Fisher Investments Editorial Staff
Trade

Protectionism, Patriotism and Politicking

By, 07/19/2012

There’s seemingly something of a new trend recently in international trade—and while likely not significant enough yet to warrant too much concern, the pattern certainly merits some attention.

As we’ve noted many times over the past year-plus, the overwhelming trend among countries has been toward broad free trade agreements: the EU with Peru and Colombia; China and Chile;  the US and Colombia; Panama and South Korea; the US and Mexico and the list goes on. In addition, talks continue on more—like the Trans-Pacific Partnership. Wednesday, in fact, the EU stated its intent to enter talks targeting a “mega free trade deal” with Japan.

But protectionism can rear its head in insidious, though potentially less obvious, ways—it needn’t be through explicit tariffs on foreign goods. Maybe it’s particularly stringent “quality” controls on imports that by definition rule out a certain country’s imports— as Russia recently attempted in banning livestock imports from the EU. Maybe it’s non-tariff anti-dumping measures, though the degree to which “dumping” is actually happening is no doubt frequently questionable. Maybe it’s export restrictions instead, which ostensibly encourage domestic consumers to switch from imports to domestically produced alternatives, which are likely cheaper given more readily available supply.

Such trends have been cropping up globally—as highlighted in The Wall Street Journal recently. Particularly in South America, where Argentina, for one, is attempting to limit how much folks spend on imports through currency machinations. Brazil seems to be making similar attempts to help its auto industry. And Australia is also debating measures aimed at leveraging relative economic growth in one sector (namely, energy development) to help prop up areas currently less economically resilient or even viable.

The EU and China recently got in on the action, trading salvos over various protectionist measures each side is attempting to implement—a tit-for-tat that likely ultimately nets neither side much in the way of economic gain.

And then there are ever-protectionist-though-beguiling measures like “Buy American” or “Buy European,” which sound so patriotic but are really more like protectionism in sheep’s clothing. Such provisions generally offer domestic companies preferential treatment in awarding government contracts or use other means to promote consumption of domestically produced goods—which seems ripe for cronyism and means government likely is buying more expensive goods than it could.

The US certainly isn’t immune to such attempts at boosting domestic production, either, having just debated whether to subsidize domestic solar panel manufacturers to help stem stiff Chinese competition. As election season continues heating up, we wouldn’t be surprised to see more demonstrations like this recent one—which, though aimed at stirring patriotic emotions and no doubt politically popular among some, was really much more an indication of politicians’ broad lack of understanding as to economies’ efficient functioning.

But the reality is protectionism is protectionism is protectionism—whether in the form of broad tariffs, preferential awarding of contracts, import restrictions, export restrictions, currency manipulations or unnecessary quality restrictions. And in a global market, the parties they often hurt most are not the intended party, but rather the party implementing such policies in the first place. Rather than focus so exclusively on domestic producers, global governments would be far better served focusing on how best to boost their own total production. Maybe that involves importing some goods they produce less efficiently—whether intermediate goods used as inputs in domestically produced final goods or final goods themselves. As David Ricardo so eloquently pointed out nearly two hundred years ago, everyone can win from such interactions—an outcome which is decidedly less likely when countries begin implementing protectionist policies.

So to be sure, protectionism—mostly rhetorical or involving relatively small slices of the global economic pie—currently seems vastly outweighed by increasing free trade. But that’s not a foregone conclusion, written irrevocably and permanently in stone—making protectionist developments an important factor to watch.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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