The Pros and Cons of Protectionism

The Pros and Cons of Protectionism

Just kidding about the title, this is really just about the cons of protectionism. False advertising. You’ll get over it. But I’m not going to talk about the cons that you hear about over and over again. Today I am going to dig a bit deeper to examine some examples of unintended consequences of protectionism that could have a negative impact globally.

There is no denying that the globe is on a protectionism kick. The kick was just a toe tap a few years ago as nationalistic parties in France and other European countries gained a bit of prominence, coming out of the shadows of the periphery of politics. At the same time, and really for years prior, several major countries had policies and even social norms written into the fabric of their population that were protectionist in nature. I’ll touch on one of those later.

Then, on a beautiful June morning a couple summers ago, my phone blew up as Great Britain shockingly voted to exit the European Union – what has become known as Brexit. But this was just the appetizer! The main course was Donald Trump’s victory in the U.S. elections in 2016.  The protectionist light dimmed a bit in 2017 as French voters slowed down the advances made by Marine LePen and other nationalist candidates. But at that time, in speeches, I warned audiences that they should not breath a sigh of relief. In fact, I believed the protectionist wave was only just pausing. The next big vote would be the Italian elections in 2018. They would likely show that protectionism was alive and well, and perhaps launch the coolest term since Brexit: Italeave.

The Italian Job

The recent Italian elections did result in significant gains for Euro-skeptic nationalist parties, increasing the odds of an Italeave. A poor economy, chronically high youth unemployment, and an influx of migrants from the Middle East and Africa have raised nationalistic ire. Leaving the monetary union would ripple across Europe. An Italeave scenario would play out something like this: Once they left, Italy would be on the hook to immediately repay the hundred of billions it owes the European Central Bank (ECB), which Italy would likely default on. The ECB then would assign portions of Italy’s defaulted debt to other members of the Eurozone. Imagine Greece getting a bill to pay for Italy’s default! Some of these countries also directly hold Italian debt, which again could be defaulted on. A protectionist spawned Italeave would cause an economic meltdown in Europe and most likely the globe.

My Yoko Always Said, Give Peace a Chance

Free trade agreements (FTA’s) have taken a big hit as a result of the rise of protectionism.  FTA’s are both a direct target of many protectionist politicians and get taken out by collateral damage inflicted as a result of protectionism. The Trans Pacific Partnership (TPP) was a proposed trade agreement between the U.S., Japan, South American and ASEAN countries. TPP would have opened new markets for the U.S. agriculture industry, brought other industries free trade access to the massive Japanese market, and installed U.S.-strength intellectual property protection regulations into the Asian emerging markets that were part of the pact. This last bit was a tactic designed as a warning shot to China that IP protection needed to be taken seriously in the region.

But the TPP FTA was DOA even before the 2016 election took place. Donald Trump made it a direct target, and Bernie Sanders’ Trump-leaning policies convinced Hillary Clinton to denounce the pact, making the TPP a victim of a targeted hit by candidate Trump and collateral damage of the Sanders-Clinton battle. Though the TPP has recently been revived, the U.S. is not part of the current list of signatories.

In an article about pros and cons I’m not going to argue the pros and cons of trade agreements like the TPP. There are plenty of economists who have made intelligent arguments for either side of the debate, and plenty of radio and cable news talking heads who have made unintelligent arguments for either side of the debate. I would suggest that trade agreements between countries are de-facto peace treaties, and when we do away with them, or refuse to enter into them, we remove or prevent a buffer between signatory countries that helps keep peace. If a portion of a country’s economy is dependent on open trade with other countries, the existing lines of communication in place would make it less likely that those countries go to war.

Protectionist policies also breed bitterness in the populations that are negatively impacted.  There is no love lost for host countries by Central and Eastern European workers being compelled to leave Britain, Latin American families being displaced in the U.S., or workers losing jobs as Saudi Arabia looks to transition to a domestic workforce in the face of structurally lower oil prices. Countries that were looked on as bastions of opportunity are being thought of in an entirely different light. Creating blocs of foreign populations that hold your country in disregard is not the greatest plan.

Japan’s Labyrinth

While some countries in Europe and North America are moving toward more protectionist policies, other countries have had policies in place that espouse some of the protectionist trends that are gaining traction today. In general, these policies have not been beneficial. Take Japan for example, which has long been reluctant to allow immigrant foreign workers to be a part of the workforce. Combining low levels of immigration with a damagingly low fertility rate creates a shrinking working age population, a rising old age dependent population, and a stagnating economy. Japan has quietly allowed more foreign workers to enter over the past several years, but continues to deny almost all refugee requests.  Throw in the fact that female participation in the workforce is also traditionally low, the economy will continue to struggle with workforce issues. Until changes are made, it’s likely Japan will continue to stagnate – economic growth over the past 25 years has averaged less than one percent per year.

A Bull in The China Shop

China is presenting an open policy in contrast to the global trend toward protectionism, and it seems to be paying off. This open policy is exemplified by the One Belt One Road Initiative, which is meant to create trade routes from China into other parts of Asia, Europe and Africa, and The Asia Investment Bank. The recent release of GE’s annual Innovation Barometer survey found that China is increasing in significance as a country that leaders from around the globe look to as an innovation champion. At the same time, the high opinion seen in previous iterations of the Innovation Barometer toward traditional innovation champions like the U.S. and European countries is waning.

Investment in infrastructure and innovation creates good will. This was highlighted in GE’s report, as executives from Africa now look at China as the globe’s innovation champion. Remember that in Africa it’s not AI and autonomous vehicles and blockchain that are important innovations. It’s simple innovations like running water and transportation infrastructure that are needed. China is providing this and it creates goodwill toward China within the countries reaping the benefits of these investments.

So yes, I am Con-Protectionism, and I’ve tried here to lay out some deeper arguments why you should all join me! But it’s important to remember, whether in the U.K., U.S., or most recently Italy, the shift toward protectionism was decided by vote. In most of these cases the margins were slim, but nevertheless, populations voted for more nationalistic policies. This should ring alarm bells. Many people in developed countries feel they have been negatively impacted by globalization – whether by illegal immigration, job automation, or weak income growth. Those of us who believe in globalization need to do a better job promoting its benefits and ensuring those benefits are clear.

 

 

 

 

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