This article by our executive director Aldo Abram originally appeared in Ambito Financiero and explains why protectionism ends up preventing growth.
Ever since Donald Trump won the US presidency, people have been worried about his protectionist policies. Much has been written on the cost for growth and worldwide well being that would result from a country as significant as the US closing down. However, the most interesting thing about Trump´s protectionism is that it will turn out to be a trap that works against the well being of current and future US citizens.
One of the reasons for the continual references to American “consumerism” is that they have the opportunity to buy a great variety of goods at the best prices. Hence, they live very comfortable lives because this gives them a high purchasing power and allows them to choose from a wide variety of products. Trump threatens to restrict available options and make goods more expensive, so the lifestyle of average Americans will suffer.
It’s true that businessmen and workers in the protected industries may earn more, but only at the expense of the well being of other citizens. Imagine you have a small enterprise that sells blue circles, which is the product where you have higher earnings. You could also sell red squares, but it would require more work and produce lower earnings. It would not make sense to allocate resource to the production of red squares when it would be much more effective to use them to produce blue circles, since by producing blue circles you would have higher earnings because squares are more expensive to produce and you would be able to produce fewer of them. If you earn more you could pay your employees higher salaries, which is exactly what happens in countries that practice free trade.
Thanks to Trump, producers of goods that can be exported or imported but are not protected will have to buy supplies within their countries, which tend to be of worst quality and offered at a higher price. Their own products, therefore, will be expensive and of a lower quality. They could also find that, since purchases abroad fall, available foreign currency declines and hence its value declines in the American market. All of this will result in a loss of competitiveness, so American businessmen will produce less, earn less and pay lower wages. Finally, less jobs will be created in the more productive sectors in order to protect those who can create less riches and well being.
It may be surprising, but a decision you would not make in your own business, thinking about your lifestyle and that of you workers, is being recommended by Trump and many other politicians or economists for their countries. In fact, protectionism prevailed in Argentina for decades and lead to the protection of inefficient sectors at the expense of more successful industries. The result is obvious, goods are expensive and we don´t create enough riches for our country to develop, increasing well being and lowering poverty.
Economic liberalization only destroys jobs in sectors that are not productive. However, it creates a lot of them in more productive sectors, that are now earning in relation to their production and can pay higher salaries. Furthermore, when people have a higher purchasing power and produce more they will spend more on services, which is now the sector that creates more employment. It is not by chance that free economies are the ones where salaries are higher and unemployment is lower.
Finally, it is not fair to force a consumer or producer to pay more for the whims of someone who wishes to do something that is not useful or is expensive for others. At any rate, whomever chooses something because s/he likes it and not because it is needed or s/he is particularly good at it should resign himself or herself to give up economic well being in order to do what s/he loves.
The first conclusion is that Trump will create incentives for production and employment in the least productive sectors of the American economy, which implies sectors in which the US cannot compete with other countries. In order to do this, he will end up reducing the performance of more efficient sectors and, therefore, will end up lowering the well being of most citizens and the country as a whole. Even worst, investments will go to less productive sectors instead of the ones that have a higher chance of increasing a countries well being in the long run. A second conclusion is that, regrettably, Argentina and its persistent underdevelopment is the best example of what could happen if the US continues along the protectionist road.