Free trade: Does protectionism protect or destroy jobs?

Neither, according to Paul Krugman. Protectionism causes a misallocation of internal resources, i.e. an economy wastes resources on producing products and services it would be more efficient to import.

Any doubts as to where he stands on protectionism v free trade should be readily cleared up by this quote

Just to be clear, I don’t think the Smoot-Hawley tariff was a good thing — it was a really bad thing. Nasty protectionism! Bad Smoot-Hawley! Bad! Bad! Bad!

Krugman on what protectionism does cause –

Bear in mind that what protectionism does, according to textbook economics, is to cause a misallocation of resources, reducing the economy’s efficiency. It does not cause mass unemployment of resources — which is what the Depression was about.

, ,

  • jj

    In order for Smoot-Hawley to have misallocated resources there would have needed to be products and services that foreign producer could make with fewer resources than we could make them for ourselves. Before free trade gave the world free access to both our capital and manufacturing know how there were not very many products we could not make cheaper than the rest of the world. They were generally limited to agricultural products that did not grow here minerals we did not have.

  • Mick ‘O Kelly

    Forget all the theorectical economic bs projections for a minute while I relate the effects to the average North American worker due to the lack of protectionism and globalisation.I worked in an auto plant for 25 years ,the wages were good as were the benefits,the total plant population amounted to 1500 workers.We were represented by a very good union,CAW but despite their efforts our plant closed down and the jobs were moved to Mexico where the workers received about 1/10 of what we earned weekly or on average $2 per hour.
    After our plant closure most of the workers ended up in low paying service jobs,many died from industrial diseases/cancers etc ,the fortunate ones were the salaried workers who received 4 times what the hourly
    workers received in pensions and severance payouts.Make no mistake globalisation is a rush to bottom for all workers internationally,it is the biggest exploitation of workers since the industrial revolution and deserves a reciprocal response.It’s time workers pooled their strength to fight the devestating effects of exploitation through globalisation.

  • Mack

    JJ

    In order for Smoot-Hawley to have misallocated resources there would have needed to be products and services that foreign producer could make with fewer resources than we could make them for ourselves

    Nearly, subtle difference though it misallocates resources if we could produce more goods and services ourselves more efficiently than ones we import. I.e. it’s the internal relationship that matters. If it takes 100 hours to produce clothes and 50 hours to produce wine in our country, then we should produce wine and import clothes..

  • Mack

    That sucks Mick. In Ireland we’ve benefited significantly from the reverse – a large number of well-paid high skilled jobs created by North American firms (Intel, Pfizer, Microsoft, Google, IBM, Facebook etc) and since the end of De Valera era protectionism and the advent of the European Common Market the economy has grown significantly. Despite our recent difficulties we’d still be regarded as a European success story haven grown from a poor backwater into a successful modern economy in 30 or 40 years.

    The ability to outsource well-paid jobs with only lower-paid jobs to replace them does seem to be a big problem in north America in particular. Real median wages have only increased slightly since the 1980’s, most of the benefits of economic growth have flowed to the rich. I’m not sure protectionism is the answer to this, a redistributive tax system like the one I proposed here –

    http://sluggerotoole.com/2010/07/08/time-to-scrap-the-lower-marginal-rate/

    might counter that trend and help make those service sector jobs well-paid (the workers there are at least less likely to suffer industrial disaese / accidents and the like).

  • Munsterview

    Globalization is a reality for International Capital; that will go where the best returns are available and little can be done about that. The irony is that in the Western World a significant amount of this comes from workers own pension funds, this in turn is invested in hedge funds and these funds can get the best returns in low wage cost countries.

    The cost of unionized USA manufacturing jobs in developed Industrial States; or as increasingly the case what were Industrial States in the Union, against Mexico at 10% of the cost is a fine example of the problem!

    The North American Free Trade agreement was pushed through exactly with this in mind, the Government’s first loyalties was not to Workers but to Capital. This of course had an adverse effect on all citizens when millions went from a productive wealth generators and spenders contributing to the general economic well being to becoming a net, unemployment funded, drain on it.

    It is possible to have good well paid jobs and a productive economy as Sweden, Finland and Denmark can show. However there is a price to be paid for that in High Taxation and to the majority of citizens in these countries are willing to sustain these tax codes for the good of society as a whole.

    In these islands we have tried to have our bread and eat it : we have had society tax takes regulated from the ‘greed is good’ school of economics with both governments now faced with selling whatever is left of the family silver just to meet the shortfalls in ordinary running the country expenses.

    We can have human society regulated on the basis of human need or human greed; we have tried greed and seen where it has got us. We should plan economies for the next generations, not the next share dividends!

    Given the interlinkages this can only be done on a European wide basis, EU money grant aided the transfer of almost two thousand Dell computer jobs to Poland and the same again in spin off jobs. EU funds now have to be provided to retrain Dell workers for non existent jobs and the EU taxpayers are funding the bills for training workers here and in Poland for a third time.

