Sneaking Protectionism Harming The Economy

from the unintended-consequences dept

Another popular topic around here lately has been this push for protectionism from people who are taking a very short sighted view of how the world works. Declan McCullough’s latest opinion piece points out the dangers of protectionist policies, in that it makes US companies less competitive on a global basis, while increasing the prices of goods to consumers. This doesn’t help anyone. The simple view is that it helps the companies that have to compete with cheaper foreign goods, but that’s not true. It actually harms them by giving them less incentive to improve their own processes, while also making it much harder for them to sell products outside of the US (where they have no protection). The people who claim that it saves jobs are wrong as well. It might allow some people to keep their jobs a little longer, but only at the expense of the overall company. If the company can’t compete, it can’t employ anyone. Yes, it’s difficult for companies to remain competitive on a global scale, but if you’re in business, it’s your job to build a competitive position. Putting in place protectionist policies does much more to threaten the basis of our economy than to boost it.

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FreeWine (user link) says:

Competition Not a Universal Cure-all

Today there doesn’t seem to be enough channels for pundits to proclaim their unshaking belief in the value of fair competition (so called Free Trade) in the marketplace.
However, it rarely applies to their own situation. Does GWBush think that more “competition” from democrats will improve the Republican party? It sure doesn’t show from his leadership choices.
Why not have private police forces competing against government sponsored police forces? Wouldn’t that make them as efficient as school vouchers have made our public schools?
What about US drug suppliers, they seem to be awfully unwilling to enjoy the benefits of competition with their Canadian rivals?
Equality in global economic systems seems to me to be a goal we will never reach. Climate, culture, wealth, wages, education, natural resources, etc. all make for an uneven playing field.
Somehow the same people who tell us that 80% of the cost of just about everything is wages, also believe that a tariff of a few percentage points will destroy the balance of trade. Sounds like BS to me.
This economy only appears to be a meritocracy to those born into priviledge, the rest of us cannot close our eyes to its injustices.

Greg Nelson says:

