Clearly a benefit: Protectionist countries risk harming themselves

p04 EvrenselEvrenselBy DR. AYSE EVRENSEL
    Since the ideology of Mercantilism appeared in the 16th century Europe, sentiments against free trade have been part of our lives. More than 400 years ago, mercantilists thought that international trade was a zero-sum game. The winner was the exporting country; the loser was the importing country. As of the 21st century, not much has changed in the stand against free trade.  
    There is something wrong with the idea that exporting to another country is good and importing from another country is bad. The mercantilist rhetoric ignores the fact that trade partners will not just accept the protectionist country’s trade restrictions. There will be retaliation, which may or may not take place in the area of international trade. Nevertheless, there will be retaliation.
    Trade wars are never “good.” International trade is one of the most positive activities, because a country must be out of its mind to wish ill to its trade partner. Everything else constant, when our trade partner experiences robust economic growth, it will buy more from our country. The beauty is that our trade partner has the same wish for us, if they want to sell more to us.
    Protectionist countries harm themselves. Import restrictions that are supposed to protect the import-competing domestic industry end up harming other domestic industries. When considering the recent 25 percent tariff on steel and 10 percent tariff on aluminum, we have to realize that there are domestic industries (from aerospace to auto makers and construction) that use steel and aluminum as inputs. The U.S. Bureau of Labor Statistics reports that about 17 million people are employed in industries that use steel. This is against about 150,000 employees in the steel and aluminum sector. Additionally, prices of domestic goods that use steel and aluminum will increase, which will hurt U.S. consumers. U.S. exporters of these goods will be injured as well, as the price hike will make them less competitive.
    The most important motivation for defending (freer) international trade is its ability to increase efficiency. Why should we use our scarce resources to produce goods at a much higher cost? If an industry can survive only when it is protected against foreign competition, it means that this industry should not exist. This idea may seem harsh; however, it makes sense when I add a conditioning phrase: This industry should not exist in its present format. Industries want to survive by doing everything the same as they have always done it before. In the U.S., mini mills emerged starting in the 1980s, focusing on a specific set of products on which they can fiercely compete with foreign producers. Competition is possible, provided that we do not insist on business as usual and carefully identify the areas where we can effectively compete.
    The underlying motivation behind protectionist measures is that we want to go back in time and capture our manufacturing capabilities of the 1950s and 1960s. The obvious criticism of this idea is that going back in time has never solved any problems, especially in the area of economics. Economies go through a kind of evolution over time, from hunting-gathering societies through agricultural societies and industrialized societies to service and technology societies. Most of the developed as well as emerging economies have gone through this transformation in their productive activities. The U.S. is not the only country in the world with the lessening relevance of manufacturing.    
    The answer to the changing economic environment is not protectionism; it is focusing on what we can do most efficiently. While we are wasting our time to revive production that should not be revived (maybe redefined), we are losing the opportunities to promote our long-run economic growth. If we are living in the information age, we need to think about education, creativity, and innovative capabilities. In terms of the share of high-tech exports in total exports and patent applications per capita, the U.S is currently on the sixth and fifth spot, respectively. It is high time to drop the mysticism of manufacturing and prepare our country according to the expectations of the 21st century.  
    By the way, the issues surrounding international trade do not escape economists. We would be the first who would point to these issues. However, the solution is not protectionism.
    One of these issues is that there is a reason as to why developed countries such as the U.S. complain about “unfair” trade with developing countries such as China. The standard trade theory implies that, despite overall efficiency gains, in each country the abundant factor will win and the scarce factor will lose. Therefore, in the U.S. capital owners win and workers lose. China cannot help that it is labor-abundant and therefore it will export labor- intensive goods. Additionally, China undervalues its currency and, compared to a developed country, its labor laws are extremely weak. All three factors make labor-intensive Chinese goods cheaper in the U.S. What should we do? Countries cannot help what kind of endowment they have (labor- or capital-abundant). In terms of labor laws, the U.S. did not have labor standards 100 years ago either.     
    It makes even less sense to blame the World Trade Organization because trade disputes filed with the WTO imply that many countries accuse each other for doing something inconsistent with the WTO rules. Yet, almost all of them are guilty of bending the WTO rules. Unfortunately, countries’ decisions on international trade always fall victim to their domestic political agenda.  
    While we cannot control other countries’ circumstances and policies, we should be able to do the right thing for the U.S. Instead of pushing the “level playing field” agenda, we can make our domestic policies to promote our comparative advantage and thereby our long-term economic growth.
    Ayse Y. Evrensel, PhD is associate professor of economics in the Department of Economics and Finance at Southern Illinois University Edwardsville.