Not All Protection is Bad

One thing that we overlook in the dialogue around the trade war narrative that has become a partisan issue is that not all protection is bad. The problem is that if you look at justifications for some kind of protection none of them fit the stated cause of what Trump and his economic policymakers are trying to do. Economists writing on trade will note six categories of protectionism justifications. The first is that imposing duties on goods is a good way to make money for the state. Many less developed countries have more of their economic activity happen in the informal economy, so taking a slice of revenue off the top of imports is a good way to get cash to run the government. This is the imagined paradise of certain right-wing Americans, who think we should go back to the days of small governments and progressive-era taxation reforms that allowed the collection of income taxes. (There is also overlap here for people who want to go back to the gold standard – a bad idea as well in a modern state). The second category is the labor argument. This is the common refrain that trade hurts jobs, as pushing labor offshore means that there is a lost job onshore. The big problem with this is that it is inefficient. Countries can spend a lot of money protecting jobs that are questionable in their need to be preserved. In addition, even if they should be preserved, the question is if protection is the best way to preserve these jobs. You could be more efficient indirectly subsidizing an industry you wanted to protect. We are seeing this right now with payments going to our “Great Patriotic Farmers” in lieu of allowing them to sell their products at world market prices because of this trade war we have going on. A third category is more nuanced. We must think of the world not as static, but as countries in different stages of development. The infant industry argument says that maybe it is a good idea to allow protection on the sum industry because it would be good for the country to have but they are not able to make things to world standards yet so allow them to develop. And this works – Hamilton in the 1790s went to congress and laid it out as the best industrial policy, arguing in his “Report on Manufactures” that the best way for the nation to develop was not through agriculture (Take that, nation or yeoman farmers) but through making sure that the nascent industries could grow. Aside from being prescient, it allowed the country to become self-reliant instead of just a commodity exporter. Of course, that commodity was cotton and the mills were developed in Massachusetts and that cotton was cheap because of chattel slavery but it worked for England as well who just kicked the serfs off the fields, enclosed the commons and then they became factory hands in a mutual free exchange of labor for wages. A fourth category is in terms of justification for national security. You can say you love free trade, but do you love free trade enough to sell missile systems to your ideological enemies? Sure, we can question why we have a world with ideological enemies or missile systems, but given that theses both exist, you might want to be careful as a state whom you trade these things with. A related argument is the cultural protection argument. Maybe you have ideological enemies, but they are also the largest producer of cultural artifacts in the world – instead of missile systems, they can insinuate in your country with their rock and roll and blue jeans and Hollywood movies and totally annihilate your own homegrown culture. You don’t like that? Put a watchman at the border and do not allow those things in. The final argument for protection is retaliation. Let’s say some person gets to be in charge of one of your largest trading partners and decides to marshal one or many of the prior arguments to ramp up protection on their shores. Do you let that slide? No! You start a trade war and put duties on the imports, targeted to hurt the people who voted for that person who decided that a trade war was a good idea in the first place. Now you are in a full-blown adversarial relationship with no winners. Glad that person decided to make his move. What we see is Trump and his people trying to push is some sort of zero-sum version of this last reason, upping trade barriers with China (and now Europe) as some sort of punishment for taking advantage of us over time. Trump does not see trade as an exchange but instead a contest where winners and losers are sorted out. For him, the fact that we bought hundreds of billions of dollars worth of goods from China shows that the Americans lost. Nevertheless, that ignores the fact that the Americans have that amount of goods now. There is a fixed mindset of a mercantilist who thinks the wealth of the nation is some pile of gold that if we import more than we export it means that our gold pile is smaller and theirs is bigger. That is not true in a global system as trade is flows and capital in motion as a process, not a fixed pile anymore. Ninety-seven percent of economists support freer trade because it is one of the few empirically generalizable net welfare gains that we can document. The real problem is in how those gains are distributed, but that is a story for another day.