In a recent post I sketched why the standard argument for protectionism, that it protects American workers from losing their jobs to Chinese workers and that tariffs prevent a negative (“unfavorable”) balance of trade or produce a positive (“favorable”) balance, are wrong.
I am spending the next two weeks at the Pennsic war, a historical reenactment event, sleeping in a medieval pavilion on a medieval rope bed. I plan to continue posting every three days but I may not get around to responding to comments for a while.
I am jealous. I really ought to start making plans for next year, getting in with a group and knocking the rust off my armor. Now that there is no question of my wife attending, camping will be a whole lot easier, too. :)
Put only slightly differently, we have to recognize that a move toward freer trade will create losers as well as winners. What can be said with certainty is that the winners win more than the losers lose. Thus, the losers can be compensated. My left, collectivist, hand says we should compensate, not least as a way to get to free trade. My right, libertarian hand, slaps me in the face!
Perhaps one could instead say that government makes many policy changes. If all, or perhaps most of them, were to enhance efficiency, everybody would get a turn at winning.
How do you compensate the losers without creating incentives that destroy the gains?
We abolish auto tariffs, helping farmers and auto buyers, hurting auto workers and investors in car factories. The gain comes from getting cars by trade instead of building them. But if an investor in a car factory knows that if the tariff is ended he will be compensated, that means he will make as much from his investment as if the tariff was not ended, so has the same incentive to invest. Similarly for the incentive to be an auto worker. So we continue to make cars, funded partly by sales revenue, partly by government transfers.
Ah, the compensation would be in the form of a transfer, not a production subsidy. So there's an income effect corresponding to what you say, but not the cancellation of a substitution effect. Displaced auto worker would collect something less than somebody else's gains from trade, and could spend it as he wished, not necessarily to compensate for a lower wage to keep his auto job extant.
I see more practical problems than problems of principle with the idea of compensation, not that there are no problems of principle. [Who owns the gains from trade?] We had a law on the books to get "trade adjustment assistance", but that has been stopped. I don't know why.
That’s potentially promising… except if some groups of people are consistently benefitted, and other groups consistently harmed. I’m guessing the former is “whoever has the most political clout right now”.
The argument is about the effect of free trade. A policy of protectionism when it benefits your friends and free trade when it injures your enemies isn't free trade.
For this purpose, a category of people with similar interests and/or political behavior. Could be racial, socioeconomic, professional, etc. Could be long-lasting: a decision affecting dairy farmers today could still affect the next generation of dairy farmers thirty years hence.
Frank suggested that if government made a lot of policy decisions, each benefiting some people and harming others, it might average out to “fair” treatment.
But if government decisions are biased in favor of groups that have political clout and/or money, as seems plausible, that “averaging out” won’t work, and the people who currently have the least clout and money will continue to get screwed.
A variant on the externality argument: this good could be produced in nation X for less money than nation Y, but only because X has laxer pollution regulations than Y, so producing it in X rather than Y creates a negative externality for everybody in the world (but presumably enough positive effects to the inhabitants of X that they still want the jobs).
On the national defense argument for protectionism, there's a terrific example in the US mohair program (which my wife's grandfather helped secure, back in the Eisenhower administration). US mohair producers (largely concentrated in a portion of Texas and another of Arizona) wanted "price stability" (i.e. price supports) via a tariff, since the price of mohair was dependent on fashion trends. They requested a tariff, which John Foster Dulles vetoed, as it would annoy Australia (a major mohair producer) with whom the US was trying to enhance defense cooperation. The Texas Sheep and Goat Raisers went to see Ike (a more innocent time when you didn't have to contribute a ton of money to get to see the president). He told them to come up with something other than a tariff, which they did. The justification was national defense - military dress winter coats were made from mohair, so we needed a secure domestic supply! (The program ultimately destroyed the US industry by incentivizing quantity over quality and so eliminating the market for it and was cancelled in the 1990s under Al Gore's "reinventing government" initiative.)
> It is a logical possibility but not a very realistic one, since it requires the government to know well in advance which industries it will need in a future war and for those to just happen to be ones that can be maintained with a tariff, cannot be without it.
This basically leads to the following hypothetical dialogue:
- You need to know which industries to prop!
- No.
- But how? You can't just prop all manufacturing and hope that some sticks!
It isn't zero sum, it's negative sum with protectionism, since you are supporting industries which produce output at a higher cost than getting it by trade.
