15.6: The politics of protection

Objections to imports are frequent and come from many different sectors of the economy. In the face of the gains from trade which we have illustrated in this chapter, why do we observe such strong opposition to imported goods and services?

Structural change and technology

In a nutshell the answer is that, while consumers in the aggregate gain from the reduction of trade barriers, and there is a net gain to the economy at large, some individual sectors of the economy lose out. Not surprisingly the sectors that will be adversely affected are vociferous in lodging their objections. Sectors of the economy that cannot compete with overseas suppliers generally see a reduction in jobs. This has been the case in the manufacturing sector of the Canadian and US economies in recent decades, as manufacturing and assembly has flown off-shore to Asia and Mexico where labour costs are lower. Domestic job losses are painful, and frequently workers who have spent decades in a particular job find reemployment difficult, and rarely get as high a wage as in their displaced job.

Such job losses are reflected in calls for tariffs on imports from China, for example, in order to 'level the playing field' – that is, to counter the impact of lower wages in China. Of course it is precisely because of lower labour costs in China that the Canadian consumer benefits.

In Canada we deal with such dislocation first by providing unemployment payments to workers, and by furnishing retraining allowances, both coming from Canada's Employment Insurance program. While such support does not guarantee an equally good alternative job, structural changes in the economy, due to both internal and external developments, must be confronted. For example, the information technology revolution made tens of thousands of 'data entry' workers redundant. Should producers have shunned the technological developments which increased their productivity dramatically? If they did, would they be able to compete in world markets?

While job losses feature heavily in protests against technological development and freer trade, most modern economies continue to grow and create more jobs in the service sector than are lost in the manufacturing sector. Developed economies now have many more workers in service than manufacture. Service jobs are not just composed of low-wage jobs in fast food establishments – 'Mcjobs', they are high paying jobs in the health, education, legal, financial and communications sectors of the economy.

Successful lobbying and concentration

While efforts to protect manufacture have not resulted in significant barriers to imports of manufactures, objections in some specific sectors of the economy seem to be effective worldwide. One sector that stands out is agriculture, where political conditions are conducive to the continuance of protection and what is called 'supply management' – domestic production quotas. The reason for 'successful' supply limitation appears to rest in the geographic concentration of potential beneficiaries of such protection and the scattered beneficiaries of freer trade on the one hand, and the costs and benefits of political organization on the other: Farmers tend to be concentrated in a limited number of rural electoral ridings and hence they can collectively have a major impact on electoral outcomes. Second, the benefits that accrue to trade restriction are heavily concentrated in the economy – keep in mind that about two percent of the population lives on farms, or relies on farming for its income. By contrast the costs on a per person scale are small, and are spread over the whole population. Thus, in terms of the costs of political organization, the incentives for consumers are small, but the incentives for producers are high.

In addition to the differing patterns of costs and benefits, rural communities tend to be more successful in pushing trade restrictions based on a 'way-of-life' argument. By permitting imports that might displace local supply, lobbyists are frequently successful in convincing politicians that long-standing way-of-life traditions would be endangered, even if such 'traditions' are accompanied by monopolies and exceptionally high tariffs.

Valid trade barriers: Infant industries and dumping?

An argument that carries both intellectual and emotional appeal to voters is the 'infant industry' argument. It goes as follows: New ventures and sectors of the economy may require time before that can compete internationally. Scale economies may be involved, for example, and time may be required for producers to expand their scale of operation, at which time costs will have fallen to international (i.e. competitive) levels. In addition, learning-by-doing may be critical in more high-tech sectors and, once again, with the passage of time costs should decline for this reason also.

The problem with this stance is that these 'infants' have insufficient incentive to 'grow up' and become competitive. A protection measure that is initially intended to be temporary can become permanent because of the potential job losses associated with a cessation of the protection to an industry that fails to become internationally competitive. Furthermore, employees and managers in protected sectors have insufficient incentive to make their production competitive if they realize that their government will always be there to protect them.

In contrast to the infant industry argument, economists are more favourable to restrictions that are aimed at preventing dumping.

Dumping may occur either because foreign suppliers choose to sell at artificially low prices (prices below their break-even price for example), or because of surpluses in foreign markets resulting from oversupply. For example, if, as a result of price support in its own market, a foreign government induced oversupply in butter and it chose to sell such butter on world markets at a price well below the going ('competitive') world supply price, such a sale would constitute dumping. Alternatively, an established foreign supplier might choose to enter our domestic market by selling its products at artificially low prices, with a view to driving domestic competition out of the domestic market. Having driven out the domestic competition it would then be in a position to raise prices. This is predatory pricing as explored in the last chapter. Such behaviour differs from a permanently lower price on the part of foreign suppliers. This latter may be welcomed as a gain from trade, whereas the former may generate no gains and serve only to displace domestic labour and capital.