    We obviously would not countenance job creation in Galway by closing down Dublin jobs or the transfer of jobs from Belfast to Derry in the same basis. Globalization is now a world reality and it is high time that the Western World Governments began to get real too in dealing with that fact.

    Capital already has and left to its own devises will continue it’s race to the bottom with thousands of BP and Bopals still waiting to come as costs are cut compromising safety and society everywhere. What suits the New World Order do not suit the Worlds peoples, there is a dichotomy and the worlds economies cannot be run equally for the benefit of both parties.

    Revolution anyone?

  • jj

    Mack,

    That is the theory but you can not site a single country where it worked that way. All rich industrialized countries got rich with trade protection. Name one that did not. When Smoot and Hawley introduced their tariff increases in 1930 the US was already the worlds most trade protected nation and had been for more than a hundred years.

    Following your theory after World War II both Japan and Germany should have bought their cars from us. Instead both protected their car industry while we exposed ours to free trade. Who won that battle?

    If trade protection did not work how did USA, Japan, Germany, South Korea, etc get rich. Great Britain tried free trade and abandoned it when their trade protected rivals outpaced them.

  • Mack

    Following your theory after World War II both Japan and Germany should have bought their cars from us. Instead both protected their car industry while we exposed ours to free trade. Who won that battle?

    The British financial services industry

    (think about it 🙂 or read the link below, gives a good overview of Ricardo’s theory, it’s counter-intuitive, and very few people have any sort of grasp of it, but even if you disagree with it it’s still worth reading).

    http://en.wikipedia.org/wiki/Comparative_advantage

  • Mack

    JJ –

    Apologies I thought you were British not American. The American car industry was very certainly protected, not only that but very protected. Far more so than the German car industry – remember it’s an EU country and was competing with France, Spain, Italy, Britain within the common market. The idea that America had free trade in cars is ludicrous.

    See (for example – there are many, many, more)

    http://www.america.gov/st/econ-english/2008/June/20080608122606xjyrreP0.9163782.html

    As Japan’s share of the U.S. market grew, the Big Three U.S. automakers—Ford, Chrysler, and General Motors—convinced the federal government to impose a cap on the number of cars Japan could ship to the United States. In 1981, the Reagan administration agreed to impose such restraints, despite President Reagan’s free market philosophy, because the auto and auto parts industries were major employers in the United States. Moreover, such employment was largely concentrated in a number of politically pivotal states—Michigan, Ohio, and Illinois—that exerted a great deal of influence in Congress and in presidential elections.

  • Mack

    Way to pesismistic MV, remember Cherobyl and the Aral Sea were much worse socialist / state run / communist disasters. We have tried planned economies and societies and found them much, much worse!

    I’m not sure capital has done as well as you think. The stock market is negative in real terms over the decade, dividends are at or near historic lows. In the UK labour share of revenue is at the high end of it’s range (in Ireland the stats are heavily distorted by transfer pricing). The real challenge is a particular segment of labour and capital are expropriating any gains in living standards for themselves. Principally upper management (executives) and finance capital (rather than industrial capital). – We could rectify this via the tax system, with a negative income tax rate.

    On NAFTA – living standards in Mexico have risen from developing world to the cusp of developed world. Real (inflation adjusted) median wages have increases (albeit sligtly) not decreased in the USA. There has been real growth. The challenge would be to evenly distribute it.

    Pensions are not invested in hedge funds by the way. They are normally invested in long only mutual funds that invest in shares or bonds, or held in cash.

    We obviously would not countenance job creation in Galway by closing down Dublin jobs or the transfer of jobs from Belfast to Derry in the same basis

    Are you advocating that we send IBM, Intel, Microsoft, Google, Pfizer etc (virtually our entire export & hi-tech economy) back from whence they came?

  • slappymcgroundout

    “Revolution anyone?”

    Indeed, but humans are stupid (to borrow from our gal in Men In Black: the person is smart, people are stupid). If they aren’t revolting in the various and sundry third world hovels, there is little hope for revolution here.

    Now on to Mack. The problem is liberal arts majors. Who have no understanding that life imitates science. Here, in a single word: equilibrium. Tariffs act as barriers within the system, to prevent equilibrium. Without those barriers, the system will find its equilibrium. And so you want a decent wage, health care, and paid vacation. But they’ll work for pennies on the dollar, go without what we would consider adequate health care, and what is this thing called paid vacation? The problem with Krugman is that he assumes that all is equal and so this is just a battle for efficiency and creativity. It isn’t. Since when they are working for substantially less, in every sense and respect, they can be even more inefficient than we are. And the related problem is, well, there is the assumption that a job will replace the lost job, and so that steel worker who lost his job will find some other job so that he might buy the steel now being manufactured elsewhere for a relative pittance. Problem is, our history says that such isn’t so. Anyone with even a rudimentary understanding of the notion of equilibrium and the current world condition will understand why that is so.