Well, I don't even know how to put it. No. If your model of economics delivers that result, start fixing the model. You predict for industrial policy to never work.
"Never" is a little strong — you could get lucky. But the implication is that it is not a good idea ex ante,
The way you put it suggests that you know it sometimes works. How do you know that? You have to compare what happened to a country with industrial policy to what happened without it, and only one of those is there to be observed.
Kudos for biting the bullet, but East and Southeast Asia exists, and so does Poland. South vs. North Korea for easy mode, Poland vs. Romania for scary mode. I presume you know the relevant literature better than me.
Another argument for protectionism, among other things, is slowing down the rate of change, so that fewer people are displaced from their livelihoods _at the same time_.
The same argument applies to other government (or social) measures that reduce the speed of displacement. Of course this only works if the measures really do get phased out gradually, or otherwise eventually removed. Politics may make that difficult.
I've recently read Karl Polanyi's _The Great Transformation_, and found a lot of relevant ideas there, though not in a form I have the knowledge to apply directly and easily. This came up somewhat peripherally in that book, though he's arguing "is" rather than "ought" - i.e. that societies will act to retard disruptive change, whatever economic theorists say they should do.
But that's what economic theorists do say! Good pedigree.
There is the late Max Corden's "Conservative Social Welfare Function". And contemporary "Political Economy of Protection" claims politicians actually do do that, so as to get elected.
ETA: Of course, this never gets into public discussion, on account no organized interest group has an incentive to put it there.
The only 2 things I don't understand is, if the arguments against free trade require some super special circumstances like not wanting to sell tanks or furnaces to Hitler for example(more economic efficiency but not wanting it for geopolitical interests/moral reasoning) then this implies that there is only some public choice reason why politicians end up with tariffs and a mercantilist view so often. However, why is that so asymmetric? One would expect on average interest groups of X-producers and X-consumers to average out thus a politician would have on average the same gain in votes if he/she promises a steel tariff to Steel Inc as if he/she promises a reduction in tariffs to Steel Consumer Inc. Wouldn't we expect then to trend towards 0 generally?
My second question is why isn't there a commitment strategy of some kind in some institution in some country that prevents this constant waste of public discourse. For example you can imagine a country in a spur of a free trade mood passing a constitutional amendment that would be committing them to a free trade position and thus if they want to pass a tariff that it would need 2/3 majority for example. Thus they can still have the possibility of stopping sale of tanks to Hitler if need be and their government agrees but they won't be able to do the special interest groups min-maxing since both parties can't be buying the steel vote at the same time. I haven't heard of this existing anywhere and even institutions that are nominally pro-trade like the EU are still passing tariffs at the international level.
The answer is the public good problem in influencing government. Suppose a tariff benefits four auto companies and workers represented by one union by ten billion, injures 300 million other people by 20 billion. Five players can cooperate in their common interest to offer a billion in bribes to get politicians to support the tariff. 300 million people face the usual public good problem in cooperating to raise as much in the other direction.
So the pattern is that governments benefit concentrated interest groups at the cost of dispersed interest groups.
If you think of your trade partner as a future enemy, then maybe them getting richer is itself a downside of trade without any need to make you poorer. Of course then the question is whom the suppressed trade would benefit more, you or the other party. I don't know there is any theory on that.
On externalities:
An interesting extension would be if you charge your domestic industry for the pollution but also don't want to incentivize just moving the pollution elsewhere. That is the justification behind the EU's new carbon border adjustment mechanism, an import duty on carbon-intensive products from countries without carbon pricing. Opponents say it's basically just a tariff while proponents argue it is more like import VAT.
"But if the people it benefits are richer than the people it harms, it might decrease total utility."
The "but" implies a contrast to the preceding sentence, so while the rest of the quote is true I think you actually meant to say "But if the people it benefits are *poorer* than the people it harms, it might *in*crease total utility."
I'm glad to see all these points laid out, but in my view their weight is next to nothing compared to the central point that protectionism requires the initiation of force against individuals who would otherwise trade with each other. Once the initiation of force is rationalized in one instance, it is soon rationalized in other instances, then others, without end. This is incompatible with a just society.
Speaking to this in my role as a copy editor, I think the hyphen is unnecessary. The word "less" is an adverb modifying the adjective "bad," and adverbs aren't normally hyphenated to adjectives. And while it might seem that there is a competing reading of "less" as an adjective modifying the noun "arguments," that reading is ruled out by "arguments" being a plural; that makes it a count noun, not a mass noun, and the adjective "less" can only modify mass nouns—even when the construction is illogical, as if I say "less bacon" even though bacon comes in discrete strips rather than as a continuous flow. Since the mismatch can be corrected by taking "less" to be an adverb rather than an adjective, that's the natural reading.