Protectionism in the age of pandemics

The year 2020 will be remembered in history as the year of the coronavirus pandemic. An uncountable number of men and women died all across the globe as a result of contracting COVID-19, the respiratory disorder brought on by an attack of the coronavirus. In the absence of a vaccine, health authorities the world over implemented a twin policy of social distancing and quarantining (or self-isolation). The world economy went into a tailspin, as huge fractions of the labor force were laid off. Trade patterns were disrupted and serious shortages of personal protection equipment (PPE - masks, visors, gowns), ventilators and drugs emerged. The world demand for PPE and ventilators skyrocketed. But the production of PPE was concentrated in China; most western economies did not have the necessary productive capacity to supply even non-pandemic requirements. Bidding wars erupted amongst countries and hospitals as they vied for supply, while domestic producers of some products added to their production capacity.

Following this chaos, we ask if self-sufficiency would not be a better model than open trade. Would a world where each country ensured it had the production capacity to produce these necessities in times of emergency not be superior to one where global supply chains characterize everything from computers to generic drugs? India is a major producer of generic drugs and the components for such drugs. The demand for anti-biotics and pain killers also rocketed upwards with the pandemic.

There is more than one way to plan for a pandemic, and such planning should not involve a generalized move to self-sufficiency on the part of the global economy. One strategy is to build up inventories of PPE and ventilators domestically. This is costly, but for the most part feasible. It does not represent a complete solution because technology changes will make 30-year old ventilators sitting in inventory redundant for the next pandemic. In addition, most medications have a limited shelf life. Hence one solution is to maintain and rotate substantial inventories of emergency equipment using existing supply chains, and benefit from the efficiencies that are built into these chains.

A second option is to maintain excess production capacity on the part of domestic manufacturers of critical pandemic products. Maintaining such capacity should be considered at least partially as a social cost; pandemics ravage societies, not just individuals, and therefore society should undertake part of the cost of insuring against them.

A more general argument against global trade comes in the form of protecting food supplies. In the early 2000s an increase in global cereal prices led some economies to limit exports of specific crops on account of the fact that global demand was pushing prices to a level that low-income consumers could not afford. But such a policy may threaten consumers in other low-income economies whose demands have not changed in a context of reduced supplies. The reality is that world food supply is adequate for world consumption, even in the presence of disruptions. It is also the case that certain economies have huge advantages in producing specific kinds of food. For example, Canada, the US and the Ukraine produce cereals very economically. Mountainous regions are unsuitable for this production. It would benefit no economy for these economies to lower their production of grains to the point where they produced only enough for their own production. By the same reasoning, warmer climates produce fruits, coffee beans, olives etc that cannot easily be produced in many regions suited to wheat. The gains to specialization in the world economy are enormous. Where food shortages occur we frequently encounter the scourges of drought or war or political upheaval, and these conditions inhibit the distribution of foodstuffs.

What about supply chains? If motherboards produced in China are not being exported in sufficient quantities then indeed production of computers in North America will suffer. But to infer from this that North America should decide to produce all of its computer components in North America is illogical. First, in the time of a pandemic, if certain economies in the supply chain are on lockdown, we cannot be sure that the domestic economy would not be on lockdown simultaneously. Second, the cost to moving the production of all computer parts to North America would likely double the cost of computer hardware - including cell-phones. Perhaps a disruption to our supply chains is something we need to bear in extraordinary times. In case it requires emphasis, most producers in supply chains have incentives to produce and sell. If they do not they will die economically.

The energy sector of every economy is impacted with the outbreak of a pandemic. This is because the demand for fuel (primarily oil) declines following policies of social distancing, limits on permissible travel, and the closure of some production facilities that depend upon oil. In North America, as we saw in Chapter 4 earlier, the price of oil declined from US $60 per barrel to US $20 in the space of two months in early 2020. Since production costs are higher in both Canada and much of the US than in Saudi Arabia, the North Sea and Russia, producers in North America were squeezed. Many were no longer able to cover their full production costs, and forced to cease drilling and recovering oil. Inevitably there was a clamor for protection. Producers sought tariffs on competing oil: Tariffs would increase the price of cheaper-to-produce foreign oil and enable domestic producers to survive.

While protection might seem like a 'sensible' policy in this instance, the fact is that unilateral tariffs usually invite reprisals, and raise the danger of a trade war with ever-expanding counter protectionism. In contrast to the case of a shortage of medical supplies, the energy sector in Canada suffered from a glut of world oil supply. The domestic issue is not about the health of consumers (as in the case of medical supplies), it is about the health of producers.

To conclude: a pandemic is a profoundly serious event and such events inflict major costs on all societies. There are no magic bullets in the form of low-cost ideal economic policies to counter viral warfare. The key to policy making is to recognize constraints and recognize an attack as soon as possible. A wholesale move to insulate the domestic economy is ill-conceived. Comparative advantage confers enormous benefits to all nations. Specific policies should take the form of inventory management and excess production capacity in specific sectors of the economy.