On Protectionism

American wages are set to decline, inexorably, toward global norms.  Let’s say you have a good union job, with good benefits, bashing metal for $40 an hour – and a guy in China is willing to do that same job for $2 an hour.  That’s the global norm.  Your standard of living, sooner or later, is going to be the same as his.  It’s a law of nature.  Either your employer will move the factory to China, or some foreign company with cheap labor will put him out of business.

It’s not only union jobs that are threatened.  Our “trading partners” have already killed American manufacturing, and now they’re moving up the food chain.  American doctors, lawyers and computer programmers are also threatened with competition from abroad.

Government intervention can’t help.  We would have to block all imports from China, and numerous other countries, to keep cheap-labor products out of America.  Even then, we would only be protecting the American market.  Cheap-labor producers would still beat us in every other market.

Government protection could keep the American economy in a bubble, but that would only postpone the inevitable.   Meanwhile, some other bad things happen:

  • China sues us under WTO rules, and wins.
  • American consumers are deprived of the cheaper products, so our standard of living suffers anyway.
  • American producers are deprived of cheaper inputs, like steel, hurting them in the global market.

This is the textbook argument against protectionism.  Government intervention is a short-term tactic, at best.  There is a similar argument against government meddling in industrial policy.  The “short term,” however, might be twenty years – and central planning worked pretty well for the Japanese.

Jeremiah fondly remembers the Ministry of International Trade and Industry (MITI), famously described by Edith Cresson as “an adversary that doesn’t play by the rules.”  MITI orchestrated Japan’s domination of the American auto industry.  They invested Japanese tax money in selected companies, allowing them to compete with America on unfair terms.

First the Japanese dumped cheap supplies of steel, destroying America’s steel industry.  When the Federal Trade Commission (FTC) finally woke up and imposed sanctions, the damage was already done.  The Japanese dutifully stopped dumping steel, raising factor prices – for American manufacturers!  They raked in huge profits, and then used the profits to put subsidized steel into Japanese cars.

Under MITI direction, Japanese companies in multiple industries pooled their resources to attack American industry.  They outsmarted the FTC at every turn.

Japanese manufacturers begged, borrowed and stole American technology – all the while exploiting their labor-price advantage, and cross-subsidies from MITI.  While the dollar was high – Jeremiah remembers when it was 300 yen – Japanese exporters enjoyed another advantage.  When the dollar went down, they snapped up American assets.  It was a bloodbath.

America – that is, our elected leaders – should have learned a lesson from the Japanese.  In the global market, there is no such thing as free trade, fair trade, or balanced trade.  There is only cutthroat competition.  Policies relating to international trade should be informed only by the calculus of retaliation and counter-retaliation.

If Chinese companies operate at an advantage, say, by abusing their workers, then we should protect those workers – and our own – by imposing trade restraints until the advantage is neutralized.  Disregard for occupational safety, environmental protection, and even animal rights, all represent unfair advantages.

America needs a coordinated industrial policy, and a much shrewder FTC.  We need to neutralize the unfair advantages enjoyed by our competitors.  We must force them to come up to our standards, instead of dragging us down to theirs.

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