Protectionism, the practice of shielding a country’s domestic industries from foreign competition by taxing imports, has a strong appeal for Americans because it seems so obvious. If the globalized economy is a zero-sum game, then a “win” for China in the form of increased manufacturing jobs is likely to be a “loss” for America. The solution would therefore be to prevent China from taking “our jobs.”
But sometimes what seems like an obvious solution can exasperate the underlying problem. Imagine that you are stranded in the Atlantic Ocean and dying of dehydration. The “obvious” solution would be to drink the water that is all around you — the water from the ocean. But if you drink the salt water, you’ll merely be increasing the level of salinity in your body, causing you to die even sooner.
The same is true for protectionism. As I wrote on Tuesday, America’s adoption of protectionism makes us poorer, not richer. But the fallacy of protectionism tends to persist because it is associated with other economic fallacies and misunderstandings.
A prime example is a recent comment to my article on Facebook. I don’t want to pick on or publicly embarrasses the person who wrote it, but I think it provides a helpful example of some of the faulty thinking that makes protectionism appealing.
Here is the comment with my attempt to clear up some of the misconceptions:
I’m neither an economist nor a policy maker but I don’t agree with your premise that increasing overall consumption is a good thing. This country is worshiping at the altar of wanting more because we believe the lies that consuming will make us happy.
I certainly don’t think consuming more will necessarily make us happier. But if we say we want “more jobs” what we are saying is that we want “more consumption.”
Think about it this way. Every job produces a good or service, right? And for the job to be sustainable, there has to be a demand for that good or service. If no one wants to buy the product — if there is zero demand — then there’s no reason for the job to exist.
If we want more jobs then we need more demand for goods and services — which is just another way of saying we need more consumption.
What about the cost to the worker in China making tires? (To use your tire example from the article). What is that workers standard of living? Are they treated fairly? Do they work in a safe environment?
We should certainly consider those factors, and do what we can to improve working conditions in foreign countries. But we also have to be careful not to make the perfect the enemy of the good. It’s easy for us in a wealthy, developed country to say that if a job is not safe and workers aren’t treated as we’d like that the job should not exist. What we forgot is that Western countries are only a rich and advanced today because our ancestors went through a similar period of transition as China. Back in the era of the Industrial Revolution many jobs were unsafe and the workers weren’t treated as well as they should have been. But even with those harsh conditions they were often happy to have those jobs since they improved a worker’s standard of living.
That is mostly true in China too. We must always ask, “What is the alternative for the Chinese worker?” Unfortunately, the answer is that if they weren’t working in “sweatshop” conditions they would likely not have any job at all and would be living in extreme poverty (less than $1.90 a day).
In fact most of the reduction in poverty since 1990 is because of the economic growth of China. In 1981, 65 percent of the Chinese population lived in abject poverty. By 2007, the number had been reduced to four percent. They reason is because they had jobs that, while not up to the standards of a Western nation, helped improve economic growth and the living conditions within China.
And you’re telling me that shipping all the raw materials to make that tire in China to China, then having it made there, then having the product shipped half way around the world costs less than just making the tire much closer to where it will be purchased?
Yes. Even with all the tariffs that are added on now it is obviously cheaper. If it wasn’t we wouldn’t do it.
The cost of each step in the manufacturing process or supply chain is added to the final cost of the product. The cost of shipping raw materials to China is included in the final price of goods that we buy from that country. If it raised the price too much, then the product could be mad somewhere else for much cheaper. That is one of the advantages of free trade for Americans: we can all benefit from the comparative advantage of foreign countries.
The fuel and time used to ship materials and products cost more than what it would cost to have someone manufacture the product locally.
That’s not true at all. If that were the case then most tires would be made in Saudi Arabia. Approximately 70 percent of all rubber used is tires is synthetic, made from petrochemicals. Since it takes about seven gallons of oil to make one tire, and Saudi Arabia has an abundance of oil, we’d expect that tires would be made there. Why aren’t they?
Because Saudi Arabia has no comparative advantage in tire manufacturing. It’s cheaper and easier for them to send the raw materials (oil) to another country (China) and have the tires made there.
What purpose does an increased profit margin of 5-15% annually serve? Why does a public corporation need increased profits every year?
The short answer is because profits are necessary for economic growth, and economic growth is important because we like babies.
Imagine a village that has 100 people living in a state of economic equilibrium, that is, their economy is neither growing nor shrinking (i.e., companies neither increase profits nor increase their losses). Everyone has just enough food, clothing, shelter, and other amenities to take care of themselves—no more and no less than enough for subsistence living. Now let’s imagine that a “baby boom” occurs, and 20 new children are added to the village. What happens to the standard of living for the villagers? Assuming that they redistribute their resources equitably, everyone (including the new children) will only have 83 percent of the resources they need to survive. Over time, they will begin to starve or die of malnutrition.
We can see this occurring today in countries with low economic growth. As the population increases, there are not enough resources for everyone to rise above the poverty level.
Similarly, in the U.S. we need to create around 400,000 new jobs every month just to keep up with the babies that are growing up and entering the labor market. If the economy does not grow, there will be no jobs for them. In the short term redistribution of resources (e.g., unemployment compensation, welfare) will prevent the unemployed from going hungry. But without long-term growth a countries wealth becomes depleted, causing instability and social breakdown.
So when companies make fewer profits there are fewer jobs for (grown up) babies.
Increased annual profits is the true problem. Not tariffs.
If you want an increase in jobs, you should want an increase in profits.
If a company makes the exact same profit every year then they have no extra money for investment. After all, profits either goes toward new investment or are paid to shareholders as dividends. That means the profits either turn into spending —thereby increasing profits of other companies — or savings, which is simply investment in other companies or ventures.
If there are no increased profits, there are no new jobs. What happens to all the babies (who were born 16 to 18 years earlier) who are entering the job market? Without increasing profits they won’t have jobs.