Protectionism and Job Loss: Part Nine of a Nine Steps Series (And Last, I Think.)

This is the last installment of a series of nine short essays in which I attempted to explain a topic that is both important and misunderstood by many intelligent people: protectionism and its obverse, free trade. The first two installments were posted on November 10th 2010. You can identify every essay in this series because the word “protectionism” is somewhere in its title.

When economic actors, people and organizations, switch from doing what they don’t do very well to what they do better, production increases everywhere, the pie gets bigger. There is no injustice involved, just a general rise in the standard of living.

For such virtuous change to achieve maximum effect, there must be economies of scope and scale. It’s not always obvious in big countries such as the US which has a large internal market (many people most of whom are rich by world standards.) It’s pretty clear when you think of small prosperous countries such as Switzerland. How efficient would Nestlé be if it made chocolate only for eight million Swiss rather than for hundreds of millions of consumers worldwide? And would the smelters of Luxembourg do a good job making steel only for the half-million Luxembourgers?

So, it stands to reason that any barrier to import limits severely the benefits of switching from mediocre to good or from good to excellent. But, the basic rule of international trade is reciprocity. (It’s a little more complicated than this in everyday life but the complications do not affect the basic soundness of my reasoning.) Countries’ governments say to each other: “ If you impede the entry on your territory of stuff made by my economic actors, I will impede access of my territory of stuff made by yours.” This is no bluff. So-called “trade wars” erupt frequently, involving different kinds of tit-for-tat. The most notable thing about every round of tit-for-tat is that it impoverishes everyone. See above.

Trade barriers, different ways of impeding access, come and go. Although it’s difficult to find a coherent argument in favor of any trade barrier, governments will often yield to interest groups and provide “protection” from imports for this or that good. They do so usually not because of some abstraction such as the “national interest,” but because of political necessity or to distribute political favors. Two interesting remarks about this poisonous practice. First, more democratic governments should be expected to be more likely to yield such favors. Second, by “protecting” domestic producers, they also lower the standard of living of domestic consumers. Naturally, the two categories of consumers and domestic producers overlap somewhat which only underscores the absurdity of protectionism. Incidentally, developing and enforcing trade barriers requires a large technical and inspection apparatus. The more trade barriers, the larger the government relative to the national economy.

All this being said, it’s clear that the removal of trade barriers will cause job losses in the affected sectors of the economy. It’s also obvious that some of those who lose their jobs will not find equivalent or better jobs. Here, individual fates diverge in small but humanly significant ways from collective well-being.

Let’s take the case of Canadian vintners. Yes, they exist. Would I make up anything so absurd? Do I have sufficient imagination? As you might imagine, Canadian wine-producing firms exist inside a network of government protectionist measures. If they were left to their own devices, most would soon be swept away by the wines of thousands of producers from twenty different places, from California to South Africa. Now, imagine that the Canadian vintners lose their muscle with the Canadian federal government and that all the protective measures are withdrawn within one year.

Under such a scenario, two things would happen. First, as I have explained step by step, many Canadian resources, including labor would eventually be switched to more productive endeavors. Because of this switch, Canadians in general but also the whole world would be a tad richer. But no one would expect the switch to be instantaneous. There would be some social dislocation, for sure.

The second consequences would be, starkly, that some people working in wineries and in wine-related businesses would lose their jobs. The fifty-five year old wine-maker of a small British Columbia winery with thirty years experience in the same winery would almost certainly have to retire. It’s extremely unlikely that he would qualify for one of the many advanced jobs open in the new, and now marginally more productive Canadian economy. An old wine-maker will not become say, a software writer, under almost any imaginable circumstance. Instead, the middle-aged wine maker will either become unemployed or he will have to take one of the lower-end jobs freed by the escalators described before.

Free trade, and opposition to protectionism have acquired a bad name, I think in part because of economists’ reluctance to face squarely this particular human implication of such policies.

I defend free trade while recognizing the wine-maker’s painful problem by pointing to the overall, collective consequences of protectionism: It’s always an economic disaster. We know this from two different sets of observations, First, other things being equal, countries that follow national policies of free trade grow faster than those that don’t. That’s true equally for poor countries and for rich countries. Similarly, when countries that have implemented protectionist policies open up even a little, they experience a quick surge in their GDP. Second, there is no part of the world where unemployment figures track free trade’s ups and downs. As an example, the sudden upsurge of unemployment in the US 2007-2009 had nothing to do with any increase in imports. This tells me that the sad middle-aged Canadian vintner’s case does not account for much of unemployment.

Other things being equal, I think it’s better to be unemployed in a relatively more prosperous country that in a poor one. The benefits are more generous, and the next job opportunities richer and more varied. Training programs are also more common and more accessible in richer than in poorer countries. And capital to start one’s own business is normally cheaper and more accessible, the more prosperous the country. I will go further: Economically, it’s better to be unemployed in a rich country than employed in a poor country. (I understand there are non-economic downsides to unemployment. This is another topic I can’t deal with here. A single thread, the economic thread, is difficult enough to follow.)

In conclusion to this whole series on free trade and protectionism in nine small steps: protectionism remains the royal road to collective poverty and it does not do much for anyone, not even for those who stand to lose their jobs when national borders open.