Recently, Donald Trump declared his intention to remake the GOP into a modern day Worker’s Party. That’s not what this article is about; I have written on that subject, and you can read it here if you wish:

However, historically, one of the key platforms for worker’s parties in America has been protectionism for native industries. This subject has been written about ad nauseum, with many learned individuals coming down on both sides of the issue, but this represents my turn to add to the body of knowledge, or, at the very least, the body of strong opinion. A short primer for those who may not be entirely familiar with the term: protectionism is the regulatory process of protecting domestic industry from foreign competition through the use of duties, tariffs, or quotas imposed on imports.

Supporters of these policies often point to claims that free trade agreements are a commitment to lower wages as a result of competition. That is certainly the case made by Global Policy Forum’s Daley, who claimed that as of 1994, American workers had suffered a real wage decline of some 17% since 1973. Trump makes similar claims, stating that the average worker has not seen a wage increase in 18 years, largely due to these negative externalities caused by foreign competition (of course, Trump not long ago claimed that wages were too high, but consistency has never been the hallmark of politicians).

At its root, the argument in favor of protectionism is simple; foreign competition harms domestic employment by both depressing wages and shifting jobs to lower cost labor markets, as well as by encouraging the shifting of the environmental costs of production to the trade partner with less stringent controls. In other words, cheap labor and a decreased need to comply with environmental regulations harms the labor pool in the more well-developed market, such as America.

This would be a compelling argument for protectionism, and against free trade, were it true. We do not, however, live in a mercantilist, zero sum world where one national market thrives only at the expense of another. Proponents of protectionism often quote some variation of the theme that America is a manufacturing nation that no longer manufactures, but to a large degree, that’s just a meme with little basis in reality. As Lincicome (2016) notes, America has been shedding manufacturing jobs since the late 1940s, with a sharp rise in job losses circa 1979. Losses in that particular sector came well in advance of any free trade agreements such as NAFTA, or any large-scale introduction of Asian imports into the market. This is simply the sign of a mature, post-industrial economy that has become more well diversified.

In addition, the U.S. remains the world’s second largest manufacturer, producing some 17.2% of global output, and the globe’s third largest exporter. Clearly, we are doing reasonably well on the balance of trade front. Even with the sharp rise in unemployment that occurred after the unfortunate incidents of 2008, some 54 million jobs have been gained since 1980, with more than 30 million of those coming after the adoption of NAFTA and the WTO. Yes, manufacturing jobs have been hard hit, but the loss of those jobs can be attributed to productivity gains. As technology improves, manufacturers require less human capital to produce the output they need.

Mr. Trump, Tear Down That Wall

Something, then, is amiss with the claims of Mr. Trump and his wall-building supporters. If America is gaining jobs, them clearly free trade can’t be the bugaboo it is made out to be, and protectionism isn’t the panacea for the sectors of the market that are losing jobs. In fact, I maintain that quite the opposite is true. The global economy has become so integrated that instituting artificial barriers to trade causes more harm than any gains realized by native industries can balance out. On balance, they cause an upwards distortion in prices, the misallocation of resources, and disruptions in the supply chain.

Consider this. The laptop that I am writing this on was likely assembled in China with a monitor made in Malaysia, with chips manufactured in Korea, keyboards produced in Japan and an operating system made in America. All of this conspires to make to the public a laptop device at a reasonable price that most can afford. Interrupting this process would have grave negative effects on consumers and workers alike, not just at home, but in many nations. The supply chain disruption alone would cost many jobs, from software engineers to firms which provide ancillary support to their efforts.

Free trade allows firms to capitalize on comparative advantage, allowing firms to achieve cost savings by spreading production between nations that specialize in the goods and services they are most efficient at producing or providing (Bradford, Grieco, & Hufbauer, 2009). We may grind our teeth at having our customer service calls handled by someone in Thailand or India, but they also provide a savings in the costs of doing business that is reflected in lower prices and higher share values. It also allows for economies of scale, as larger markets provide for the spreading of fixed costs. Technology is shared between integrated markets; one would be hard pressed to argue that this has not been to the good of everyone involved. Finally, the competition that results from free trade minimizes the monopoly power of domestic firms.

How does this all benefit the domestic economy? Well, for one thing, import competition forces domestic producers to adjust. Given a range of choices, consumers will trend towards decisions based on price when confronted with products of similar quality. Because of this, domestic producers lose market share, and most boost productivity. Simply put, they must create a better product at a lower price. This means resources are reallocated more efficiently. Firms that can’t do so tend to shutter their doors, causing opponents of free trade to cry about lost jobs, but the disappearance of a competitor on the market generally provides the opportunity for more efficient firms to not only expand, but innovate. Given the choice between training new workers with little knowledge of the industry’s processes, or hiring the displaced workers of their shuttered competitors…let’s say in the long-run, jobs are simply shifted, not lost.

Consumers benefit through the array of choices now available on the market, with different price and quality levels better suited to fill their personal needs at their disposal. Remember, imports minimize the monopoly power of domestic firms, forcing them to compete on price and increased quality. This lessens the markups you see at the cash register. Immigrant workers, the bane of Mr. Trump’s world, actually enhance productive efficiency by providing a labor pool large enough for firms to expand. Instituting protectionist measures reverses all of these gains and benefits, with nothing in return. Additionally, protectionist regulations often inhibit job growth by catering to well-connected domestic industries with powerful unions and expensive lobbyists, giving firms little reason to expand (and create new jobs) or formulate more efficient processes.

It’s politically popular to blame free trade for the loss of employment in certain sectors of the labor market, but that’s just plain wrong. Building walls (a Quixotic policy if ever I heard one) and imposing stiff tariffs on Chinese imports (although that nation does need to be taken to task in some manner) will do nothing but harm America’s interests, not only in the long-run, but likely in the short-term as well.

Mr. Trump, tear down that wall.

References (not hyperlinked in content)

Bradford, S. C., Grieco, P. L., & Hufbauer, G. C. (2009). The payoff to america from globl integration. Washington, DC: Peterson Institute for International Economics. Retrieved from https://piie.com/publications/chapters_preview/3802/2iie3802.pdf

Liniciome, S. (2016). The truth about trade: it has revealed, not created, problems in the amercian economy. National Review(6), 27-30. Retrieved from https://www.nationalreview.com/nrd/articles/433214/united-states-trade-and-economic-realities

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