Re: Competition Not a Universal Cure-all

I would have to disagree with a few of your conclusions FreeWine…
I dont really like the comparisons you make to justify your position. Elected officials get to where they are by playing the political ‘game’, by being able to convince people to vote for them. The current system voting systems
used in the western world is not structured in a way that encourages better government management. It encourages
candidates who are better at playing the game, by making policy that appeals to the wider audience and getting
elected. You are comparing apples to oranges here. The election process merely shows that George W Bush is good at
getting elected.
But lets just say the Democrats did become more competive. They figured out how the play the game better in a
replicatable systematic way and so beat down the Republicans in the next elections. If the republicants did nothing,
they would beaten again and a again. The republicans would have to do something to stay competitive. Competition
forces action.
Protectionism here would be a central party saying to the Democrats “Okay, you aren’t allowed to discuss economic
policy because you do it so much better at it than the Republicans”(saying that this is where the improvement was,
assuming it was something everyone cared about). Which now gives them equal ground. So now the Republicans dont have
to worry about economic policy because it’s emphasis has been diminished by this third party. This is perhaps an
extreme example, but I am trying to give an equivalent example.
Competing police forces is not feasable because of the way law enforcement works. All Law enforcement has the one
goal, and that is justice.
Setting up competing police forces would be like setting up sub companies within a company to achieve the same thing,
but with absolute cooperation[a cooperative competition?]. Any information or benefit would immediately have to be
shared with the competition. If you dont cooperate, you dont achieve the common goal of justice because information
or procedure that could have solved a case or found someone innocent wouldn’t have. So you basically have several
carbon copy organasations, but you have the added burden of ensuring absolute communication between the two. You may
as well just have the one police force!
Political parties, corperations do not have shared goals, can effectively run by themselves as a sole unit. They dont
need to share, in the end they have selfish goals[to be elected/to earn money]. That is why you cuold not set up
competing police forces, though perhaps you could set up another to foster cooperative competition.
I am unfamiliar with school vouchers. I am not a US citizen.
The drug trade is hardly aligned to provide the best product at the best price. NO suppier in the drug trade wants to
see cheap product highly available because that means less money for them. There are NO benefits to competition for
these people, there is a LOSS. It is logical therefore that anyone in this profession would actively work against any
means to bring about competition by any means necessary.
Equality in global economic systems is going to take decades, perhaps even hundreds of years. This is really the Only
feasable way to really Really fix problems such as global poverty and hunger. We will forever be supporting nations
unless they can create wealth and trade.
Protectionism only serves to Hinder this. Protectionisms puts mechanisms in place to prevent ‘fair’ competition.
Lets take a supremely simplistic view. There are 2 countries in the world. They each produce only 1 product. Poor
counrty labour costs $50 to produce widget X, Rich countries labour costs $100. Assuming there is no additional cost
to having the product produced in the poor country, 50% of Rich countries corperations shift their production to the
poor country. A 50% saving to them, they can either pocket the saving, or reduce the cost of their Widget. WHat has
happened is a shift in the demand for labour in both countries.
Because demand has reduced in the Rich country, you now have 2 people fighting for 1 job. Wages will go down, or
rather, not go up. So you have a loss. Wages go down. But the product is now cheaper, or they make greater profits,
so the rich country has gained as well.
In the poor country there has been an increase in demand for labour for this job. Provided the government labour is
in place and proper unions, and nothing stopping wages going up – the wages will go up.
Short term, there is both a Gain AND a loss to the richer economy. But definitely a gain to the poor country. They
gain the money from labour, and the knowledge on how to create these product.
This is really just explaining the start of the process, the closing of the gap. In the end there is a levelling out. Through protectionism you block this bridge from being created.
This is a very simple example where equality could be reached relatively quickly. In the real world things are much
more complex.
I disagree with your last sentence the most.
Wealth is derived from the value that one[or one’s family] has been able create in their life AND how well one has
understood how the capitalist system works. Sure there are exceptions, but this is generally how things work.
A person who is a cleaner by trade is never going to become a billionare by cleaning toilets. It is a service that
practically any able bodied person can provide, there are a large number of people who can provide this service.
I give you the example of the man who invented the white LED. That invention made his Company millions. He got crappy
bonus that in no way was sufficient for the value he created. He was able to create immense wealth, but he did not
have the understanding or was not in a position to be able to fully take advantage of his invention. So you need to
understand How things work.
You get a 30 billion dollar net worth by taking a risk and starting a mail order computer company. By streamlining
business processes to reduce costs, by making an attractive product for millions of people. Or something like that…
It is a Detriment to the economic system that only the priveliged are given the ability to achieve the greatest
heights. You are preventing people from creating wealth, that is a stupid BAD crazy thing!
Capitalism rewards effort, risk, creative innovation. Fair competition ensures continual advancement, better products, lower costs, it prevents stagnation.
As you may have gathered, I believe in Fair competition and open markets…
[Note – I have written alot, I hope this all makes sense. I was not the best english student 🙂 ]

Greg Nelson says:

Re: Re: Mistake

I would like say that my statement about ‘drug suppliers’ is utterly irrelivant.
At the time I did not realise that FreeWine was talking about US Pharmaceutical companies, not actual drug dealers.
Where I live, drug companies/drug stores are never referred to as drug stores but ‘Pharmaceutical company’ and ‘pharmacies’. You only ever hear about ‘drug stores’ in US television shows.
So I just assumed he was making some crazy point about drug dealers 🙂

Mike (profile) says:

Re: Re: Competition Not a Universal Cure-all


Thanks for the great post! I think you did a fine job.

By the way, I agree with your general assessment of the police situation, but there are plenty of cases where there have been private police forces as well – and sometimes they do “compete”. However, on the whole, policing is a situation that’s best served by some sort of natural monopoly. That’s generally not true of commercial situations.

FreeWine (user link) says:

Re: Re: Competition Not a Universal Cure-all

Thanks Greg, but I’m not sure what position of mine you are disagreeing with.

