The fallacy of protectionism

The fallacy of protectionism
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Álvaro Martín

Álvaro Martín

Estudiante de economía internacional. Defensor del libre mercado desde que tengo uso de razón. Una sola frase para cambiar el mundo: "Laissez faire". Autor de "IN DEFENSE OF FREEDOM", prologado por Daniel Lacalle, a la venta en Amazon y en la tienda online del Club de los Viernes.
Álvaro Martín

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Patriotism and protectionism

Many politicians nowadays usually employ patriotism as a relevant and exalting argument, and many times as a refuge for their protectionist or interventionist ideas.

Donald Trump has been lastly a clear example of it, announcing policies on trade and measures as tariffs or tolls on imports that even his own companies are not accomplishing at the moment.

He wants other firms to do what he says, but not to follow his example.

Donald Trump

Donald Trump has seemed really sympathetic with trade union leaders, uncompetitive American firms (which were suffering and losing large amounts of money due to cheaper and more efficient imports) taxpayers and local businesses, who saw how the government will now steal less money from their pocket each month due to a lowered Corporate Tax.

With Trump’s measures, and according to the Cato Institute, more than 1.7 trillion dollars will be lost on international trade, which into the national markets of the USA would be transferred as higher prices, due to firms not being able to purchase components outside the country, which will generate a large cost-push inflation process.

Capital attraction

Obviously, if capital attraction is lowered unemployment will increase, due to less workers hired in transnationals firms, and there is no bad time to remember that in today’s globalized economy, FDI supports more than 40% of employment in developed countries, and reaching nearly 70% in emerging markets.

Even though, in the next few months, or inclusively in the first year of mandate we could observe how there will be short-term economic growth and even a contraction of the unemployment rate, due to a larger investment in public expenditure and governmental labour force, on the long run it will be transferred just on a greater increment in external debt.

Global GDP growth protectionism


America has always been a country limiting external competition since 1933, trying to benefit national companies by imposing higher tariffs or taxes on multinationals.

This restrictions attack directly supply of firms and not the demand side, as some economists think.

The problem is not demand anymore.

Manufactured products

Looking at the secondary sector of the economy, which deals mainly with manufactured products, we’ll know that this sector is the most affected one by these policies due to higher prices of provisions and larger difficulties and costs for international trade.

Trump has declared recently, that all manufactured products sold in America must end at least their process here, what is called usually a “domestic end product”.

Several studies, done mainly by the Heritage Foundation attach that protectionist tariffs will increase the mean manufacturing costs by nearly 50%.

Other one of mains Trump projects is the construction of multitudes of new highways and public infrastructure.

These requirements are clearly under the public interest threshold, and will only drive to a short supply chain, which will cause greater debt increments due to exploration and production projects of natural resources into America.

Many of the largest low-cost products suppliers and engineering firms are actually located in the US, due to the increasing qualified human capital.

These companies will be mostly excluded from the market by higher prices and lower level of imports and exports, due to retaliation, which could generate in the mean term a high-value production outflow of the US, due to higher cost projects and lower disposable income of citizens to finance them.

Mr. Trump seems to prioritize US companies and their right to foreign firms, even if they were previously settled with their headquarters into the country, being an objectionable idea, due to more than 6 million Americans work for foreign small and mean firms, without taking into account externally settled multinationals.

Lower economic growth

Parallelly, there are packages of nearly 1.2 trillion dollars of FDI coming from external companies with the unique objective of investing privately into the US infrastructure.

You can perfectly imagine what comes next if the protectionist measures and rules are applied and taken into law… higher unemployment, lower economic growth resulting in diminished levels of disposable income and negative trade balances, with direct dependence on FDI levels, causing also negative effects on the Current Account Balance.

protectionist measures since Jan 2008

Insulating markets and isolating businesses is never a good idea, as this prevents resources from flowing freely through countries and intervening into various production processes, which on the long term descends on larger added value goods being created.

A globalized world

The idea of restricting external trade in a globalized world will just bring lower expending due to higher prices and lower output levels.

In an intervened and “protected” market, companies are fewer, take more time to develop and grow, and their costs are risen.

Why would we like to put obstacles to economic and social development? As once, Henry George; a libertarian American defender of the Single Tax, declared:

What protectionism teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.

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