Religion & Liberty Online

What are the unintended consequences of American protectionism?

Protectionism is often associated with patriotic zeal and concern for America. While citizens should certainly have concern for their nation, protectionist measures do not necessarily secure the economic results desired. Acton’s director of research, Samuel Gregg, writes about the unintended effects of protectionism in a recent article for The Stream. These policies often hurt the very people they’re meant to help. Gregg, while admitting protectionism may be well-intended, indicates the superiority of free trade in bringing about human flourishing. Samuel Gregg begins by criticizing the concept of protectionism:

The very word “protectionism” is one of its selling points. It implies that those who favor protectionist measures want to shield, guard and defend Americans from forces which undermine their economic welfare. But does protectionism realize these goals?

Generally speaking, the answer is: no.

In the first place, measures to protect particular businesses don’t buffer them from the technological changes that are among the biggest disruptors of the economic status quo. No subsidy from the federal government in 1900 could protect the American horse-and-buggy industry from the birth of the modern car when Karl Benz built the first prototype in Germany in 1885. His technology crossed the Atlantic and Henry Ford eventually developed the Model-T. This created wealth for many, jobs for millions, and greater ease for all.

Gregg affirms the fruits that can arise from free trade and criticizes the protectionist ideals that stifle innovation and economic growth. The stifling of free trade will cause more harm than good in its goal of benefiting Americans. Additionally, while having the intention of saving jobs, protectionism can actually cause a net-loss in jobs. To illustrate his point, Gregg covers the U.S. auto-import quotas of the 1980s. He says:

Between 1981 and 1984, the US imposed import quotas on the car industry. In this case, the import quota sought to limit foreign car imports and thus ostensibly benefit American car manufacturers and workers. Indeed, approximately 22,000 jobs were saved.

Unfortunately, it also resulted in a 41 percent average price increase in the cost of a new American car over that same period. In other words, this protectionist policy encouraged the American car industry to be less efficient. Millions of American consumers picked up the bill.

The problems didn’t end here. The price-increases contributed to lower demand for cars from those same American consumers. That led to fewer sales and subsequent lay-offs of over 50,000 American workers by car manufacturers. As one report retrospectively noted, “Thus, even though 22,000 jobs apparently were saved, the layoffs caused by the price increase actually produced a net loss of 30,000 jobs.”

In his conclusion, Gregg affirms that free trade may not be a fix-all to our economic problems, but indicates that it can serve as an incentive-force in the market that creates economic growth and greater access to resources and, although imperfect, is certainly preferable to protectionism.

The competition created by free trade generally results in one of two responses from affected American businesses. The first response is to try to out-innovate and out-compete foreign competitors.

As a result, some businesses will not only survive but grow and prosper. Consumers benefit from better and cheaper products. Other businesses will, despite their best efforts, fail. This happens every single day. And sometimes the competition that drives an American company out of business comes mainly from other American companies.

The second response for businesses facing foreign competition is to request state assistance. This is usually made in the name of the national interest or American jobs. But it actually has more to do with (1) protecting what industries regard as “their” markets and (2) their inability to make the hard-decisions which are part-and-parcel of business.

An entire industry may even calculate that it’s more cost-effective for them to spend resources on lobbyists to secure some sort of government subsidy. That’s called crony capitalism, which, because of its corrupting effects, is even more reason for America to resist protectionism.

…Certainly free trade isn’t without its downsides. But that’s not a reason to blind ourselves to protectionism’s many flaws. In the long-term, protectionism isn’t in America’s national interest. It won’t make America great. Let’s hope we don’t have to rediscover that truth the hard way.

To read the full article, click here.

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