While politicians—particularly Donald Trump—are busy promoting how protectionist trade measures will help our economy, the reality is that all of us lose when we turn our backs on free trade. Well, not all of us. There is one group that benefits…the inefficient (not to mention those politicians). And they win at the expense of everyone else.
Inefficiency is the primary beneficiary of trade protection. [Inefficiency is defined in two ways according to dictionary.com: 1. not efficient; unable to effect or achieve the desired result with reasonable economy of means; and 2. lacking in ability, incompetent.] However, so many of us get caught up in nationalistic sentiment to realize what is abundantly clear. The popular mantras include Americans “losing” their jobs to sweat shops and foreigners; companies “outsourcing” phone centers; or auto manufacturers shipping those poor union member’s jobs south of the border. All bunk. Let me give you an example that might help clear things up because the emotion has been removed.
Let’s say in your town you have an intersection with two gas stations. At the QuickUp—yeah, I made that up all by myself—the employees are friendly, the facilities clean, the beer extra cold, and the pumps always give you a receipt instead of having to “see cashier” (I hate that…if I wanted to “see cashier” I would not have swiped my card!). Across the way, at the Sucks2B-N the store lives up to its namesake; the facility is filthy, the bathrooms are always closed, and the employees view you as an inconvenience to their normal texting routine.
Now, not surprisingly, the QuickUp sells more gas and has better profits than the Sucks2B-N which is clearly unfair…right? So, to keep Joe the crackhead, Rebecca the part time meth-cooker, and Jim (the owner with a gambling problem) from losing their jobs, the local government institutes some “trade protection.” Basically, if you want to stop by the QuickUp, you have to pay a tax of 5%; that way we do not lose valuable jobs in the community, because if the Sucks2B-N closes, those three people will be unemployed, right? After 6 months people are still going to the QuickUp—because that’s how bad the Sucks2B-N sucks to be in—prompting local government to increase it to 35% to ensure success.
As expected, people are largely unable to afford to go to the QuickUp and a significant portion shifts to the cheaper Sucks2B-N. Joe, Rebecca, and Jim are all better off now and have secure jobs. While the QuickUp, with a staff previously at 20, now has only 8 employees left (that means we are down 11, by the way). But, on the bright side, we get 4 jobs “back” with the addition of new employees which have been hired at the Sucks2B-N (it is easier to provide crappy service as it turns out…who knew).
Here is the bonus though. In economics, it has been empirically proven that in the light of high tariffs (trade protection) the domestic producers raise their pricing to be more in line with foreign producers’ new pricing which includes the tax. Because Sucks2B-N follows predictably with what economics has long known, the people of your town can afford less ice cream for their families and two more jobs are lost at the parlor (11-4+2=9 jobs lost to save 3…hmmm). And that example could potentially apply to any type of good. In fact, other employers have to buy fuel at the more expensive price therefore they have less money for raises and increased benefits. In the light of reduced sales in other market segments, the local government takes in less tax revenue. In short, everybody in town has essentially paid a tax—in the form of higher prices and reduced future wages—to ensure that Joe, Rebecca, and Jim stay employed…still feeling warm and tingly inside? The “Inefficient 3” (catchy, I know) has been relieved of the consequences of inefficiently operating a gas station and you have received the bill. Both trade protection and the gas station example are, for all intents and purposes, wealth redistribution; a very costly form of redistribution at that. This kind of redistribution has much higher transaction costs than simple welfare leading to an increased magnitude in the future through the compounding effect.
We must always keep in mind that if production of a good goes elsewhere, there is a reason and we, the consumers, have made that choice. Consumers make choices based on cost and quality that drives producers (i.e. businesses and corporations) to change their production methods and sources. And this is okay. Does this mean some people lose their jobs…certainly; but people lose their jobs all the time for inefficiency, we only seem to mind when it is to someone that is not an American citizen. Additionally, the amount of future production (read as consumption and the ability to have “stuff”) goes down making us all relatively poorer to subsidize—or benefit—a few. In fact, anyone that truly favors trade protection should thank the next fast food employee that screws up their food, or the next server that brings the appetizer after the entrée. Or the next car salesman that sells them a lemon…so on and so on. At least be consistent and support inefficiency directly in all its forms.