I know I have written many times about this topic, but reading the featured blogger's article today, I was pleasantly surprised to see many of the same arguments I have made repeated in his article. However, what interested me more were the replies, one in particular. You see, I think that, for the most part, protectionism is a dead issue. While the government may manage to periodically protect a single industry, as Bush sadly did for steel, the public, for the most part, adopts the sensible consumer position that cheap goods are desirable, and opposes outright protection, especially when goods are viewed as expensive due to overpaid union labor.

But there is a second approach taken by protectionists, an advocacy of something less than outright protectionism, which seems to be more appealing to the public at large. It is described pretty well in the following comment:

That being said I am a trade advocate, but trade equity has to become priority. The same TV that we buy for $1500.00 here is $10,000.00 in China-I've seen it with my own eyes. They are not efficient manufacturers and their and many others exports are subsidized. I merely submit that we trade with each as they trade with us. Open for open, closed for closed, WTO be damned.

Unfortunately, thanks to a sense of "fairness", many who hear these sort of arguments buy into the proposition, and so we end up with, not protectionism, but a system of retaliatory tariffs, which are just as harmful.

Actually, the post in question is odd, as usually the argument goes the other way, arguing Japan sells TV to us at $100 and at home for $500, to break into our market, subsidizing it with overpriced sales at home (protected by huge tariffs on US imports). But in any case, the basic argument is that foreign nations are either (1) keeping US goods out of their nation or (2) subsidizing imports into the US, both of which are sold as "unfair trade", and thus situations which the government must remedy.

I was initially tempted to look at both types of protection independently, but that would be a mistake. As the reaction is singular (adding tariffs to foreign goods), and as both practices are usually paired to create an atmosphere where the home manufacturer has an advantage at home and abroad, I will deal with them together. In fact, rather than dealing with them at all, I will look at the general principles and ask the questions I have been asking since I began writing about protectionism.

That question being: Do you spend money to give you an excuse to work, or work so you will have money to spend?

Most people will think that question incredibly stupid, as do I, but if you endorse protectionism then obviously you believe you spend money to give you an excuse to work. Why do I say that? Because protectionism views jobs, that is labor, as the ultimate end, while ignoring the many benefits to consumers of cheap foreign goods. Which means that they view spending as a means, and work as an end. In other words, you spend so you can work, not work so you can spend.


But as I have made this argument so many times, as the postscript will show, perhaps I should simplify things. Here is a list of the most basic points:

1. Work is a means, not an end - I wrote about this many times, but the point never seems to sink in. Even if foreign nations are not buying our goods, if they offer good cheaply enough, it is in our interest to buy them. Just think of it this way. You have a neighbor you hate, but he is going to sell you his brand new Rolls Royce for $2, would you be better off buying it or not? The same is true of foreign nations. I know it is a bit of an over simplification, but then again, not as bad as the oversimplification of protectionists. By looking only at the nation as producers, they ignore completely any advantage those same people might enjoy as consumers. So if I focus on them entirely as consumers, yes it is still an oversimplification, but a better one, as consumption is an end, while labor is only a means.

2. Heavy industry is not the only work - I will not bother rewriting as I said this perfectly in a previous essay:

That is, in essence, the argument against those who would stop us from engaging in overseas trade or outsourcing of jobs. But i would be remiss if I did not address one other popular complaint. Even among those who recognize that we are not going to end up unemployed, and who recognize that we must trade for goods received from abroad, the complaint is often heard that we are trading "good" manufacturing jobs for "service" jobs.

I still can't quite grasp this complaint. It shows a strange attachment to heavy industry which has no real economic significance. In fact, if anything, it resembles argument heard in the 19th century from people who argued against surrendering "good" farming jobs for industry. The argument then was that countries that weren't net exporters of food would be at the mercy of their neighbors. The success of Japan gave lies to this, so now we hear if a country is not a net exporter of manufactured goods, then they are at the mercy of their trading partners.

But it just isn't so. Except in as much as any nation is "at the mercy" of its trading partners. Yes, if you go to war with your trading partners they will no longer trade with you, but that is actually a good point of capitalism, the interdependency of trade tends to dispose countries toward peaceful relations rather than encouraging warfare*. But it does not leave them "at the mercy" of one another. Prior to World War II the US had virtually no domestic armaments industry, yet we managed to retool and refit and win a war in short order. Even had we built up form scratch, I doubt we would have failed to win the war. To argue that we must have a mass of factories at hand or else risk conquest by another nation is just absurd, and history does not support it. Wealthy nations can retool and fight wars, and trade builds wealth. Sticking with industries which are not efficient depletes wealth. And more than factories, wealth wins wars.

