One word. Debt.

Chris Dillow asks, “Why is protectionism popular? The answer is the title, and perhaps I should leave it at that.

But no. I have a reputation for verbosity to protect.

First, the current incarnation of free trade is coming under pressure not because people are stupid, but because people are smart. The publics in countries like the United States and Britain have been remarkably tolerant of free trade over the last two decades, because the policy-relevant public “gets it”, has been persuaded by economists from Ricardo on down that free trade is a positive-sum good thing. The arguments for protectionism that Chris catalogs are old tropes that we had almost managed to put behind us.

I’ve done no study, but here’s a conjecture: The countries where protectionism is becoming popular are those with both growing current account deficits and shrinking tradables sectors. A shrinking tradables sector is not the same as a declining industry. Declining industries are normal and good. Even the near extinction of manufactures as a whole is okay. But a shrinking tradables sector is not. A shrinking tradables sector means a decline in nation’s capacity to produce goods or services of any sort that citizens of other countries want to buy, at competitive prices.

Free trade is positive sum because of specialization. The idea is that if someone else makes cars better or more cheaply than the UK can, Brits will do some other thing in which they have a comparative advantage, maximizing both overall productivity and the wealth of both nations. But there’s a catch to this ancient Ricardian reasoning, a hidden assumption: The other thing that Brits do has to be tradable. If the UK stops building cars, and instead concentrates on home-building and retail sales, then there are no certain gains to trade.

Ricardo probably failed to agonize over this point, because if a country ceases to produce tradables, it stands to reason that it ceases to have the capacity to trade, and the question of whether trade is beneficial or harmful is rendered moot.

But Ricardo is dead, and we live in a brave new world where, at least for a while, some countries are willing to trade persistently for debt not backed expanding (if adjusting) tradables capacity on the part of the debtor. This is not a Ricardian paradise. This is economic terra incognito, and citizens are right to be spooked.

Chris writes:

People lose their minds when they think about national economies. It’s obvious that, as individuals, we get rich by specializing in the trade we are least bad at, and buying stuff from others. When I go to work, I’m exporting. When I go to Tescos, I’m importing. No-one thinks of it this way, though.

I think he’s wrong. I think that nearly everyone thinks of it this way, both on a personal level and at a national level, and that’s precisely why “free trade” is under pressure. At a personal level, when we import by buying stuff at Tescos, but fail to export enough at work to fund our imports, we consider that a problem. When our credit card balances grow large relative to our expected capacity to pay-off or even service our debt, we get very nervous.

So it is, and ought to be, on a national level.

A consumer “importing” more than she is “exporting” has a bunch of alternatives: She can force herself to “import less”, by cutting consumption or by turning to imperfect home-made substitites (fire the maid). Or she can increase her capacity to export, by, for example, upgrading her skills and getting a better job. The latter choice is best, both for the consumer herself and for the world as a whole. But if she can’t succeed at increasing exports, cutting back on imports is much better than simply letting unfundable liabilities mount.

On a national scale, increasing exports is also better than forcibly cutting imports. But so far, some “rich countries” seem unable to expand exports relative to imports. When the first-best solution to a serious problem proves inaccessible, reasonable people eventually turn to less optimal strategies.

And that’s why protectionism is becoming popular again.


One Response to “One word. Debt.”

  1. John Konop writes:

    Economists Are Destroying America

    Economists, politicians, and executives from both parties have promised American families that “free” trade policies like NAFTA, CAFTA, and WTO/CHINA would accomplish three things:

    • Increase wages

    • Create trade surpluses (for the US)

    • Reduce illegal immigration

    Well, their trade policies have been in effect for about 15 years. Let’s review the results:

    • Declining real wages for 80% of working Americans (while healthcare, education, and childcare costs skyrocket)

    • A record-high 46 million Americans who don’t have health insurance (due in part to declining wages and benefits)

    • Illegal immigration out of control

    • Soaring trade deficits, much with countries that use slave and child labor

    • Personal and national debt both out-of-control

    • Global environments threatened by lax trade deal enforcement

    Economists Keep Advocating Policies That Aren’t Working

    Upon seeing incontrovertible evidence of these negative trade agreement results, economists continue with Pollyannish blather. Some say, “Cheer up! GDP is up and the stock market’s doing fine.” Others say, “Be patient. Stay the course. Free trade will raise all ships.”

    Even those economists who acknowledge problems with trade agreements offer us only half-measures—adjusting exchange rates, improving safety nets, and providing better job retraining. None of these will close the wage gap in America—and economists know it.

    Why Aren’t American Economists Shouting From Street Corners?

    America needs trade deals that support American families and businesses in terms of wage, environmental, and intellectual property abuses. Why aren’t economists demanding renegotiation of our trade deals? There are three primary reasons:

    • Economists are too beholden to corporations and special interests that provide them with research grants.

    • Economists believe—but refuse to admit—that sacrificing the American middle class is necessary and appropriate to generate gains in third world economies.

    • Economists refuse to admit they make mistakes.

    Economic Ambulance Chasers

    Now more than ever, Americans need their economists to speak truth and stand up to their big business clients. Instead, economists sound like lawyers caught chasing ambulances: they claim they’re “doing it for our benefit”.