WashTech News: Labor News
July 23, 2009
WashTech News

Protectionism - Give it a Second Look!

Copyright �© 2009 by Rabindra P. Kar.

In the past year, as the much-hyped wonders of the "global free market" unravel before our eyes, the public has been subjected to a barrage of warnings about the return of that old bogeyman - protectionism. From President Obama and British PM Gordon Brown, down to the editorial in my neighborhood's free weekly paper, the opinion leaders are portraying protectionism as the "original sin" of economics, for which the world may incur the ultimate consequence -- be driven out of the "paradise" that is Western capitalism.

So what exactly is protectionism? And is it as bad as it is made out to be?

Generally, protectionism is understood as the erection of trade barriers. These could be tariffs (import duties), local-content laws, statutory imposition of national technical standards incompatible with foreign ones, or outright bans on the import of goods and services. The predominant view among Western economists in the last century or so has been, that the fewer the trade barriers, the better for all. Hence the emphasis on "free trade" agreements (like NAFTA), or worldwide free trade negotiations, like the recent Doha round.

Historically, there have always been trade barriers, and there probably always will be. In centuries past, the barriers were not primarily governmental but physical in nature. In the time of Marco Polo, the biggest barrier to bringing Chinese silk to Europe was not European import duties, but the time, trouble and risk in transporting the silk across the known world. Until refrigeration became commonplace, highly-perishable food could not be transported from one coast of the United States (US) to the other, so importing South American seafood was out of the question. The impressive transportation and communication infrastructure built since the 19th century has changed all that. Today, a rich family in Kansas can feast on Maine lobster any day of the year. However, a lower middle-class family in Maine cannot afford Maine lobster, nor can an underprivileged family in Oregon afford the salmon swimming up the Columbia river in their backyard. That's because the destruction of trade barriers often results in the erection of another kind of barrier - affordability. When affluent people anywhere in the world are willing to pay a high price for something, those lower down the economic ladder are denied it, even if they are the "sons of the soil" where it is made, found or harvested.

In the present day, many people in the US and a few other Western countries like the United Kingdom, pride themselves on their nation's free trade ideology. Except that they gloss over the trade barriers that still exist, and more importantly the reasons why they do. So let's consider some of these barriers and the reasons that keep them there:

Foreign policy. Can you legally buy a Cuban cigar in the US? Can you freely import plush Persian (Iranian) rugs? For decades, US firms could not trade with Vietnam, even though it offered many low-tech goods cheaper than Mexico or China. The Cuban embargo, in particular is enforced mainly because anti-Castro Cuban Americans are a strong political force in Florida, and Florida is a perennial swing state in Presidential elections. If free trade is a basic economic principle of the US, why is such a narrow political reason enough to trump it?

National security. Few Americans realize that there are literally tens of thousands of pages of Federal regulations (read "trade barriers") on what can be exported or imported, all in the name of "national security". These apply not just to trade with potential adversaries like Russia or China, but even friendly countries like India and Taiwan. Some of these regulations really do enhance security by keeping dangerous technology out of unfriendly hands. But a lot of them are simply arcane, almost laughable regulations, because US manufacturers would not be able to export the "banned" items even if they tried, since similar items are widely and cheaply available elsewhere.

Politically, it is a "no-no" to question trade barriers erected for "national security" reasons, or to even call it protectionism. But erecting trade barriers for the economic security of American workers, is immediately condemned by right-wing and even centrist political pundits.

Plain old political lobbying. Some industries and organizations have poured millions of dollars into political lobbying for decades, and they have been rewarded with plenty of economic protection. Some examples:

  • The pharmaceutical industry. The US and Canada share a 4,000+ mile, lightly-guarded border. There is a free trade agreement (NAFTA) between the two neighbors. Yet the Canadian price of many brand-name drugs is vastly lower than the US price of exactly the same item. Even though countries all over the world (especially China and India) manufacture the active ingredients in most of our medicines quite cheaply, the American consumer has to pay outrageous prices enforced by a completely protectionist pharmaceutical regime. The pharmaceutical industry justifies the trade barriers by claiming they protect the health and safety of the American consumer. The public desperately wants the cheaper medicines, but democracy does not function as government for or by the people, when there are substantial political contributions involved.

