Should we protect ourselves against international trade?
(picture from Wix's library)
Hello everyone! There are so many things happening these days, from the developments on Brexit to the USA’s elections… not forgetting the Canadian delegate “storming out” of negotiations with the EU for a new trade deal.
This month’s article relates to all these events: trade and protectionism
During the great depression (early 1930s), many countries decided to tax and block a good number of imported products to help their own local producers. The idea was relatively straightforward: less competition from foreign firms should help our own sell more inside our borders. This should create more employment, which should create more demand, which should help our firms even more… we refer to that as “supply creates its own demand” and it mostly comes from Jean-Baptiste Say, a French Economist.
That is all well except that it didn’t work at all! Trade ended up being much more complicated than Economists thought at the time.
It is true that imports can hurt local production when these domestic producers are not as efficient as the foreign ones. Efficiency can be in terms of costs (which is the case in many markets) but also in terms of quality and functionality.
However, imports can also allow for more value added industries to grow thanks to these better inputs that are being imported. Foreign competition can also force domestic firms to change and innovate in a way that they would not have done otherwise, often benefiting the broader economy.
Also, blocking other country’s imports is very likely to lead to them blocking your exports, which hurt your economy even more.
Protectionism is often cited as one of the main reasons for the world economy to have taken so long to recover after the great depression.
Fast-forward to 2008 or so, the great recession. I must say that I was very proud to see that major economies did not fall in the same protectionist trap this time around. There was a good amount of coordination between countries, expansionary fiscal and monetary policies were used to help economic output during harder times (at first, then we got the whole austerity debacle), and trade kept flowing relatively well (given the reduction in economic activity and income)… all in all we had *finally* learnt from our past mistakes.
Eight years of low economic output and high unemployment, coupled with an oil shock (that may have reduced global demand due to lower income of oil-rich countries), is about to change all that it seems.
The IMF published a report this year highlighting the appearance of anti-globalisation political parties and individuals. I do have the impression (rightly or wrongly) that more politicians promote protectionism to get votes, which means that this position is more popular among voters.
SO! Should we open or close our borders? Is trade good or is it bad?
As you all know by now, my very favourite answer of all time is: it depends!!!!!!
International trade has some good things and some bad things. The trick, as with everything else, is to try to get more of what is good and less of what is bad. One thing that is clearly bad is to have complete open trade in everything or to have complete protectionism in everything… the average is almost always better than the extremes in Economics.
Some of the good things: trade can bring new and better products to a country, which can be used to improve people’s lives (or make better products in the case of inputs); trade can open new markets that can lead to economies of scale (and create more employment); trade brings access to new technological innovations that can make a country much more productive; trade also brings new knowledge that may help develop whole new industries that didn’t exist in the country before; trade forces domestic firms to improve their products and their production; and finally, trade allows to diversify risk in different markets (even of the same product), making the economy more robust to internal shocks.
Some of the bad things: trade can lead to the bankruptcy of domestic firms and industries (and create more unemployment); trade can bring undesirable products that create long-term problems for a country; trade can be used as a political weapon to influence domestic laws and regulations (by threatening to stop trade if a country does not relax certain laws for example); trade can displace marginalised populations to prioritise certain industries; trade can create a dependency on certain foreign interests (countries and companies alike); and finally, trade can increase instability of the economy against foreign shocks.
As you can tell, countries need to balance their trade policies based on their specific situation. Bigger economies tend to have more bargaining power with their trade partners but may not be able to adapt as fast to any change in trade patterns. Smaller countries tend to be much more sensitive to foreign shocks but they may be able to find new markets more easily given their small production.
Next time someone tells you that globalisation is great or is catastrophic, take time to ask them: for whom?
Take care everyone and thanks for reading!