The Problems with Protectionism

The world seems to have turned on its head. Countries like the United States and the United Kingdom were earlier frontrunners in the race for globalization. They were increasingly pressurizing developing countries to open their markets. They thought this would allow them to have increased sales for their products.

They never thought the reverse could happen. The developed nations never believed that they would end up buying much more than they would sell. This is exactly what has happened. Both the United States and the United Kingdom are running massive trade deficits with their partners. As a result, their production is declining. Therefore, the impact of globalization on jobs in these countries is very much visible. As a result, the voters in these countries have taken radical decisions.

On one hand, Britons have voted for Brexit. There is widespread belief that this is possibly a ridiculous decision Britain could have possibly made given its current state of affairs. Similarly, there is the appointment of President Trump, an equally inexplicable and some would say a foolhardy move by the United States.

We could criticize the lack of thinking amongst the population of these countries. However, the fact of the matter is that emotions had taken over rationality in these countries. The hatred of job loss has triumphed over reason and good sense. In a way what both United States and the United Kingdom have voted for is protectionism i.e. the same thing that they were to try to convince the developing nations to get rid of! It truly has been a massive U-turn

The problem with protectionism is that it is a flawed economic policy. Some of the biggest problems with protectionism are listed in this article.

The Greater Good, or Is it?

Protectionism is often passed off as being for the greater good of a country. For instance, Trump claims that he will make America great again and that he will do so by ensuring that American jobs do not go overseas. This problem suffers from what can be called the “seen effect”. The people and problems that can be seen are given more weight as compared to the problems that cannot be.

Consider the fact that greater good implies benefitting a maximum number of people. In reality, protectionism favors only a few people. It supports the producers who get to stay in business even though they are inefficient. It also supports employees who get to prevent their jobs from being shipped overseas. But at what cost does this good come? Well, every consumer of the product has to pay a higher price because the jobs weren’t moved to a lower cost location! The pain of these consumers which are quite large in number as compared to a handful of employees is simply neglected. The money saved by these users could be used to buy other products and services which would give an indirect boost to the economy.

Protectionism Makes the State Powerful

The state has very little if any, role to play in a free market. Hence businesses do not consider the state to be an important part of the ecosystem. This is good for the economy but not good for the politicians. On the other hand, protectionism makes the state extremely powerful. Protectionism lets states simply pick losers and winners. There is no competition taking place in a protectionist economy. Instead, politicians are cutting back room deals and picking winners. Over the long run, this unruly nexus of politicians and their cronies severely impacts the efficiency of resource allocation in the entire economy.

Kills Innovation

The allure of the pot of gold at the end of the rainbow that only free markets can provide is what keeps innovation coming. Donald Trump may be able to force the producers to keep jobs within America temporarily. However, in the long run, these workers will get complacent. The productivity will drop and so will the innovation. Protectionism is the death-knell of innovation. This is the reason there are fears that a Trump presidency may lead to mass exodus of technology companies from the United States.

Retaliation

Protectionism is like a crazy policy that takes us back to economic dark ages. We have already figured out that no country is self-sufficient and that trade is inevitable. However, protectionism by one country causes all other countries to also take up similar measures. The result is a strange world where countries cannot produce what they need on their own. They have an excess of some goods and services and deficiency of others. However, they are not willing to stick to their competitive advantage and trade for other commodities. Protectionism may make good political rhetoric, but it is an absolute blunder when it comes to being an effective policy.

To sum it up, Donald Trump has not come up with an innovative policy. It is the same old gaffe of protectionist policies that are being peddled to the masses. Disturbed by job loss and the possibility of a slowdown, the masses are hanging on to every iota of hope that Donald Trump is giving in his speeches which have reeked of self-aggrandizing superiority complex.


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