A twist on protectionism

Donald Trump probably has a brain which can only carry 140 characters at once. It would explain many of his policy statements, where the consequences of what he says gets missed out of his thought process. (Apologies, but he is such an easy target.)

The latest policy 'burp' from Trump is that he will impose a 35% tariff on the goods made by any American firm which has switched production out of the USA to another country.

The aim is to reduce the price competitiveness that the move will bring to the firm and so make it less attractive to move. This, Trump believes, will keep more jobs in the USA.

Analysis of this protectionist policy measure might be quite useful. Many points to make so I'm going to dot point them.

• If 100% successful the measure would keep uncompetitive (inefficient) jobs in the USA - this means everyone is worse-off in the long run.
• The firms remaining in the USA will therefore loose their overseas markets to firms that do move (possibly from EU countries).
• The loser from this policy is the USA consumer, wherever the goods are made. They either pay more for goods made in the USA or more for goods made abroad, reducing consumer surplus.
• The obvious problem might be that the firms move export sales production overseas while keeping domestic sales production in the USA. All the gains go overseas in this scenario.
• There is likely to be retaliation from the country which hosts the firms, as their exports are now being taxed.
• This policy breaks the WTO rules and therefore is illegal.
• The policy misses the really important point that the USA needs to move to industries that are high value and knowledge based, not try to hang on to low value manufacturing jobs.
• The cost advantage of moving abroad may well be more than 35%, so it still pays to move abroad.

CNN covers the story here

This topic comes under the International Economics topic for IB and is a good example of the new protectionism (economic nationalism) which is becoming popular. The problem is it goes against hundreds of years of economic knowledge on the gains from trade. An IA on this could look at the impact of a tariff, resource allocation or the impact on the various stakeholders.

Free trade is the way to prosperity - but now it is under threat.

Donald Trump's election will provide a great many challenges, including a threat to the environment. The greatest threat will, however, be to free trade and so the prosperity and wellbeing of the whole world.

That might sound a bit dramatic, and I am trying not to be political here. The fact is that specialization and trade are the basis of all the gains we have made in the standard of living and anything that restrict that makes us worse off. This is a lesson known for many years and most persuasively put by Smith and Ricardo and refined by J.S. Mill and all economists working in the field since.

There are costs of free trade. The one that is presently causing people like Donald Trump to get elected is that some industries decline due to trade. For one place to specialize in a good or service others cannot. This means some people lose their jobs in industries which are uncompetitive. People so affected tend to be pretty unhappy about it.

Economists point out that while some industries decline, others grow and so resources in a country transfer from one industry to another. The result is improved efficiency in the allocation of resources and a higher standard of living for everyone. The costs of adjustment are temporary.

It's a difficult sell, but until now we have relied on the education, good sense and long term vision of those in government to do no more than slow transition and cushion the blow for those affected. Now we have people being elected who are happy to pander to those who shout loudly, but don't have the necessary perspective. Make no mistake if the free trade arrangements we have worked so hard to build over more than one hundred years are unwound we will all suffer.

There are many articles out there on this issue right now. Below is the Guardian's.

The Guardian article is here