The Problem With Protectionism

I have made it clear that I think that protectionism is harmful. Lew Rockwell has also done a great job of discussing why protectionism does not actually protect.

"Let’s first consider an example from current popular wisdom about the manufacturing base. Many products that were once made in the United States—thinking here of televisions, pianos, firecrackers, plastics, and bicycles—are now made in China. This has caused a great deal of alarm—all unwarranted, so far as sound economics is concerned.

But let’s say we have the ambition to change this social outcome. Anyone is free to build a bicycle and attempt to market it to willing buyers. Let’s say you rent some property, hire the workers, acquire all the necessary capital, and then put your bike on sale. In order to cover your costs and make a profit, you find that you must price your bikes above the going market price. Maybe you can persuade people that you have a special product that is better than the others. Or maybe yours will sit on the floor. Or maybe you will have to lower your price and you will find that your revenue does not cover your costs, and you have to go out of business.

No matter what you decide, this much is clear: you are not dictating the outcome. You wanted to build bikes, but it is the consuming public that decides whether it is in our interest to do so. There is nothing you have to say about it. You cannot make people fork over the money. I would venture to suggest that you will ultimately come to the conclusion that you should be doing other things besides attempting to keep up with other businesses that have lower labor and capital costs and hence can make a profit through selling goods at much lower prices.

But let’s say you decide that you don’t want to bow to the realities of the market. Instead you lobby Congress to tax everyone who buys a bike from overseas. The tax is high enough that you can continue to charge exorbitant prices for your bikes. You make a profit. But at what expense? The consumers who buy your bikes have less income left over for other pursuits, whether consumption, saving, or investment. The workers you are employing are being kept from other pursuits as well, and the capital you are consuming is not available for other projects.

Ultimately, you have skewed the entire economic system in a way that benefits you at everyone else’s expense. Others have found a way to do what you are doing much more efficiently, but because you lobbied and got your way, society is prevented from benefiting from others’ innovations. And how long must this distorted system last? That you managed to tax everyone to benefit you does nothing to change the reality that others can do what you are doing more cheaply and better. Do workers really want to be employed in an industry that is something of an artifice? Do consumers really want to pay high prices just so that you can continue to indulge in your bike-making passion?

Clearly not. At some point, people will catch on to the racket, and find other ways to go about acquiring bikes. Maybe they will exploit loopholes in the law that allow them to import bike parts. An industry of do-it-yourself bike building becomes a threat to your profits. Or perhaps black markets will take over. Or maybe people will turn away from bikes altogether and starting trying out new forms of informal transportation. Skateboards are fitted with handlebars. Gas-powered scooters develop a peddle-only option. The very definition of a bike
comes into question. Increasingly, enforcement will have to become ever more onerous.

At some point in this game, we face a choice. We can continue to impose an ever more absurd and preposterous system of regulations and protections just so that you can benefit, or we can bow to reality and let in foreign bikes for consumer purchase. Let’s say your tariff lasts a year or even 10 years. What will it accomplish? In that time, vast resources are wasted. Consumers of all sorts are exploited. Capital is consumed in economically wasteful ways. People are pushed around and the police powers of the state grow. It does society no good at all.

My point is that whatever the fate of the so-called manufacturing base, there is nothing in the long run that can be done to turn it in one direction or another. The fate of manufacturing is in the hands of consumers at large, and subject to the laws of economics which no man can repeal. It is the outcome of human choice."

Yup. Protectionism makes sense only if you really actively avoid thinking about it for more than two seconds straight.