11 November, 2016

Protectionism is the worst response to an economic crisis

Around the world, governments are under increasing pressure from their unions, manufacturers and farmers to re-erect trade barriers and instruct government agencies to buy local. In times of economic crisis, that’s the worst possible thing to do.

Buying imports enables others to buy your exports. In general, providing you live within your means, trade tends to balance out, and the more trade the merrier for everyone. You sell more of what you’re good at, and buy more of what others are good at. There’s possibly an argument to be made for temporary specific protectionism when you’re building a new industry which will be genuinely globally competitive once it has achieved scale and the barriers are removed; but generally, protectionism only transfers wealth from consumers and taxpayers to uncompetitive local suppliers.

Whether it’s in response to calls for US highway builders to use US steel, the NZ Army to buy locally made wet-weather-gear, or British hospitals schools and prisons to buy only British meat fruit and dairy products, governments must not yield to popular pressure (and their manufacturers’ and farmers’ naked self-interest). Otherwise, as the chart below shows, things will only get very very much worse. The Great Depression of the 1930’s may have been triggered by a stock market crash, but it was made many times worse by well-meaning protectionist initiatives and retaliatory moves by other countries. World trade plunged by two-thirds, industries collapsed, and many millions were thrown into the breadline. Let’s not even start going down that slippery slope.

First posted February 26th, 2009 and reposted post Brexit, Trump, et al

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