Saturday, January 17, 2009

Protectionism for the Right Reasons

A lot of people are looking at how and why America lost so much manufacturing to Asia and that discussion always leads to protectionism. Protectionism is the act of adding taxes or quotas to imported items to favor locally produced items.

Protectionism isn't necessarily a bad thing, but it is one of those things where it's a lot easier to do it for the wrong reason than for the right reasons.

The Wrong Reason
There really is just one wrong reason here and that's to protect local companies who aren't competitive due to poor management or greed on the part of either the owners or the workers, which especially happens when the workers belong to a union or the owners make large political donations.

It's bad because companies use this shield to avoid meeting consumers' needs and wants. Invariably they start out a little less competitive, but entropy sets in and they grow to become a lot less competitive.

Since it's such a bad idea to use protectionism in this way, and it's so easy to fall into, a lot of people favor prohibiting protectionism all together and letting market forces do as they will. While this is tempting, it abandons the use of protectionism for some very valid reasons.

The Right Reasons
Some countries, like the United States, work very hard to protect the consumer, the worker and the environment from irresponsible business practices. This protection isn't free. It adds considerably to the cost of the final product. Emerging economies will often abandon these protections to give their products a competitive edge in pricing.

Image: Air Pollution in Beijing;
Source ABC News
China, for example, enforces very few commercial laws to protect the environment. As a result, China has become the world's center for manufacturing, but they're also arguably the most polluted country on earth.

During last summer's Olympics, China prohibited much of the automobile traffic in Beijing in a desperate attempt to clean up their air before the world showed up for the games. Even with that, many athletes chose to wear particulate masks to try and protect themselves from the polluted air so they could perform at their peak and all the athletes avoided locally produced food and water because of its reputation for being tainted.

The thing is, pollution doesn't recognize national boundaries. China's pollution becomes the world's pollution instantly and we in the United States are culpable for China's contribution to world pollution because we're the ones consuming the goods made in these polluting factories.

Not to pick on China, but they also have a really bad record when it comes to protecting the consumer. From tainted foods to lead paint in toys, everyone knows there are risks inherent in consuming goods made in China.

Better For Us All
In these instances, the world would be better off if we used protectionism to make products produced in countries that have laws to protect the environment, the consumer and the worker more competitive than products produced in countries that don't.

For instance: it's much more expensive to produce paper and steel in ways that protect the environment than it would be not to protect the environment. In the U.S., we force companies in these industries to be environmentally responsible, but China doesn't.

Not only the U.S., but the world would be better off if we consumed more paper and steel produced in this country rather than China, but because the U.S. produced goods are more expensive, the only way to achieve this would be to use tariffs and import quotas on these goods coming in from Asia.

China won't like this. It's the kind of move that can cause a trade war or even a real shooting war, but I think it's we're extremely careful to use protectionism only for the right reasons, it can still work.

A Level Playing Field
If we use protectionism in this way, then eventually emerging nations will be forced to enact similar laws to protect the environment, the consumer and the worker just to sell their goods on the world market. When that happens, we'll have to learn to compete on a level playing field.

If we don't employ protectionism for these reasons though, then emerging nations will avoid enacting these types of regulations until their local environment gets too polluted to live in or their reputation for consumer safety is so bad nobody is willing to buy their products and there never will be a level playing field.

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