  • The entertainment industry. Did you know that DVD players sold in the US and many "developed" countries are legally required to play DVDs with an exclusive software code for their region? This allows the film industry to sell the same movie in different parts of the world at completely different prices. To add insult to injury, it is a crime for Americans to modify their own DVD players to defeat this flagrantly protectionist mechanism. This is not supposed to happen in our "globalized" world. But globalization, free-trade, anti-protectionism and all the other buzzwords are no match for the political clout flowing from millions of dollars given to political campaigns.

  • Agribusiness. What is the difference between an agricultural import tariff and an agricultural subsidy? Both of them utilize government intervention to make domestically produced foods cheaper than imported foods. Except that the subsidy is worse, because it takes money out of the Treasury (read taxpayer's pocket) to achieve the lower domestic price, while the tariff actually puts money into the Treasury, every time a dutiable item is imported. Nevertheless, these subsidies are "sacred cows" to both Republican and Democratic lawmakers from farm states, even though many of them vehemently support "free-trade" in non-agricultural goods or services.

    Thus protectionism is very much a part of the US economy, but not evenly so. The industries and groups that have organized themselves politically, enjoy it. The rest of us, who have no such political protection are left at the mercy of the "free-traders". Worse, we are also exposed to a stream of "expert opinion" in the news media, designed to convince us that asking for economic protection is a terrible thing. Who is responsible for this stream of one-sided opinion? Well, who benefits from the prevailing free-trade ideology?

    The higher up the economic ladder you go, the better are your personal interests served by "free trade". If your primary source of income is from stock and bond investments, then it benefits you if the corporations you invest in pay Third World wages but sell at First World prices. It should come as no surprise that, by and large, the wealthy do not support trade barriers, except for those that protect their own sources of income. Pharmaceutical company executives are happy to buy inexpensive clothing made in Honduras, or 60" flat-screen TVs made in Korea. They just don't want Indian-made antibiotics sold in the US at prices comparable to Indian prices.

    The unsurprising truth is that economic opinions in the news media generally reflect the interests of media owners, who inhabit the top 5% of the income distribution curve. The poor and the middle-class don't own newspapers or TV stations, they merely work at these places. Moreover our politicians, especially the right wing ones, get the vast majority of their campaign contributions from the moneyed class, not the middle class.

    So, what is the alternative to the pseudo-free trade economics of today?

    Before we consider specific alternatives, let's digress a bit to political philosophy. The US Constitution appropriately enshrines freedom and the "pursuit of happiness". It does NOT give any special status to economic growth or capitalism. And the freedoms it protects are human freedoms, not free markets or free trade. Clearly, any economic policies we follow should be a means to an end, not an end in themselves. The end goal must be the happiness and best interests of the average citizen.

    For the last half-century, the most economically dynamic part of the world has been East and South Asia. Between the 1960's and 1980's it was Japan. Since the 1980's it has been China and the East Asian "tigers" - Korea, Taiwan, Singapore, Malaysia, even Vietnam. And since the 1990's, India. Starting from an abysmal economic level caused by war and centuries of colonialism, these countries have become economic powerhouses. Note that in the political lexicon of these countries, capitalism is a dirty word, free trade is a foreign concept, and protectionism of all kinds is a way of life.

    The Asian countries have achieved economic success by "managed trade", not free trade. They protect certain industries from foreign competition in order to protect jobs, or preserve strategic capabilities, or until domestic players are mature enough to compete globally. They open themselves to free trade in those industrial sectors where they need the goods or services, but have neither the capability nor the will to produce domestically. Korea built an automobile industry by protecting its domestic car manufacturers from Japanese and American imports for decades. Japan still protects its rice farmers because rice is a staple of the Japanese diet and hence a strategic crop. In a future conflict Japan does not want to be vulnerable to an adversary's rice embargo or naval blockade.

