The Harmful Effects of Protectionism
Acton Institute Powerblog

The Harmful Effects of Protectionism

What is the biggest economic problem that the U.S. is currently facing? Depends who you ask.  Some social justice warriors would tell you that capitalism is ruining our economy, yet many who have studied and understand economics would argue the opposite. Capitalism is not to blame, but rather cronyism and protectionist policies are the ones wreaking havoc on the economy.

In a previous post, I discussed how occupational licensing as a form of cronyism is trapping people in poverty. However, cronyism is a much bigger problem than just occupational licensing. The U.S. struggles with other forms of cronyism too, such as protectionism through quotas, tariffs, and corporate welfare.

Quotas and tariffs make it extremely difficult for international firms to sell their product in the U.S., thus protecting U.S. firms from international competitors.  Corporate welfare is government support of a private business usually through direct money transfers (subsidies) or tax breaks, often protecting big firms from the competition of smaller firms.

This form of cronyism typically occurs for two reasons:  First, in an attempt to create new domestic jobs or prevent jobs from being sent overseas and second, because politicians promise “goodies” to corporations and individuals that help them get elected.

Perhaps some people find it acceptable for politicians to return favors to corporations for funding their election, but it is probably a safe assumption to say that most people would have a problem with this.

Where many get caught is at the idea that the government should give money and tax breaks to private businesses in the name of protecting the loss of jobs to international competitors. On impulse, these kinds of policies sound good, especially to the average blue collar worker whose job could be lost to an international firm, but ultimately these policies hurt our economy.

Without protectionist policies, firms are forced to compete with each other on an international market in order to provide the best product for the best price. When government gives freebies and tax breaks to corporations, it prevents them from having to compete with other corporations and in the end it causes the consumer to pay a higher price for a lower quality good.

But perhaps there are people who are willing to make the trade-off of paying a higher price for some goods in order to prevent the jobs that produce those goods from being sent overseas.  The problem is that while some jobs may be protected, these protectionist policies can force more jobs in other industries to be outsourced.

For example, the U.S. has policies that protect American sugar producers from international competition saving all kinds of jobs in the American sugar production industry.  All of this comes at the cost of higher sugar prices, about $3 billion per year.  These costs fall not only on sugar consumers but also on the producers of products that use sugar such as Life Savers, who moved a factory with 600 jobs from Holland, Michigan to Canada.  The U.S. sugar program was designed to protect the U.S. sugar producer but in the end it has only sent jobs to foreign countries.

Protectionism has more consequences than driving up the price of goods and sending jobs overseas, it also stifles innovation.  When a firm is relieved from competitive pressures with corporate welfare and government subsidies, it has no incentive to improve itself.

It seems pretty clear that corporate welfare and protectionist policies are harmful to our economy, so one might think that politicians from all across the spectrum would join together to fight it.  But this simply is not the case.

Again, politicians are easily bought out by corporate interest. For example, Marco Rubio, the U.S. senator from Florida.  He, “a consistent vocal supporter of the sugar subsidy,” also receives thousands of dollars from sugar companies.

While there are politicians who support cronyism because of corporate interest, there are others that support it simply because they don’t understand its harmful effects.  For example, in the Democratic debate in Flint, Michigan on March 6th, Vermont senator, Bernie Sanders made this statement: “I was on a picket line in the early 1990s against NAFTA, because you didn’t need a Ph.D. in economics to understand that American workers should not be forced to compete against people in Mexico making 25 cents an hour.”  I thought Senator Sanders’ was opposed to rigging the economy against the poor, but apparently his compassion for the poor only extends to Americans.

If free-market capitalism, and all of the benefits it brings to the economy, is going to be effective we need to oppose its biggest threat: cronyism.  This starts by educating ourselves on basic economics.  I recommend reading “Economics in One Lesson” by Henry Hazlitt.  But more importantly, the biggest challenge to fighting cronyism requires that corporations eschew subsidies and special favors from government.  Until this happens, cronyism may never go away.