Nor are we helped by the derisive use of "service jobs". Most often this is used to imply that the US has been reduced to a nation of McDonald's cashiers. In reality, most jobs to which people aspire are "service" jobs. Lawyer, doctor, professor, theoretical physicist, computer programmer, musician, 0investment banker, actor, movie producer, engineer, and so on are all massed in this description of "service jobs"**. To argue that becoming the primary source of research and development for the world makes the US weaker is just absurd.  It is akin to saying that Switzerland is weaker than Nigeria based on the amount of manual labor carried on in each.

And the line which went with that footnote was the following:

Does anyone tell their child "Son, don't become a doctor, you need a good job in the steel mill"? If not, then why this worry about moving from heavy industry to service jobs?

I think that line alone just about says it all.

3. Venice was very rich - My point here being that there have been very wealthy nations which have done no, or very little, traditional manufacturing. The protectionist obsession with manufacturing and the need to find "markets' for those goods is not only an anachronistic throwback to 16th century mercantilism, but it also flies in the face of historical experience. Venice grew wealthy not because of her trade in salt, silvered mirrors or glass (her main manufactures), but by trading in goods she purchased elsewhere. If the only route to national wealth were heavy industry, then Venice would have been a pauper nation, as would Switzerland. For that matter, neither the Netherlands nor England would have been anywhere near as wealthy as they were throughout most of their history if the protectionist view of wealth were true. Unfortunately for those pushing the protectionist line, history argues quite the opposite, many trading nations, with little or no manufacturing, were among the wealthiest of their age.

4. Goods trade against goods - Now, I will grant that fiat currency, deflation, inflation and other monetary trickery can create some small exceptions to Say's Law, but excluding those, Say's Law still holds true. When Japan sells us cars, the US dollars they receive must eventually be spent for US goods or services. There can be no "trade deficit". Yes, Japan may trade the dollars to France, who then buys the goods, but eventually those US dollars come back to the US. The only reason we think of trade deficits are (1) because we measure country-by-country, and often the country buying from us is not the one to which we sell, (2) we don't count the eventual sale as trade, such as Toyota hiring US consultants, or (3) we don't see it as foreign trade, such as Toyota using those dollars to build a plant in the US. But in every case, the "balance of trade" will work out as equal, minus whatever cash either party chooses to hold, and less money stolen by the states through inflation. There is simply no way it could not.

5. Subsidies impoverish, they don't enrich - Imagine there is a foreign TV maker who charges $50 less than my domestic TV maker. If I need a TV, the existence of that manufacturer makes me $50 richer. If my nation taxes me $100, gives $85 to the TV local manufacturer so he can charge $75 less for the domestic TV, I am not $75 dollars richer, I am $25 dollars poorer. Even if there was no loss in the subsidy, if it took only $75, I would still be where I started, while allowing foreign imports would have made me $50 richer. So, at best, subsidies deprive me of savings foreign goods would allow, and, in most cases, they actually make me poorer than I would be had I just bought the domestic product at the old price. If that is the case on an individual basis, how could this conceivably help an economy as a whole? (And before anyone mentions jobs, really once all the costs were figured, even the pro-tariff groups said Bush's steel tariff cost several hundred thousand dollars a year for each job it saved. We would have been better off just paying those workers their old salaries to stay home.)

6. Fair is a meaningless term - I mentioned this in my post ""Empathy" Threatens not "Justice" but Predictability", but "fair" means nothing. There is no such thing as "fair" and by obsessing on fairness and equity we end up giving ground to those who fight for arbitrary government. Is it "fair" that a nation protects their domestic industries? Why or why not? Are not their citizens allowed to waste money in a futile effort to "protect" their industries? Yes, it is self-destructive and harmful, but they seem to have the right to do so. So how is exercising that right "unfair"? I do not argue we should not enact tariffs or quotas because they are "unfair", but because they do more harm than good, do not achieve the goals for which they are proposed, and end up harming more people than they help. "Fair" is a bad basis on which to dispute this topic, "ineffective" is much better.

7. Nations don't trade, individuals do - The last point most people miss is that nations don't trade, individuals do. Except in those rare circumstances where a government buys or sells something, trade is by people. We speak of what "China" buys or "Mexico", but the truth is John buys from Frank, not Mexico. Mexico is not holding US currency, John is. And this once again helps show how absurd "trade deficit" talk is. If John wants to buy form Frank, he must give Frank value for value. So Frank gets something of value equal to what he gives, and vice versa. Why do we care if one side is currency and one goods? And why do we call it a surplus or deficit? If I buy goods from my grocer for money, is it a "trade deficit"? And do I need to fret until I can force my grocer to buy goods of equal value from me? Then why do we hold to that view when dealing with trade crossing national boundaries?