    For the United States, is managed trade a viable alternative to "free trade"? What is the biggest tangible objection to managed trade? That the government would be picking and choosing which industries or professions should be protected or not. Granted, this is a major concern. In democracies, governments are neither the most efficient nor the wisest economic decision makers. But what do we have today? The government protects and manages certain favored industries anyway, because of political lobbying or foreign policy reasons, as explained earlier. Meanwhile our nation's trade patterns are determined mainly by the corporate drive for profits.

    Is it a benefit of free trade that an overwhelming percentage of US consumer goods are made in Asia? Why spend hundreds of billions on a navy that can defeat China in a shooting war, when the Chinese could wreak havoc on us by manipulating their trade or currency, or by simply not buying Treasury debt? Would the US be worse off if it passed laws that protect high-skill and high-wage computer software jobs from outsourcing, or limited the import of foreign programmers on H-1B visas?

    How would managed trade ("protectionism" to its detractors) work in the US economy? Ultimately it comes down to identifying which industries or professional skill-sets are considered vital to the economy. If garment manufacturing is not vital, then impose no restrictions or duties on clothing imports. If home construction is not strategic, then issue thousands of temporary work-visas to Mexicans or Central Americans to come here and build houses. If auto or aircraft manufacturing is vital, then impose high import duties on the import of cars or airplanes. If biochemistry is a strategic technology, then impose local-content requirements on any biochemical product that the Pentagon or National Institutes of Health buys from commercial sources. This is not as "un-American" as the free trade boosters would have you believe. President Ronald Reagan, that darling of political conservatives, limited Japanese imports to 2 million vehicles annually (less than 15% of the US market) to protect the US auto industry. This forced the Japanese to build automobile plants in the US, using Japanese designs but American workers.

    For decades, this country has let its political and economic discourse be constrained by the demonization of certain words and ideas. The political right-wing has effectively used labels like "big government", "liberal", "socialist", "government-run", "class warfare" and of course "protectionist" to discourage the consideration of policies that would benefit the average person at the expense of immensely powerful corporate interests. There is nothing inherently right or wrong about either free trade or protectionism. Both create winners and losers in society. By definition, protectionism protects and benefits some part of the general population. The national discussion we need is not whether to be a protectionist nation, but whom to protect and how to manage trade, so that the number of winners far exceeds the losers.

    About the author

    Rabindra Kar is a free-lance writer on contemporary economic and political issues. His "day job" is computer software development, in Austin, Texas. He holds a Bachelors degree in Electrical Engineering from the Indian Institute of Technology, Bombay, a Masters degree in Engineering from the University of Notre Dame, and an MBA from Portland State University. He is a member of WashTech.

    Talkback on Article
    Jul 25, 2009, 2:22 pm
    A good article except for the idea that "If home construction is not strategic, then issue thousands of temporary work-visas". In Arizona, construction was one of the few good-paying jobs. Roofers were making $25 hour with paid apprenticeships in the early 90s. Since those jobs have been filled with unskilled illegal workers, the former American workers subsist on multiple PT restaurant/retail jobs and food kitchen handouts, while new homeowners deal with shoddy construction.

         Linda, Houston TX USA
    Jul 25, 2009, 9:48 am
    This is a very well written article I enjoyed reading it, Protectionism by any other name is still protectionism and should be applied eqyally for everything or not at all.What is really wrong in our country is the lack of personal integrety. Greed comes in a close second. Elsie, Alden USA

         Elsie Menefee, Alden, Kansas USA
    Jul 24, 2009, 12:44 pm
    Well written and excellent article. Wished the author had driven home the point about it being crucial to take measures to protect one of the hardest hit livelihoods by NAFTA, computer programming, a profession that is unquestionably vital to our country, since it effects important industries such as healthcare, finance and transportation. That point must be clearly stated rather than entrusted to the intelligent reader to discern.

