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Protectionist myth busting

At a debate in New York last year entitled Buy American/Hire American Policies Will Backfire, with hundreds of people in attendance, my team of three free-trade proponents took on a trio of protectionists who are often in the public eye.

We expected that we would lose the final audience vote by 55 per cent to 45 per cent. As it happened, we wiped the floor with them, winning by an unprecedented margin of 80 per cent to 20 per cent.

The feedback from several voters was that we had won handily because we had the "arguments and the evidence," whereas our opponents had "assertions and invective."

Evidently, the pessimism and despair that often overwhelms free traders today is unwarranted. The arguments of protectionists, new and old, are just so many myths that can be successfully challenged. Consider some of the most egregious examples.

Myth 1: "The cost of protection and its flipside, gains from trade, are negligible."

This means, of course, that if protectionism is politically convenient, you need not shed tears over harming the country by surrendering to it, an attitude that many Democrats in the United States find convenient to adopt.

Ironically, this myth was a product of inappropriate methodology and resulted from the research of my eminent Cambridge teacher Harry Johnson; and it has inexplicably been a favorite thesis since 1990 of my celebrated MIT student Paul Krugman. But, while this theme continues to play well in Washington, no serious scholar buys into it, owing to the compelling refutations published in 1992 by Robert Feenstra, the most accomplished trade policy empiricist today, and in 1994 by Stanford's Paul Romer.

Myth 2: "Free trade may increase economic prosperity, but it is bad for the working class."

This claim has great credibility with labour unions that believe that trade with poor countries produces paupers in rich countries. They therefore argue for leveling the playing field - i.e., that the costs for their rivals in poor countries must be raised by imposing the same labor standards that exist in rich countries. Orwellian use of terms like "fair trade" masks the fact that this is nothing but an insidious form of protectionism that seeks to reduce import competition.

Many economists have concluded, however, that continual and deep labour-saving technological change, not trade with poor countries, is a principal culprit in the stagnation seen in rich-country wages nowadays. Moreover, workers profit from lower prices for imported goods like clothing and electronics.

Myth 3: "Free trade requires that other countries also open their markets."

This is a refrain that recurs each time a new US administration takes office. But the facts are often fiction, and the logic is not compelling. US automakers were convinced during the years of Japan-bashing in the 1980s that Japan was closed and the US was open. But it was the US that had a quota of 2.2 million units for Japanese cars, while the Japanese market was open but difficult to penetrate. The refrain is recurring with China today.

Even if other economies are closed, open economies still profit from their own free trade. There was scepticism about this long-standing wisdom when it was argued that, if Japan was closed and the US was open, Japanese firms would have two markets and American firms would have one. The former, it was claimed, would have lower unit costs than the latter. But the problem here, as always, is with the assumption that Japanese firms would continue to be as efficient as American firms, despite protectionism.

Myth 4: "Paul Samuelson abandoned free trade, and he was the greatest economist of his time."

The latter is indeed true; but the former, asserted by many protectionists, is not. Even Hillary Clinton, in her campaign for the US presidency, mistakenly embraced this fallacy.

All that Samuelson showed was that any exogenous change could harm a trading economy; he did not argue that an appropriate response to that unfortunate situation was to abandon free trade. Consider an analogy. If Florida is devastated by a hurricane, its Governor would only make matters worse if he responded by abandoning trade with other states.

Myth 5: "Offshoring of jobs will devastate rich countries."

This scare arose during Senator John Kerry's failed presidential campaign in 2004, when digitised x-rays were sent from Massachusetts General Hospital in Boston to be read in India. But no radiologists have lost jobs in the US since then, nor have their earnings fallen. Indeed, it is clear that the increased tradability of services has not unleashed an economic tsunami on rich countries.

Often, jobs that would have disappeared anyway, owing to high costs in the US and other rich countries, have resurfaced where costs are lower, thus providing services that would have been lost otherwise.

So noted offshoring worriers like the economist Alan Blinder have now shifted to arguing merely that increased tradability of services means that we should extend long-standing Adjustment Assistance Programmes for trade-distressed activities to include services.

To which the free trader responds: no problem there!

The author, university professor at Columbia University and senior fellow in international economics at the Council on Foreign Relations, is completing a book entitled Terrified by Trade: How to Contain Protectionism Today.

© Project Syndicate, 2010, www.project-syndicate.org.

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