My simple explanation would be: hyphenate a compound adjective phrase if it clearly helps to avoid likely confusion (as this example confused me). However, you are evidently much more of a Conan the Grammarian than I; and so, you might be right (I shall continue to mull). On this matter, I at least concede your impressively greater pedantry. Thank you.
“The economics of trade imply that, outside of some special cases, a tariff reduces total value. But if the people it benefits are richer than the people it harms, it might decrease total utility.”
I’m confused. If a tariff reduces total value, you would _expect_ it to also reduce total utility by default, with no special circumstances necessary. Were you trying to describe a scenario under which it _increases_ total utility, e.g. if the people it benefits are _poorer_ than the people it harms (and therefore have more utility per dollar)?
Another argument: status vs. property. You might be able to ship my factory overseas and compensate me with a pension, but I lose the status I had as a worker/foreman/whatever, and I don't get that camaraderie as a pensioner.
i.e. Taiwan having semi conductors provides a positive externality of talent to their economy.
External monopoly argument (variant of infant industry argument)
i.e. China dominating EV cars results in monopoly/oligopoly type pricing that otherwise could be competitive (this may still be net accretive to the US owing to Chinese subsidies, but in principle it could increase car costs versus a counter factual internationally competitive landscape?).
Cultural externality:
We don’t build a lot of stuff so we don’t think we can build a lot of stuff.
Probably the specialization of many economies (eg Ireland) is path dependent on central planning/subsidy, which perhaps suggests that - even if not tariff driven - things operate far from free market approximations? #speculation
I am spending the next two weeks at the Pennsic war, a historical reenactment event, sleeping in a medieval pavilion on a medieval rope bed. I plan to continue posting every three days but I may not get around to responding to comments for a while.
Have fun! I haven't been since about 2008, but it was always a good time, even when it was 100 during the day and 60 at night :D
Thunderstorms predicted for today and tomorrow. But dry and not terribly hot the first two days when we were setting up.
I am jealous. I really ought to start making plans for next year, getting in with a group and knocking the rust off my armor. Now that there is no question of my wife attending, camping will be a whole lot easier, too. :)
Excellent, again!
Put only slightly differently, we have to recognize that a move toward freer trade will create losers as well as winners. What can be said with certainty is that the winners win more than the losers lose. Thus, the losers can be compensated. My left, collectivist, hand says we should compensate, not least as a way to get to free trade. My right, libertarian hand, slaps me in the face!
Perhaps one could instead say that government makes many policy changes. If all, or perhaps most of them, were to enhance efficiency, everybody would get a turn at winning.
"Thus, the losers can be compensated."
How do you compensate the losers without creating incentives that destroy the gains?
We abolish auto tariffs, helping farmers and auto buyers, hurting auto workers and investors in car factories. The gain comes from getting cars by trade instead of building them. But if an investor in a car factory knows that if the tariff is ended he will be compensated, that means he will make as much from his investment as if the tariff was not ended, so has the same incentive to invest. Similarly for the incentive to be an auto worker. So we continue to make cars, funded partly by sales revenue, partly by government transfers.
Ah, the compensation would be in the form of a transfer, not a production subsidy. So there's an income effect corresponding to what you say, but not the cancellation of a substitution effect. Displaced auto worker would collect something less than somebody else's gains from trade, and could spend it as he wished, not necessarily to compensate for a lower wage to keep his auto job extant.
I see more practical problems than problems of principle with the idea of compensation, not that there are no problems of principle. [Who owns the gains from trade?] We had a law on the books to get "trade adjustment assistance", but that has been stopped. I don't know why.
That’s potentially promising… except if some groups of people are consistently benefitted, and other groups consistently harmed. I’m guessing the former is “whoever has the most political clout right now”.
The argument is about the effect of free trade. A policy of protectionism when it benefits your friends and free trade when it injures your enemies isn't free trade.
What is a 'group'?
For this purpose, a category of people with similar interests and/or political behavior. Could be racial, socioeconomic, professional, etc. Could be long-lasting: a decision affecting dairy farmers today could still affect the next generation of dairy farmers thirty years hence.
Frank suggested that if government made a lot of policy decisions, each benefiting some people and harming others, it might average out to “fair” treatment.