My point, and I also apologize if I didn’t make it clear, is that the simple reduction of tarrifs does not create a “fair competition”.

Much of the bluster of free trade advocates comes from a simple unwillingness to pay taxes and be regulated. The current political environment has pushed a belief that contributing to the common good via taxes is always a punishing waste of resources. It has also pushed the idea that corporations are simply noble-minded job creation engines, that fully realize the importance of working for the longterm sustainablity of our society. Regulation from governments could only be a wasteful hinderance to the advancement of such noble entitites.

The corporation is an entity designed to gahter authority and power, while reducing personal responsibility and accountability. As “ownership” has been dispersed to vast multitudes of investors, their “authority” has become completely dilluted. The result is that corporate strategies are now designed to create wealth for management…not shareholders.

These types of entities are needed in a complex economy like ours, but they demand close regulation to prevent fiascos like Enron, WorldCom, Tyco, etc. robbing shareholders and employees alike. As these companies globalize, they become harder and harder to regulate.

Typically, the first thing they outsource is their official corporate headquarters, to some impoverished tax haven. No doubt they citizen’s think that they will be getting great jobs in the global economy, but a corporate HQ with a mailbox and one phone won’t save their economies.

I believe that corporations contribute AND extract resources and services to the communities where they operate. What I don’t believe is that a simple flat tax between US operations and offshore operation creates a “fair” market. There are more complexities to the relationships than that. I also do not believe that the a tarrif applied to offshore produced goods and services makes our market “closed” to competition.

I agree with most of your post, Greg. However, the problem with using a “supremely simplistic view” to determine where production is the most efficient is, as you say: “Assuming there is no additional cost”.

Often, the guys that see no addition cost in moving an operation overseas, CHOOSE to see no additional costs. Like snow-blindness, the hypnotic gleam of a substantial bonus destroys the clarity of vision.

You seem to believe that cheaper workers are always more “competitive”, but I have participated in many corporate offshoring projects and I don’t see the competition occuring anywhere but on the balance sheet. In an outsourcing deal, both the outsourcing provider and the outsourcing purchaser are incentivized to “cook the books” for their own personal gain.

Greg Nelson says:

Re: Re: Re: Competition Not a Universal Cure-all

I disagreed on a number of points you mentioned. I guess basically the theme of the post.

I wonder, if management creates strategies that are designed to create wealth for themselves… is that not creating wealth for the shareholders? Management usually has it’s hands on a good number of shares, which is the only real way they can validly create wealth for themselves. Giving themselves substantial pay increases or bonuses wont work because shareholders will shoot down unreasonable attempts at increasing their remuneration. Unless you are seeing this from a different angle..

Adding a tariff to internationally produced goods is indeed not closing off a market, I agree with you there. Unless of course it is an excessive tariff. But still, adding the tariff is providing soem basic form of protection to that market. The 3.5% added to imports in the US[I believe it’s 3.5%], while small does make a difference. It’s 3.5% international competitors needs to make up through efficiency, price cutting or perhaps a more efficient structural change. It is 3.5% the local industry does not need to make up for. The burden of action here is on the international trader.

This is the reason why I believe tariff benefit international traders long term.

If a local industry is given a more substantial tariff because of trouble it may be having, that is even worse. Because it prevents the corperate natural selection from removing the weak players from the market. I dont believe the US is doing their farmers any good by providing them with the level of protection they currently do.

I dont doubt that there is going to be a cost of moving operations overseas. “Assuming there is no additional cost” was just a was of simplifying the explanation. It’s all about return on your investment. If it is going to cost you $200,000 to send $1,000,000 of work overseas for a saving of $500,000 saving, then it’s probably a good idea. If it’s going to cost you $2,000,000 then perhaps it would be a good idea to make that this is actually going to save you money.

I believe that cheaper workers, are cheaper workers. I am not really sure whether you are saying the cheaper workers are less efficient, or what, the quotation marks dont help me. But what I do believe is that this whole offshoring thing is a relatively new fad in IT [I am assuming you are talking about IT], so there’s bound to be a bit of mixed bag until the market sorts out who really should be there, and who should not.

