10 Jan 2017 04:24pm

Debate: can a protectionist approach ever be in the national interest?

Michael Lind, a senior fellow at New America and Tom Follett, policy and projects officer at ResPublica, discuss whether protectionism can ever be in the national interest in this month's debate

Debate: protectionism
Caption: Michael Lind and Tom Follett discuss the merits of protectionism in the age of Trump.

Yes: Tom Follett

Free trade agreements have boosted the buying power of consumers, meaning cheaper food, better clothes and widespread technology. But these benefits haven’t accrued equally to all. Perhaps a cheaper cost of living can make up financially for lost factory jobs; but it can’t replace the dignity and purpose that comes with a career. Sharing and managing the wealth of globalisation in a way that creates enough winners is the key challenge for modern democracies, one that’s turned out to be much harder than we thought. That doesn’t mean we should give up.

The causes of malaise in the West are bigger than trade and much harder to get to grips with. The labour market is being hollowed-out, but tariffs won’t stop driverless cars or bring back middle-class jobs such as travel agents. At the same time, the most high-value jobs cluster today in the graduate-rich megacities, not the factory towns and office parks of the 20th century. Trade barriers won’t stop that.

But free trade agreements do mean the world superpowers’ economies are deeply interconnected and dependent on each other for prosperity. Major wars are less likely if they make everyone poorer.

It’s a difficult task for national governments to use the powers they have to spur innovation, provide security and assets for their populations, and ensure a peaceful international order. Perhaps that means a bigger role for industrial strategy, or radical proposals like a Universal Basic Income. These are hard questions. Putting up walls is an easy answer, but it’s the wrong one.

No: Michael Lind

The case for free trade today rests on bad economics and bad politics. To begin with the economics, most consumer goods are cheaper today because of technological innovation, not imports from low-wage countries. Nor do the classic arguments for free trade on the basis of fixed national comparative advantage work. A growing amount of so-called trade is really transnational product assembly, co-ordinated by a small number of large, successful transnational corporations. Where global corporations locate production is mostly determined, not by a free market, but by nation states that provide carrots such as tax incentives or sticks such as local content requirements.

Agreements such as the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP) are “free trade agreements” in name only. They are really attempts to harmonise regulations among nation states, among whom tariffs are already pretty low, to the benefit of transnational corporations and global investors.

And the politics? In the short run, consumer prices may be lower because of imports from countries with low-wage labour or governments that subsidise their exporters. But throughout history countries have been willing to sacrifice short-term consumer benefits from trade to avert greater dangers from trade, like the loss of high-value-added industries and jobs to commercial rivals.
No one-size-fits-all trade policy is right for all nations in all times. Free trade or protection may be good or bad for different countries in different circumstances.

Tom Follett

Harmonising regulations can go both ways. We should beware a race to the bottom, with the right institutional design we can create a race to the top. Trade blocs like the EU have been successful at harmonising upwards, exporting strict labour and environmental laws to trading partners and potential members. It’s the unintegrated international markets, with high non-tariff barriers, where monopolistic corporations thrive. So globalisation doesn’t have to mean deregulation.

Integrated trade and continent-spanning supply chains have created opportunities to specialise that could never have existed solely in the domestic market, especially for SMEs and their workers. Working with people from many different cultures has changed us too.

Change has left many behind, but the greatest gains are for states who can contribute high-value inputs into transnationally assembled products. That means those who invest in upskilling their people, investing in infrastructure and creating great cities. That today there is such discontent is a reflection of national governments’ failures to do so. It’s understandable people are holding them to account.

Michael Lind

Of course countries can benefit from trade of various kinds. The subject being debated here is free trade. Free trade means more than the absence of barriers like tariffs to the free movement of goods.

Free trade also means that a country must be completely indifferent as to whether it has particular industries inside its borders – or indeed any industries at all.

Under a free trade regime, the location of particular industries will result solely from the choices of private sector producers and consumers in a free market. If the market determines that all steel will be made in China and all cars in Germany, other countries must withdraw from those sectors and import Chinese steel and German cars.

There is an alternative – the preservation of a national steel or automobile industry or the creation of one from nothing. But doing that would require tariffs, local content requirements, subsidies or other national policies that would violate both the letter and spirit of free trade.

Tom Follett

Free trade does mean that countries cannot raise the price of competitors’ goods by means of tariffs and subsidies (so long as their competitors are also not unfairly doing the same), since doing so would mean companies had no incentive to produce more efficiently. But it is a political choice whether states are “indifferent” to their industrial makeup, and arguably one where the UK chose wrongly in the past.

Successful non-protectionist countries take measures to increase productivity. In Germany, the automotive market did not just “determine” to locate there, but responded to the country’s long-term industrial policy, which relies on its industry associations, chambers of commerce and Fraunhofer (applied research) centres.

Despite its entrepreneur-friendly rhetoric, the US state spends heavily on research and commercialisation through the Defense Advanced Research Projects Agency. But open doesn’t mean naive. Where countries are dumping surplus goods on the market to drive out competitors, or multinationals are abusing the secrecy of Investor-State Dispute Resolution tribunals, a muscular response is required.

Michael Lind

Trade is a means to an end, not an end in itself. The end is the economic development of a particular community, defined as a long-term shift from primitive, labour-intensive economic activities to technology- and capital-intensive activities.

The problem is that developing countries and already-developed countries both want to expand their shares of the same limited global markets. This is the real source of trade tensions and trade wars – not the ignorance of populists, but genuine clashes of economic self-interest. Trade policy should be modeled on arms control, not disarmament. Unlike disarmament, arms control takes it for granted that nations have a legitimate right to their own militaries.

In the same way, all major economies, be they giant nations like the US and China or multinational blocs like the EU, have the right to acquire and preserve certain high-value-added industries. Like arms control policies, trade policies should seek to moderate rivalries among nations, but not to create the utopia of a rule-governed, global market in which all countries practice free trade.