Saturday, January 26, 2013

Protectionism and the hierarchy of needs

International trade is one of those subjects that people talk about with confidence when they really don't understand the basics. It seems like common sense. Of course we want to be the ones who produce cheap merchandise. Of course China is doing all of our manufacturing for us, as we can clearly demonstrate by looking at where cheap consumer goods are made. Of course the purpose of free trade is to increase our exports.

All three of those common sense ideas are wrong and they require looking at international trade the same way we look at the cola wars, where America and China compete with each other the way Pepsi and Coke compete for customers. Paul Krugman called this view pop internationalism.

Krugman said we should look at China and Japan as trading partners, not competitors. This is a hard sell to the public, and the ignorance of this perspective is what drives protectionism and pseudo economic fads like the "Buy Local" movement.

They tell us, of course the community benefits if you buy from within instead of afar. Of course we should produce our own food. Of course these methods will lead to a higher quality of life for people in our community.

To get into the proper mindset, let's look at providing for the community through the lens of Maslow's hierarchy of needs.

The community must have its basic needs met first. Your library won't do the public much good if everyone freezes to death, and good luck unraveling the mysteries of philosophy if everyone is dying of starvation. The bottom tier of the hierarchy includes things like food, shelter, water and air to breath.

Localists want to have communities feed themselves first, so they support local agriculture as a way to create jobs and keep the community self-sustained.

But remember, jobs are a cost, not a benefit. If you are tying up all your workers with inefficient food production than you will have fewer workers around to tackle the higher tiers of safety, love and belonging, esteem and self-actualization. Who will research cancer treatments, build cars or reinvent higher education if everyone is too busy feeding themselves? That's why the advancements from civilization has always been possible through trade and technology and protectionism is a source of harm for the local community.

With international trade, we put our trading partners to work satisfying some of those needs on the lower tiers so we can concentrate on the higher ones. When China makes our souvenir baseball caps, that frees up our workers to build airplanes.

1 comment:

  1. Nice post - but remember a little learning is a dangerous thing! Sure, naive arguments for protectionism are usually rubbish. But my own interest is in computer simulations of trade using new optimizing techniques and in these simulations deep problems do surface. One problem is that under certain circumstances trade will still leave large differences in factor prices between a capital rich country (home) and a capital poor country (foreign). In particular, rent (the return on capital) maybe much higher in foreign than at home. This will promote the transfer of productive capital from home to foreign in search of better returns. At home, the transfer of capital will lower wages, reduce labour's share of national income and cause economic stagnation through reduced investment in productive capacity. The only winners for the home country are the rentiers (owners of capital) who benefit from the higher returns on capital invested abroad.