THE FALLACY OF PROTECTIONISM
Many politicians nowadays usually employ patriotism as a relevant and exalting argument, and many times as a refuge for their protectionist or interventionist ideas. Donald Trump has been lastly a clear example of it, announcing policies on trade and measures as tariffs or tolls on imports that even his own companies are not accomplishing at the moment. He wants other firms to do what he says, but not to follow his example. Many of us thought that the protectionist speech will be vanished after the electoral campaign, and particularly I even imagined Donald Trump being an uncovered libertarian who just wanted to give an image to his voters and supporters; which many of them, boosted by anger decided to believe without questioning a coma the policy of “America First”. Trump has seemed really sympathetic with trade union leaders, uncompetitive American firms (which were suffering and losing large amounts of money due to cheaper and more efficient imports) taxpayers and local businesses, who saw how the government will now steal less money from their pocket each month due to a lowered Corporate Tax.
With Trump’s measures, and according to the Cato Institute, more than 1.7 trillion dollars will be lost on international trade, which into the national markets of the USA would be transferred as higher prices, due to firms not being able to purchase components outside the country, which will generate a large cost-push inflation process. Many economists have argued that this won’t be a problem as mean wages and purchasing power will rise alongside, but which is a complete fallacy, as if costs of production are higher, companies won’t be attracted into the country, and capital outflows will be larger, causing less new firms to settle into the US. Even taking into account the lower Corporate Tax, which overall will just benefit American, and local production firms. It may seem rational to many of us, but many people still think that this hasn’t got a correlation with unemployment; no comments. Obviously, if capital attraction is lowered unemployment will increase, due to less workers hired in transnationals firms, and there is no bad time to remember that in today’s globalized economy, FDI supports more than 40% of employment in developed countries, and reaching nearly 70% in emerging markets.
Trump wants to build a renovated “New Deal” similar to Roosevelt’s after the Crash of 29. We were able to observe how Roosevelt subsidized the American private industry through the Reconstruction Finance Corporation in 1932, and other state organisms, with the unique objective of “creating jobs”. Trump wants to improve road and bridges infrastructure through public finance, with the unique objective to “create jobs”. Roosevelt decreased imports from 4400 million of dollars before his mandate to 2100 million afterwards, due to a large number of impeditive tariffs to international trade. Trump wants to put a tariff to Mexico’s commerce of more than 20% of the price and a 10% similar one to China. It already failed in the 30s. As always, why not? Let’s repeat.
Even though, in the next few months, or inclusively in the first year of mandate we could observe how there will be short-term economic growth and even a contraction of the unemployment rate, due to a larger investment in public expenditure and governmental labour force, on the long run it will be transferred just on a greater increment in external debt.
IN THIS GRAPH, WE CAN OBSERVE HOW PROTECTIONIST MEASURES AFFECT LONG TERM GROWTH GLOBALLY:
America has always been a country limiting external competition since 1933, trying to benefit national companies by imposing higher tariffs or taxes on multinationals. This restrictions attack directly supply of firms and not the demand side, as some economists think. The problem is not demand anymore. Looking at the secondary sector of the economy, which deals mainly with manufactured products, we’ll know that this sector is the most affected one by these policies due to higher prices of provisions and larger difficulties and costs for international trade. Trump has declared recently, that all manufactured products sold in America must end at least their process here, what is called usually a “domestic end product”. Several studies, done mainly by the Heritage Foundation attach that protectionist tariffs will increase the mean manufacturing costs by nearly 50%.
This measures are mainly promoted in public interest, but the majority of products will result in scarcity if no goods of the sector or category are imported, which will lead to a lower quality and a deplorable VFM in the American market. Estimations admire even the possibility that the previously mentioned costs will be 6% or even more below the price of domestic supplies and components. Other one of mains Trump projects is the construction of multitudes of new highways and public infrastructure. These constructions are in need of iron, steel and construction materials, which will according to governmental plans, be manufactured in the US. These requirements are clearly under the public interest threshold, and will only drive to a short supply chain, which will cause greater debt increments due to exploration and production projects of natural resources into America. These plans and expenditures will lead to a project on infrastructure resulting on a cost 25% higher at minimum estimations, in contrast to what it would have resulted with imported raw materials. This results, in a destruction of all possible secondary effects on employment and economic growth that these plans could lead to.
Many of the largest low-cost products suppliers and engineering firms are actually located in the US, due to the increasing qualified human capital. These companies will be mostly excluded from the market by higher prices and lower level of imports and exports, due to retaliation, which could generate in the mean term a high-value production outflow of the US, due to higher cost projects and lower disposable income of citizens to finance them.
Mr. Trump seems to prioritize US companies and their right to foreign firms, even if they were previously settled with their headquarters into the country, being an objectionable idea, due to more than 6 million Americans work for foreign small and mean firms, without taking into account externally settled multinationals. Parallelly, there are packages of nearly 1.2 trillion dollars of FDI coming from external companies with the unique objective of investing privately into the US infrastructure. You can perfectly imagine what comes next if the protectionist measures and rules are applied and taken into law… higher unemployment, lower economic growth resulting in diminished levels of disposable income and negative trade balances, with direct dependence on FDI levels, causing also negative effects on the Current Account Balance.
WE CAN SEE HOW FREER SOCIETIES HAVE LARGER DEVELOPMENT AND PROGRESS LEVELS:
Insulating markets and isolating businesses is never a good idea, as this prevents resources from flowing freely through countries and intervening into various production processes, which on the long term descends on larger added value goods being created. The idea of restricting external trade in a globalized world will just bring lower expending due to higher prices and lower output levels. In an intervened and “protected” market, companies are fewer, take more time to develop and grow, and their costs are risen. Why would we like to put obstacles to economic and social development? Do you prefer having higher prices and lower quality, or to be in a competitive ambience with companies fighting to offer the highest possible quality at the lowest price? You just need to have simple understanding of economics to know that restricting supply will just have negative price effects for consumers and cause retaliation into international markets for American firms. As once, Henry George; a libertarian American defender of the Single Tax, declared: “What protectionism teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.”