    I otherwise doubt that you will all those jobs. Your standard of living is not so low as compared to ours that it would necessarily make sense to have those jobs come back. We aren’t losing to you, but to China and Malaysia. Apple and Intel are both considered US companies, though they really aren’t, since while their headquarted here, the overwhelmingly majority of their workers are in Asia.

    Another Krugman is startups. The former CEO of Intel tears Krugman a new one (as it were) in a piece he wrote that appears on Bloomberg. With Mr. Grove’s point being, sure, they’ll start up, and be here when they go public, but problem is, when they scale up the operation, that won’t be done here, but in China, since not only will they work for substantially less in every sense and respect, those building the new factory will also be working for substantially less. So more room for higher executive pay and other manifestations of increased profit all around. And so Mr. Grove reports on the “China policy” of the investors, meaning we won’t be funding your scale up of operations unless you ship every job possible to China.

    Lastly, here’s Mr. Grove’s piece, and you can read the other reason why, something to do with the loss of knowledge that will eventually come as well:

    http://www.bloomberg.com/news/2010-07-01/how-to-make-an-american-job-before-it-s-too-late-andy-grove.html

  • Keynesian economist in stating intervention is not evil per se shock.

    When this is all over, Krugman will be widely discredited. He should have quit while he was ahead in 2008.

  • Mack – your way of the mark. There was nothing particularly “socialist” or “communist” within the Soviet Union. It was essentially a state capitalist venture, with a dictatorship of central control. there was zero democratic involvement from ordinary people or workers.

  • Mack

    Slappy –

    Grove’s piece is discussed here. He raises some valid points – his remedy (protectionist tariffs) is nonsense and completely ignores that all countries have industrial development policies, subsidies, tax breaks and the like.

    http://sluggerotoole.com/2010/07/02/job-creation-what-andy-grove-giveth-deng-xiaoping-taketh-away/

    Imports have to be purchased with exports (or at least money borrowed from abroad). There have been rich and poor countries throughout human history and it does not neccessarily follow that competition from poor countries will impoverish the rich. Or indeed that poor regions such as Northern Ireland, Scotland and the North of England will impoverish rich regions of the UK.

    Tariffs act as internal barriers preventing the most efficient internal equilibruim (although the notion that markets are self-correcting around equilbria has taken something of a battering lately). There are much larger / more important barriers that prevent rich countries becoming poor and vice versa (including state insitutions, democratic government, rule of law, trust levels, corruption, eduction levels, infrastructure, the banking system, distribution channels, the currency, capital and capital formation and much more).

  • Mack

    Don’t know if you saw my reply to your post on the Grove article, I’ll repeat the most important points here.

    Tariffs on imported goods might protect American companies internally (for a while) but it would ensure they can’t compete in export markets (because there would be less pressure on American firms to become more efficient in production). Should the foreigners become even more efficient again (as happened to the US car industry) such that the can compete at Price * 115% or so – then there is truly no way back for the industry. Sure you can bump up the tariff but the local industry is just going to become less and less competitive as the foreigners become more and more productive.

    Do you believe that if an import tax of 100% was slapped on Chinese goods American firms could outcompete them in Europe, Asia, Africa? Do you really think that the Chinese wouldn’t be back selling TVs for less than the Americans in a year or two?

    Imposing a tariff on foreign labour in American MNC’s would mean that foreign firms could sell products cheaper than American firms in American markets. It would mean that if American firms moved jobs back to avoid the tariff they’d be facing higher costs domestically and would be out-competed in their export markets by firms not facing tariffs.

  • Mack

    So what would you envisage a socialist / communist economy looking like? The record, of attempts so far is pretty absymal. Liberal capitalism is the least worst option we have identified in practice.

  • Alex

    He is right. It does not destroy jobs, it relocates them. But the only focus here is in the efficiency of the economy as a capital exchanging and exponential growing thing.
    This is over simplistic, like most economists, Krugman can’t see pass the models. Economy is a multi disciplinary science with influence in all aspects of life.
    Though this seems good in short term, this is a disaster in long term. For the simple fact that the Chinese don’t buy what they produce. The only way we aren’t in a complete catastrophe sooner is because of credit. Credit is like selling your future in return for stretching the life you can no longer have because high paid jobs are a thing of the past. However this is again a mistake in the long run. We are on a dead economy making schemes for stretching it a little longer, making the next crisis worse or even unstoppable… An unstoppable crisis is a catastrophe like the great depression, only solvable by one of 2 not so different things: Complete nationalization of production or total mobilization for war.

    Make no mistake. Money just don’t disapear it merely changes hands. If someone gets poorer, other gets richer. Only hyperinflation or a catastrophe scenario can make money disappear. If that happens even the rich will suffer. Given the greed that’s ripping the world that’s a serious possibility.

  • Alex

    Moreover… I think economists and most CEOs forget (conveniently) that economy is all about supply and demand. If you cut demand purchasing power you are putting the economy at risk. This is precisely what corporations are doing simply because they are only looking out for themselves instead of looking out for the health of the economy.

    Credit is like selling your soul to the devil. Sooner or later you’re going to pay back dearly with 20% interest.