Wednesday, June 29, 2016

Protectionism

     I’ve long been fond of this Herbert Spencer statement about protectionism:

     It is, indeed, marvellous how readily we let ourselves be deceived by words and phrases which suggest one aspect of the facts while leaving the opposite aspect unsuggested. A good illustration of this, and one germane to the immediate question, is seen in the use of the words "protection" and "protectionist" by the antagonists of free-trade, and in the tacit admission of its propriety by free-traders. While the one party has habitually ignored, the other party has habitually failed to emphasize, the truth that this so-called protection always involves aggression; and that the name aggressionist ought to be substituted for the name protectionist. For nothing can be more certain than that if, to maintain A's profit, B is forbidden to buy of C, or is fined to the extent of the duty if he buys of C, then B is aggressed upon that A may be "protected." Nay, "aggressionists" is a title doubly more applicable to the anti-free-traders than is the euphemistic title "protectionists"; since, that one producer may gain, ten consumers are fleeced. [From The Man Versus The State]

     Those who call for entirely free trade among the nations have often employed an argument parallel to the above. Moreover, it’s a good argument in its proper context. However, there are contexts in which it has very little force...and the United States of America in the year of Our Lord 2016 is one such.

     What’s that you say? “How can this Fran person call himself a freedom advocate when he opposes free trade?” Patience, Gentle Reader. We have a significant distance to cover.


     Economic interventions by governments are deeply sunk in history. I’ve often ranted about government manipulation of currencies, of course, but the currency wars are almost childishly simplistic in comparison to the machinations concerning trade barriers and border imposts.

     In the U.S., it started virtually with the Founding. Alexander Hamilton was foremost among those who advanced the famous “infant industries” argument for import tariff protection of American wares. Such tariffs have been a feature of American trade policy for more than two centuries. Never have they been lowered all the way to zero.

     The fallacy hidden by the “infant industries” argument is one that’s hard to spot. It requires the recognition of two subtle aspects of market economics:

  1. There’s more to competition than price;
  2. There are products that have not yet been invented.

     Some very intelligent people have failed to understand Item #1. (A famous example is George Orwell: “The trouble with competitions is that somebody wins them.”) If price were the sole determinant of who shall flourish in the marketplace, how is it possible that there are multitudes of vendors for cars, computers, and canned soup? Even more striking, how can it be that new vendors of such products – supposedly “mature” products over which competition has been flaming for many decades – pop up every day?

     The answer, of course, is that no two makers of a given item offer exactly the same item on the same terms. Indeed, this is part of the value trichotomy that students of business must absorb:

  1. You can compete on price;
  2. Or on features;
  3. Or on service, which is actually a compound of service, quality, “customer care,” and other factors.

     You can also compete by offering a unique balance of those things. In this way, the market offers an effectively inexhaustible array of niches into which a business can attempt to fit itself. Some of those niches will be more profitable than the others, and some will prove completely non-viable, but that’s in the nature of the market. Success is not guaranteed.

     Item #2 requires a knowledge of economic history and a sense for the possibilities afforded to Man. The frequent emergence of new enterprises that offer entirely new products is a characteristic of free-market economies. Indeed, this is the preferred route for the ambitious businessman unsatisfied with the prospects for competing in an “established” or “mature” industry. A brand new product is self-differentiating; there’s no need to concern oneself with direct competition until it arises. Of course, one must envision the new product and the reasons it might appeal to purchasers, a gift not all persons possess. More, not all innovations flourish, as anyone who remembers the Edsel, the massage belt, or the pogo stick will attest.

     For these reasons among others, lesser ones, protectionism is less profitable to a nation than a market open to goods from other nations. That, of course, hasn’t stopped even one nation from imposing trade restrictions at its borders – and that has consequences that can reach across the centuries.


     Once a nation has erected protectionist measures, those measures become a part of the nation’s economic order. They produce a state of affairs in which some people’s livelihoods are semi-guaranteed. (The guarantee can never be absolute, as the customer can always decide not to purchase.) A look at internal European Union trade policies reveals several such arrangements, specifically to protect certain “established” industries in France and Germany.

     Thus, we can imagine that the nation of Brux has protected, via an import tariff, its thing industry, thus bolstering the livelihoods of Bruxist thing makers. This angers thing makers in Wazznia who’d like to sell to Bruxists. If there’s a substantial market for things in Brux, both the glee of Bruxist thing makers and the unhappiness of their Wazznian competitors are entirely understandable. Conversations between the nations will follow, though not necessarily to any particular effect.

     What follows in Brux is what will matter. Over the near term, the thing industry will tend to enlarge. It offers a degree of security that unprotected industries lack. The prospect of large or rapid gains might not be there – this is more commonly the case in an industry of long standing – but there will always be persons more drawn to security than opportunity and its risks.

     Bruxist thing purchasers will notice that Wazznian things are made more expensive by the tariff. However, the thing makers of Brux will have attained a politically powerful status: a special interest already embedded in Brux’s politico-economic order. Arguments against the tariff, or for reducing it, will be met by two countervailing forces:

  • It will be argued that Bruxist thing makers would lose their jobs or suffer reductions in income, a blow to the Bruxist economy (and to the politicians that bring that upon them).
  • The thing companies of Brux will ply the politicians with liquor, lobster, and luscious hookers.

     Special interests always possess greater influence than their numbers suggest, because their agenda is short, their members powerfully motivated, and their efforts concentrated. They will nearly always carry the day...and as time passes and “the vital importance of the thing industry to the Bruxist economy” increases, their clout will increase.

     Only one factor can undo this dynamic: the counter-dynamic that arises with an entirely new product – widgets – that obsoletes things completely. There’s no way for the thing makers to countervail the loss of consumer interest in things. In extremis, they might strive to have their political protectors declare widgets illegal, but that seldom works.

     Once widgets are available, the thing is destined for extinction. It might take a while, but it cannot be prevented...and with the market for things will go the incomes of all those persons, from CEOs to janitors, that coppered their bets on things.


     The above schematic illustrates both the politico-economic power of protectionism and what will eventually force its demise in specific cases. The U.S. has protected a wide variety of industries via import tariffs and other regulations. Thus, many Americans’ incomes (though less than a majority) would be endangered by the removal of those barriers. That makes the affected Americans a potent special interest, perhaps capable of elevating or dooming a presidential candidate all by themselves.

     No one in a protected industry thinks of his political protection as a privilege, though that’s exactly what it is. To him it’s a right, something to be defended a outrance. In this lies the potency of contemporary protectionist politics, and therefore a great part of the appeal of Donald Trump. That all those protected industries (with the possible exception of protected sectors in agriculture) will eventually fall to as-yet-uninvented successors has little impact on the current debates. Millions of jobs have already been lost and millions of incomes have been reduced. That this is in large measure because of government interventions in the economy is generally waved aside.

     Politics is always about power, and moreover about the present. An intensification of protectionism is being touted as a necessary measure for the restoration of Americans’ prosperity. In fact, it’s merely a short-term buttress for the wealth and status of political clients whose dooms are already sealed, the fruit of an attitude toward trade that has persisted for far too long. But we cannot expect those who see today’s paycheck endangered to think that clearly about tomorrow, let alone about years and decades to come.

     “Change is hard, and difficulty make people impatient.” – Arthur Herzog

     Food for thought.

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