But if government decisions are biased in favor of groups that have political clout and/or money, as seems plausible, that “averaging out” won’t work, and the people who currently have the least clout and money will continue to get screwed.
A variant on the externality argument: this good could be produced in nation X for less money than nation Y, but only because X has laxer pollution regulations than Y, so producing it in X rather than Y creates a negative externality for everybody in the world (but presumably enough positive effects to the inhabitants of X that they still want the jobs).
On the national defense argument for protectionism, there's a terrific example in the US mohair program (which my wife's grandfather helped secure, back in the Eisenhower administration). US mohair producers (largely concentrated in a portion of Texas and another of Arizona) wanted "price stability" (i.e. price supports) via a tariff, since the price of mohair was dependent on fashion trends. They requested a tariff, which John Foster Dulles vetoed, as it would annoy Australia (a major mohair producer) with whom the US was trying to enhance defense cooperation. The Texas Sheep and Goat Raisers went to see Ike (a more innocent time when you didn't have to contribute a ton of money to get to see the president). He told them to come up with something other than a tariff, which they did. The justification was national defense - military dress winter coats were made from mohair, so we needed a secure domestic supply! (The program ultimately destroyed the US industry by incentivizing quantity over quality and so eliminating the market for it and was cancelled in the 1990s under Al Gore's "reinventing government" initiative.)
I think a lot of these arguments are driven by what appeals to voters rather than validity of those arguments.
Perhaps can free trade arguments be made in a different tone and language than tariffs and protectionism ?
> It is a logical possibility but not a very realistic one, since it requires the government to know well in advance which industries it will need in a future war and for those to just happen to be ones that can be maintained with a tariff, cannot be without it.
This basically leads to the following hypothetical dialogue:
- You need to know which industries to prop!
- No.
- But how? You can't just prop all manufacturing and hope that some sticks!
- Why not?
Because propping an import competing industry penalizes an export industry. Growing Hondas.
1. The whole point of national security arguments is that growing Hondas can be cut off by the crucial steps being overseas.
2. This isn't how that works, you absolutely can be more or less successful in manufacturing overall, it isn't zero-sum.
It isn't zero sum, it's negative sum with protectionism, since you are supporting industries which produce output at a higher cost than getting it by trade.
Well, I don't even know how to put it. No. If your model of economics delivers that result, start fixing the model. You predict for industrial policy to never work.
"Never" is a little strong — you could get lucky. But the implication is that it is not a good idea ex ante,
The way you put it suggests that you know it sometimes works. How do you know that? You have to compare what happened to a country with industrial policy to what happened without it, and only one of those is there to be observed.
Kudos for biting the bullet, but East and Southeast Asia exists, and so does Poland. South vs. North Korea for easy mode, Poland vs. Romania for scary mode. I presume you know the relevant literature better than me.
Another argument for protectionism, among other things, is slowing down the rate of change, so that fewer people are displaced from their livelihoods _at the same time_.
The same argument applies to other government (or social) measures that reduce the speed of displacement. Of course this only works if the measures really do get phased out gradually, or otherwise eventually removed. Politics may make that difficult.
I've recently read Karl Polanyi's _The Great Transformation_, and found a lot of relevant ideas there, though not in a form I have the knowledge to apply directly and easily. This came up somewhat peripherally in that book, though he's arguing "is" rather than "ought" - i.e. that societies will act to retard disruptive change, whatever economic theorists say they should do.
But that's what economic theorists do say! Good pedigree.
There is the late Max Corden's "Conservative Social Welfare Function". And contemporary "Political Economy of Protection" claims politicians actually do do that, so as to get elected.
ETA: Of course, this never gets into public discussion, on account no organized interest group has an incentive to put it there.
The only 2 things I don't understand is, if the arguments against free trade require some super special circumstances like not wanting to sell tanks or furnaces to Hitler for example(more economic efficiency but not wanting it for geopolitical interests/moral reasoning) then this implies that there is only some public choice reason why politicians end up with tariffs and a mercantilist view so often. However, why is that so asymmetric? One would expect on average interest groups of X-producers and X-consumers to average out thus a politician would have on average the same gain in votes if he/she promises a steel tariff to Steel Inc as if he/she promises a reduction in tariffs to Steel Consumer Inc. Wouldn't we expect then to trend towards 0 generally?
