Aug 20, 2018

What’s Wrong with Protectionism?

Answering Common Objections to Free Trade
Pierre Lemieux Senior Affiliated Scholar

1. What are the biggest misconceptions about free trade?

Some people think that free trade hurts the country because it causes manufacturing to decline, because it destroys jobs or pushes wages down, or because it is not fair. Another misconception is that the size of the trade deficit matters and that a growing deficit is bad for the nation. Underlying these misconceptions are two misguided notions: first is that the benefits of economic exchange vanish when trade is done over a political border, and second is that some aspect of international trade justifies prohibiting an American from importing freely. But importing freely is part of economic freedom, and economic freedom is not a problem. Economic freedom generates prosperity.

2. What broke down the long-standing bipartisan commitment to free trade?

The recent rise of populism, both in America and elsewhere in the world, has contributed to the widespread but mistaken belief that protectionism would benefit the middle class and the poor. Another cause has been the fear of economic disruptions, despite the fact that the bulk of changes in economies and employment patterns is caused by technological progress rather than by international trade. The real way to put America first is to put Americans first. That means letting them buy whatever they want from whomever they want, instead of letting government limit their freedom by imposing trade barriers.

3. What is causing the loss of manufacturing jobs in the United States?

The bulk of the loss of manufacturing jobs is a result of technological change, which has increased productivity. Since 1979, the number of manufacturing jobs has decreased by one-third, but output has more than doubled. This jump in productivity was fueled by technological change. Trade explains, at most, only 10–20 percent of the loss in manufacturing jobs. Even during the so-called China shock of 1999 to 2011, only 40 percent of manufacturing job losses came from Chinese competition. At the same time, six million net jobs were created in the US economy, despite the most serious recession since the Great Depression.

4. What is the future of American manufacturing employment?

It isn’t coming back to its previous levels—and we shouldn’t fret. Today the final assembly of components is the low end of manufacturing. The high end is conception, R & D, complex manufacturing of components with new techniques like 3-D printing, and integrated after-sales service. In developed countries, factories are often places where highly trained engineers, designers, and technicians work with a small number of production workers in a computerized, low-noise environment.

This is where American firms have a comparative advantage. The comparative advantage of less developed countries lies in producing more labor-intensive goods in more traditional manufacturing plants. The exploitation of comparative advantage increases production and incomes in all trading-partner countries.

5. Trade unleashes “creative destruction”—some jobs are created and others destroyed. How would you explain this to an unemployed blue-collar worker?

While I sympathize with his personal plight, I would say this: “In the long run, free enterprise and competition is better than the alternative, for you and certainly for your children.” Technological progress and domestic competition also unleash creative destruction. But that’s no reason to block them. In a dynamic economy, jobs are continuously destroyed and replaced by new, more numerous, and usually better-paying jobs. Between March 2016 and March 2017, for example, 13 million new private jobs were created and 11 million disappeared.

6. How does protectionism play into crony capitalism?

Protectionism is a form of cronyism. It amounts to government protection for favored American producers against other producers—and against American consumers. Protectionism is a particularly vicious form of cronyism for two reasons. It hides under the false claim that foreigners pay its cost. And it promotes the false idea that trade is similar to a war.

7. Does free trade benefit the poor or the rich?

In general, free trade benefits the poor more than the rich because the poor spend more of their budgets on simple manufactured goods than the rich do. Visiting a Walmart is pretty convincing in this regard. A large proportion— and perhaps most—of Walmart’s goods are imported. The populists, even when they have good intentions, do not offer policy prescriptions that actually benefit the poor or ordinary Americans, the very people they claim to champion.

8. What makes protectionism so dangerous?

First, it damages the economy. Protectionism reduces the incomes and choices of most people, and perhaps of all people in the long run. Second, it promotes the idea that trade (which is just voluntary exchange) is a war to be waged by government. Third, it’s a demagogue’s dream world. Foreigners are scapegoats, and citizens are presumed to all share the same preferences and interests—and will duly rally behind “the leader.”

9. What could Americans most learn from What’s Wrong with Protectionism?

The main economic argument is comparative advantage: it’s worthwhile for people to sell what they are more efficient at making and to buy what others are comparatively better at making. This way, more is produced and all parties gain. Trade is not a zero-sum game where wins have to be balanced with losses. Another major takeaway from the book is that competition makes businesses more efficient. Since international trade intensifies competition, it also boosts efficiency and economic growth over time. In response to the question “What’s wrong with protectionism?” the real answer is “everything.”

Read more: You can learn more about this issue and order Pierre Lemieux's new book What's Wrong With Protectionism: Answering Common Objections to Free Trade at www.mercatus.org/freetrade

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