating the high ground to avoid giving the opposition a clear target to use. It is not ceding the fight to not lead with your chin.

The gains from trade are clear to all of us here, and should be to honest thinking people everywhere. To make a claim that that can be so easily twisted is to give away debates that need not be lost. To claim that there are no losers does not ring true to those that have not given the matter the level of thought that we consider normal. The majority of people have not, and will not ever put a high level of thought into this matter. Giving the opposition a wedge to use is to lose ground.

It is clear that communism doesn't work. But making the claim that communism never works only requires the opposition to find one counter example to put your claim in doubt. And it works at the family level for some families. It is clear that police make us safer, but claims that they always do is only one tragedy from apparent refutation.

I have not been claiming that trade is bad. I am not recommending deception. I am suggesting an understanding of the perceptions of the prospective audience. This is not purely an academic discussion. I don't have a better term handy than "real world vs ivory tower" to attempt explaining my point.

Pierre Lemieux writes:

Being also a big fan of Don, I was not surprised to find his critique interesting. I believe his argument does reduce the number of individuals of whom it can be said that they are harmed by trade, but not to zero. (Don elaborated his point in a second post on Cafe Hayek.)

I admit that (as @Peter Gerdes also pointed out) my treatment of Pareto optimality was not exactly “optimal.” Of course, free trade (whether domestic or international) brings us on the Pareto frontier – which, by definition, is a situation where all opportunities for exchange have been realized. One must distinguish between Pareto optimality and a move towards Pareto optimality (I took a big shortcut on that point). Such a move is not necessarily a “Pareto improvement,” in the sense that it does not necessarily lead to a “Pareto-superior” point compared to the starting point, because one individual may lose out in the process. My argument is that although trade moves society to a Pareto-optimal situation, getting there from a non-Pareto-optimal situation is not necessarily a Pareto improvement. In other words, there can be “losers.”

Part of the problem raised by Don (and perhaps by @Jon Murphy) may be terminological. In English, “loser” has a strongly pejorative connotation: in common usage, the term refers to somebody who generally loses out in life. “He’s a loser.” (The French word perdant,” the equivalent of “loser,” is not used in such a general sense.) So talking about losers from trade may suggest more than the public-choice sense, which is that somebody has lost out on one occasion because of some economic or political development: for example, he was trying to produce something and was outcompeted by somebody who does it better.

The way I read Don, he has two major substantive arguments. First, there is the argument that in the long run (“on a longer time period, beyond the mere ‘now’”) somebody who appears to lose out from a number of factors related to free trade may actually not be losing out. As Don mentions, the starting point (as well as the ending point) from which the individual’s loss is calculated may represent a more desirable situation for him than what he could achieve in a situation of autarky. For example, he might not have not had the job he is losing were it not for the general prosperity created by trade.

Yet, I would argue, we must also accept the possibility that some individuals (even if only one: Pareto optimality is a demanding mistress) lose out in the long run. Somebody who, at 50 years of age, because of competition and trade (or technical progress), loses the only job he has ever held may conceivably end up with lower lifelong earnings than if his job had been protected, even in a generally protectionist regime. It’s also easy to imagine an authority-loving, trade-regulating bureaucrat who ends up being a loser in a free-trade, market society. (“In a socialist society, I could be Vladimir Lenin.”) Perhaps @Jon Murphy in his last post is making a similar point.

Don’s second substantial argument seems related to a contractarian perspective in which a rational individual behind some “veil of ignorance” prefers ex ante a free-trade economy to a regulated, autarkic one. This argument à la Buchanan is very tempting for an economist. (I have myself been trying to resist the temptation, but yielding to the sin would be even more forgivable if done by Don, who has been close to Buchanan.) But the argument does not necessarily apply to an individual who is a risk-averter; or else this individual will have to be compensated at the social-contract bargaining table (a troubling implication of contractarianism, referred to by @Hazel Meade, @Thaomas, and perhaps @bill).

I think I would also argue that a probabilistic cost that comes to be realized ex post – Smith had thought that furniture manufacturing was the American industry of the future and that the probability of losing his job in that industry was small, but he did lose it – should be considered a welfare loss at that point in time. What is (opportunity) cost if not a loss compared to the best alternative? Of course, as Don argues, the loss or cost is not necessarily a net cost of trade over an individual’s lifetime.

To summarize this too long comment, Don correctly reminds us that, even for a single individual, we must consider the overall benefits of free trade and not just one instance of cost at one point in time. That’s an important point, like many that Don makes on free trade. I am simply arguing that, in a Paretian perspective, we cannot assume away the possibility that trade imposes a lifetime welfare loss on some individuals (who don’t have infinite lives). Moreover, as I argued in my post above, an individual may want his own job protected against competition while competition is allowed for what he consumes, and he may lose out (compared to that starting point) if he too has to face competition.

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