WHAT IS TRADE PROTECTIONISM, AND WHAT ARE THE ECONOMIC AND POLITICAL CONSEQUENCES?

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Trade protectionism are restrictions on the free flow of international trade, and it takes on many forms.  The intention is to protect a nation’s economic well-being.  It can take the form of tariffs to protect home industries from foreign competition by levying fines to make the outside goods less competitive.  It can be quotas, which are restrictions of certain goods that can be imported from other nations.  It can be subsidies, which are payments made by a government to a private industry, which can be direct cash transfers, lines of credit (low interest), or government ownership of common stock.  Governments can also impose local content requirements in order to internalize at least a portion of the manufacturing of the finished good.  Rules and regulations can also be put in place by governments to make it next to impossible for imports to enter the country.  Antidumping policies can be enforced to prevent other nations from selling their oversupply of goods at below the cost of manufacturing.  Currency manipulation is also a method of restricting imports while lowering the cost of a nation’s exports, much like what China does today.

All of these methods restrict free international trade, some for good reason, and many just to protect inefficient industry in their own country.  Politicians use reasons like “protecting our legacy industries” in order to sell the idea.  They also sell trade restrictions on the basis of national interest, protecting industries that support the military complex, thus making it a matter of national defense.  Administrative trade policies are often initiated on the argument that it protects the safety and health of consumers, and so to anti-dumping policies are also sold to the electorate as some sort of protection from unfair foreign competition.

The consequence is that consumers pay more for less.  The politicians that implemented these restrictions usually get re-elected because they did their job of selling the policies in question as a net “benefit” to the electorate, protecting health, safety, national defense, or a variety of other reasons left to the creative processes of these same political actors.  Other possibly unintended consequences are inflation cause by currency manipulation, trade wars, and infant or legacy industries that intentionally do not modernize for efficiency because of artificial protection.

Most economists believe that these types of protectionist activities do more harm than good.  Few economists agree with President Trumps contention that tariffs can be used exclusively for bargaining chips to eventually lower most if not all trade barriers.  Time will tell if President Trump is right, but so far, he has re-negotiated NAFTA to the mutual benefit of all involved, has China close to a rightly needed agreement on fair trade, and has the EU coming somewhat closer to the negotiating table.  If he loses this bet it could cost him the election in 2020.  A side-note is that congress has to ratify these re-negotiated agreements, and the Democrat House is refusing to put the re-negotiated NAFTA agreement on the floor for a vote in order to stop the President from having a political victory before the 2020 election.

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