         Sharon, Orange County, CA
    Jul 24, 2009, 11:55 am
    I woked in Korea for 7 years. s.korea, japan and mexico as well as all non-western nations have various types of protectionism: s.korea has an 80 percent import tax and koeans don't want anything much not made in s.korea by their own people. ditto japan, etc. Mexico, etc. have laws protecting their workers. if a company fires someone or closes a factory they must continue paying workers for 6 years to life. Venezuela brings in foreign factories, businesses, then nationalizes them for the people

         dinda evans, san diego, ca
    Jul 24, 2009, 11:39 am
    If you have not already, check out "Bad Samaritans" by Ha-Joon Chang. "Free Trade" has not been around that long. Good article.

         John Heaven, Raleigh, NC, USA
    Jul 24, 2009, 9:24 am
    Before WWII, America was nobody. After WWII, America had a World Economic Monopoly. All foreign nations were Ruined and Destroyed. Consequently, all foreign developing nations were Forced to purchase 'Made in USA' at our High Monopoly Price which raised our Standard of living thru the Roof. Today, America got No World Economic Monopoly. Americans must lower their Standard of Living in order to have a chance to Compete with Foreign Developed Nations. I do not Blame or Credit Capitalism, Democracy, Organized Labor and American's IQ.

         Anonymous, USA
    Jul 24, 2009, 7:52 am
    Good job. I suggest a more precise way of specifying how we might best protect the jobs of US based workers. Tariffs should be imposed to cancel out price advantages due to workers abroad being grossly underpaid by US standards, and goods produced under environmentally destructive conditions should be blocked. I've written about the effect of globalization on US jobs in an article accessible at http://www1.cs.columbia.edu/~unger/articles/jobs.html

         Steve Unger, West Nyack, NY
    Jul 24, 2009, 7:26 am
    The national discussion mentioned at the end of the dissertation needs to be an international discussion. The implications of free trade or protectionism are global.

         armen basmajian, United States
    Jul 24, 2009, 7:03 am
    Very good article. Free trade assumes a level global playing field. Nothing could be further from the truth today. How many more well-educated underemployed, demoralized Americans will we tolerate before action is taken? Let's start by protecting and more fully utilizing our increasingly-wasted homegrown intellectual capital. We better do it while the US market is still globally strong, or the gap between haves and have-nots in the US will continue to widen.

         Chris, Danville, NH
    Jul 23, 2009, 10:42 pm
    Even long time free trader (and Nobel Laureate in Economics) Paul Krugman has agreed that free trade between nations with much different labor rates can not benefit the country with the higher rates. We not only have higher rates but higher labor standards and environmental rules. All of which deny US citizens the right to work in much of industry.

         Harrison Picot, Haymarket VA USA
    Jul 23, 2009, 7:54 pm
    Even though this will likely not be posted, as to the 3 main points you made about protectionism. All 3 of the examples are bad forms of protectionism and should be abolished. How do those examples highlight that we should be more restrictive on trade, particularly against countries such as Germany, Japan, and South Korea which have similar labor rules as our own.

         Ian, Shoreline, USA
    Jul 23, 2009, 7:50 pm
    Sorry to disagree here, but let us take cars as an example. We put massive import duties on German, Japanese, and Korean cars that are either cheaper, better designed, or both. Consumers who would prefer these cars no longer can afford them and therefore have to buy inferior American cars. This also provides a disincentive to the American companies to improve their own product, and hurts companies like Ford who do the majority of their business overseas, as other countries would raise their t

         Ian Loney, Shoreline
    Jul 23, 2009, 6:59 pm
    Thank you for this. Very well argued.

         np, New York, NY
    Jul 23, 2009, 6:04 pm
    'Protectionism' in its rightful form protects the trade of goods, but under the disastrous banner of 'globalization, it has only served to to protect global elites in their profitable crime of trafficking human labor from India to take American jobs. This is what must stop. India needs to employ its own.

         Dave, Oakland, CA
    Jul 23, 2009, 4:44 pm
    Americans who can't earn a living can't buy things, no matter how cheap they are. That hurts all Americans. As long as the world continues to be made up of sovereign states, it is up to our government to defend our interests and it doesn't want to do that. Americans who can't earn a living can't pay taxes, either. The US government will go broke, sooner rather than later.

         Pat, Keyport, USA