FreeWine (user link) says:

Re: Re: Re:2 Competition Not a Universal Cure-all

“I wonder, if management creates strategies that are designed to create wealth for themselves… is that not creating wealth for the shareholders? “

IMHO, no it isn’t…ask shareholders of Tyco, Williams Communications, or Enron if their executive’s decisions were even intended to increase shareholder value. It is quite possible for management to work toward increasing their own compensation, rather than shareholder value.

“I dont believe the US is doing their farmers any good by providing them with the level of protection they currently do.”

The U.S. has led the World in agricultural production, efficiency and innovativeness. What county’s model would you reccomend we copy?

“I am not really sure whether you are saying the cheaper workers are less efficient,”

That is not what I am saying at all. I am saying that accounting figures are often rigged if both the party being measured and the party doing the measurement have pre-determined what results they are looking for. The balance sheet simply does not tell the whole story, especially if Arthur Anderson was doing the auditing.

FreeWine (user link) says:

Re: Re: Re:4 Competition Not a Universal Cure-all

>> Why does the US government need to subsidise and protect US agriculture then?
I never suggested that the US “needed” to protect our agriculture sector. I am merely looking for the examples of more efficient AG exporting countries that are doing better.
If the proponents of “Free Trade” are not pushing a religion, then they will have to give folks more to go on than faith.
It was innovation that made America great, not fair play across our borders from our competitors.

Anonymous Coward says:

Re: Re: Competition Not a Universal Cure-all

> […] All Law enforcement has the one goal, and that is justice […]

I’m not sure if these is a troll or just misguided ignorance, but I feel compelled to correct the oversight.

Uh, I don’t know about your country (if you’re in .au, then I believe there is a similar program), but in the US, Law Enforcment IS *in business*, legally (I won’t even bother launching into the usual property rights violations and seisures market rant):

They’re not exactly following the Chinese model of setting politicaly disident minds free through vigerous work, but it’s pretty damned close.

Greg Nelson says:

Re: Re: Re: Competition Not a Universal Cure-all

So AC, what you are saying is that the purpose of law enforcement is… profit? What you are saying, is that because I dont see this that I am ignorant/trolling?

If I am wrong with my analysis so far, please ignore the rest of my post.

I did a little research on the web –

Unicor sales for the Financial Year of 2002 – $678,654,899 []

Cost per inmate: $25,000 []
Avg daily population: ~166,000 []

I calculate a total cost of $4,150,000,000 [4 billion]

So for $700 million in sales, it cost the US government $4 billion. Keep in mind this is sales, not profit. Having a quick look at the 2002 annual report it seems that Unicor is actually making a loss on operation, to the tune of 3 million, down from $10 million the previous year. So it costing the US govenment 4 billion dollars to LOSE another 3 million.

And this is just the cost of housing criminals who have been caught through law enforcement and trialed in the court system.

I could be wrong, but it seems the justice system is running a little on the side of a deficit, a big deficit.

I say it again, the purpose of Law Enforcement is Justice. The police find likely candidates for crimes, the court system tries them, and the prison system houses any criminals they deem to need separation from society.

They do not however find candiates who could be profitable, the court system does not critique them for their profitability, and then send them to work.

Anonymous Coward says:

Forget Protectionism... make cheep labor obsolete

Would it not be a wonderful gift to the world if the “Land of Freedom” and “Democracy” could manage to make cheep labor obsolete?

We’re on the cusp right now and it can be achieved using a combination of robotics and completely automated assembly… and these are *exactly* the areas that the government should be subsidizing and encouraging research.

When a company considers moving an assembly plant to Mexico or China or Vietnam, frequently it comes down to a choice between investing in high-tech CNC machinerey and a robotic assebmly line or just doing things the old fashioned manual labor method. Currently, manual labor is cheaper, but what if it weren’t?

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