My second question is why isn't there a commitment strategy of some kind in some institution in some country that prevents this constant waste of public discourse. For example you can imagine a country in a spur of a free trade mood passing a constitutional amendment that would be committing them to a free trade position and thus if they want to pass a tariff that it would need 2/3 majority for example. Thus they can still have the possibility of stopping sale of tanks to Hitler if need be and their government agrees but they won't be able to do the special interest groups min-maxing since both parties can't be buying the steel vote at the same time. I haven't heard of this existing anywhere and even institutions that are nominally pro-trade like the EU are still passing tariffs at the international level.
The answer is the public good problem in influencing government. Suppose a tariff benefits four auto companies and workers represented by one union by ten billion, injures 300 million other people by 20 billion. Five players can cooperate in their common interest to offer a billion in bribes to get politicians to support the tariff. 300 million people face the usual public good problem in cooperating to raise as much in the other direction.
So the pattern is that governments benefit concentrated interest groups at the cost of dispersed interest groups.
It seems to me that if you have a military that is armed with rifles, you had better be able to manufacture the bullets yourself.
On national defense:
If you think of your trade partner as a future enemy, then maybe them getting richer is itself a downside of trade without any need to make you poorer. Of course then the question is whom the suppressed trade would benefit more, you or the other party. I don't know there is any theory on that.
On externalities:
An interesting extension would be if you charge your domestic industry for the pollution but also don't want to incentivize just moving the pollution elsewhere. That is the justification behind the EU's new carbon border adjustment mechanism, an import duty on carbon-intensive products from countries without carbon pricing. Opponents say it's basically just a tariff while proponents argue it is more like import VAT.
Probable typo:
"But if the people it benefits are richer than the people it harms, it might decrease total utility."
The "but" implies a contrast to the preceding sentence, so while the rest of the quote is true I think you actually meant to say "But if the people it benefits are *poorer* than the people it harms, it might *in*crease total utility."
I'm glad to see all these points laid out, but in my view their weight is next to nothing compared to the central point that protectionism requires the initiation of force against individuals who would otherwise trade with each other. Once the initiation of force is rationalized in one instance, it is soon rationalized in other instances, then others, without end. This is incompatible with a just society.
"Less Bad Arguments for Protectionism"
Fewer Bad Arguments....
(Pedantic, I?)
Not fewer bad arguments but arguments that are less bad.
But then it ought to be "Less-Bad Arguments".
Speaking to this in my role as a copy editor, I think the hyphen is unnecessary. The word "less" is an adverb modifying the adjective "bad," and adverbs aren't normally hyphenated to adjectives. And while it might seem that there is a competing reading of "less" as an adjective modifying the noun "arguments," that reading is ruled out by "arguments" being a plural; that makes it a count noun, not a mass noun, and the adjective "less" can only modify mass nouns—even when the construction is illogical, as if I say "less bacon" even though bacon comes in discrete strips rather than as a continuous flow. Since the mismatch can be corrected by taking "less" to be an adverb rather than an adjective, that's the natural reading.
My simple explanation would be: hyphenate a compound adjective phrase if it clearly helps to avoid likely confusion (as this example confused me). However, you are evidently much more of a Conan the Grammarian than I; and so, you might be right (I shall continue to mull). On this matter, I at least concede your impressively greater pedantry. Thank you.
“The economics of trade imply that, outside of some special cases, a tariff reduces total value. But if the people it benefits are richer than the people it harms, it might decrease total utility.”
I’m confused. If a tariff reduces total value, you would _expect_ it to also reduce total utility by default, with no special circumstances necessary. Were you trying to describe a scenario under which it _increases_ total utility, e.g. if the people it benefits are _poorer_ than the people it harms (and therefore have more utility per dollar)?
Another argument: status vs. property. You might be able to ship my factory overseas and compensate me with a pension, but I lose the status I had as a worker/foreman/whatever, and I don't get that camaraderie as a pensioner.
Positive Externality Argument: knowledge overflow
i.e. Taiwan having semi conductors provides a positive externality of talent to their economy.
External monopoly argument (variant of infant industry argument)
i.e. China dominating EV cars results in monopoly/oligopoly type pricing that otherwise could be competitive (this may still be net accretive to the US owing to Chinese subsidies, but in principle it could increase car costs versus a counter factual internationally competitive landscape?).
Cultural externality:
We don’t build a lot of stuff so we don’t think we can build a lot of stuff.
Probably the specialization of many economies (eg Ireland) is path dependent on central planning/subsidy, which perhaps suggests that - even if not tariff driven - things operate far from free market approximations? #speculation