8. Individuals are blind to nationality of goods - Again, individuals make trades, not nations. And they really care little for national boundaries. Does it matter to you if you get socks from Korea or Kansas? So long as you have socks, do you care? And if there is some supposed benefit to keeping trade inside our national boundaries, is there not a similar benefit to keeping it inside our state? Or town? Or street? Should I start demanding everything I buy was made in my own home? Because isn't that the logical outcome of protectionist thinking, the argument that I should make everything I consume myself? I mocked this position in "I Have Seen The Light" because it really is the only logical conclusion from many protectionist arguments.

9. Trade is not war - So much of the talk of protectionism sounds like talk of warfare. We are "at the mercy" of our trade partners, they could "cut us off". Yes, that did happen during the OPEC embargoes of the 1970's, but it did not destroy our economy, despite the many bad laws in effect. In fact, OPEC had about the best conditions imaginable, and it still failed to crush us, so why all the worry about "being at their mercy"? This argument ignores many factors. First, if we are such a huge customer of any nation, then when they cut us off, they will suffer sales losses as much as we suffer loss of goods. Yes, they may be able to sell some of their steel or oil, but not at the same price, or in the same quantity, or they would be doings so already. So any boycott would be as harmful to them as to us. That is why trade is so different from war. And why trade actually discourages war. By being mutually dependent, trade partners actually have an interest in avoiding war, as trade relations make war much more costly. It is a simple fact protectionists, and many government "experts" influenced by protectionist pseudo-military rhetoric, regularly forget.

10. Borrowing does not change anything - Many point to debt as the one factor that makes Say's Law invalid. However that simply is not true. Borrowing is no different than currency. Yes it does defer payment, but it does not defer it indefinitely. Goods still trade against goods, just not immediately. And, more importantly, debt does not confer the powers many seem to imagine. When they speak of China "calling" the money they loaned the US, they seem to be thinking of some noir film where a mobster buys a bettor's debt. In reality, very few debts allow for early "calling". Even if they do, they do not grant the creditor the sort of power that many think it does. At worst, it allows the creditor the right to seize some assets, or, in the case of a private firm, take control of the firm, they do not "gain control of the country".  (See my post "Really Silly Fears" for a discussion of the really absurd fears that somehow China will seize control of the US through T-Bills or stock purchases.) Yes, those who hold your debt may be able to persuade you by offering to defer collection, but such influence has limits, and many seem to refuse to recognize that fact, that one can always just say "no". (Some seem to imagine that the moment China gains majority shareholder status, every employee of a formerly US owned firm will instancly become loyal agents of the People's Republic, which is absurd. I worked for a Dutch firm, yes I still can't pronounce umlauts correctly, despise tulips and wear shoes without the slightest hint of wood... Yes, I know that was silly, but you get my point. Ownership of a company is not the same as total control of the employees.)

I think that covered all the highlights of my argument, though doubtless I forgot one or two. I am sure it didn't convince any die hard protectionists, or even those committed to "fair trade", but maybe it did make some impression on those sitting on the fence. But in case I failed to say enough (unlikely given how much I write), I will list my past writing on this topic in the postscript to this article.

POSTSCRIPT

The following are all my previous posts on protectionism:

Exploiting Workers?
The Shortcomings of Pragmatism
Protectionism
The Theory That Wouldn't Die
Beware Populist Deception
Fear of Trade
The Limits of Econometrics
The World's Oldest Myth
Authoritarian Oil Talk
STOP BIG PORCELAIN NOW!
I Have Seen The Light
Free Trade, Employment, Outsourcing, and Protectionism
When Help Hurts
Pragmatism Revisited
Misplaced Blame and A Power Play
Remember I Predicted It
Inescapable Logic
Smaller Government , Fair Weather Friends and Special Cases
Cheap Lighters, Overseas Dumping and Monopolies
Jobs, Jobs, Jobs, and More Jobs
Capital Investment
Fairness and the Free Market
More Proponents of Protectionism
John Stossel Imitates Me Again
Has No One Heard Of Lord Say?
Retaliatory Tariffs
Clarfiying My Argument
The Limits of "Scientific" Management
The Endless Cycle of Intervention
Exploited Labor
Planning For Imperfection
Protectionism Right and Left
Unfair Advantage and Foreign Trade

I also made mention of protectionism in some essays on paleo-cons and on Keynesian theory, but as they simply repeat arguments made in the essays above, I won't bother to list them here.