Edward L. Hudgins, director of regulatory studies at the Cato Institute, has a very useful primer on the economics of trade and protectionism. He offers a number of simple examples to demonstrate the fallacy of the anti-trade positions taken by Obama and Clinton. Here’s just one example.
Cutting Up the United States
As a way of understanding the error of protectionism, consider the consequences of such policies if practiced by American states today. California, for example, has had unemployment rates above the national average in recent years. Defense downsizing explains the problem in part. But the state’s harsh regulatory regime explains the remainder.
What if California were able to set up trade restrictions against other states? It might use such policies to try to achieve trade surpluses with the other 49 states. For example, it might attempt to “save” jobs in the food processing sector by placing a high tariff on imported canned or packaged food products coming from other states. To protect jobs for low-paid, unskilled workers assembling parts into finished products, a “wage equalization tax” might be charged on finished products coming from lower wage states. And to help agricultural workers, the Golden State might place quota restrictions on imports of beef from Texas, Wyoming, and Montana and on Kansas wheat.
Would such a policy result in higher employment and better pay in California? Hardly! California’s productivity would sink, and prices for goods and services would rise. Consumers would cut back on consumption, thus depressing sales and driving many enterprises out of business. Land that is better used for producing wine grapes might be used for raising cattle. The prices for both wine and beef would rise.
In other words, California, or any state or country practicing such policies, would fall into poverty rather than grow prosperous. Full employment would be purchased at the price of poverty.
Another thought experiment — how poor would you be if if trade barriers were erected at the borders of all fifty U.S. states?
Technorati Tags: Free Trade
0 Responses to “Protectionist myths”