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The High Cost of Protectionism

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The High Cost of Protectionism

March 14, 2016

This column originally appeared on CapX.

After the recent spate of primary elections, many are saying that it is inevitable that Donald Trump will be the Republican nominee in the 2016 election.  If Donald Trump were to become President and enact the policies he has espoused on the campaign trail -- signature policies such as his call for China and Mexico tariffs (the latter to build his famous wall), those policies will be the biggest job-killers we have seen since the Great Depression.  Bernie Sanders, also doing much better than anyone had expected, advocates the same brand of protectionist policies.

Trump has all too often embraced a nationalist-populist-protectionist stance that draws more from the policies of Bernie Sanders than from a typical Republican candidate. Hillary Clinton is being pulled to the protectionist side also, partly by Sanders and partly by Elizabeth Warren -- she disavowed the Trans-Pacific Partnership, a trade area that includes a tranche of countries in Asia, an agreement she was pivotal in concluding.

This rise in protectionism is understandable given the anger the electorate feels and the perceived and real unfairness in the economic order.  And we do need to have policies which tell voters that if they lose their job because the Chinese or other countries' markets are so distorted that foreign firms cannot enter in a meaningful way or that their firms have undue advantages, that we have a policy that deals with that situation.  But at the same time, we need to also communicate that the power of fair competition is immensely beneficial to consumers whose clothing, food and the basic necessaries of life are much cheaper.  In a fair competition, of course American firms will be successful, and create jobs for their people. Indeed any firm located in America, no matter what its origin will be successful and create jobs for Americans.  In America, where competition is part of the national DNA, such an argument should resonate with people.

The language of protectionism is also similar to the language of the 1930s where the Smoot-Hawley tariff extended the Great Depression, and nationalist-populist-protectionist leaders rose up in a number of countries (Hitler and Mussolini to name but two).

That Trump's natural first choice is against the fundamental pillars that drive economic prosperity -- open trade, competitive markets and property rights- is borne out by his most recent seven-point healthcare plan which includes drug re-importation, which would drive a coach and horses through US patent law and deny property rights to US firms.  It would be a huge gift to the producers who violate intellectual property laws in developing countries and lead to tremendous job loss in the US.  His embrace of eminent domain for private gain is also suggestive of a lax approach to property rights when it suits him. Far from softening his anti-free trade stance, he has doubled down, criticizing John Kasich in recent rallies because of his support for NAFTA and the TPP.

We have looked at the rise of nationalism/populism around the world and how that translates into crony capitalism.  Crony capitalists often seek to be protected from competition and use governments and legal mechanisms to achieve their goals.  This level of protectionism has a very real cost by destroying wealth out of the economy which means less jobs, and much greater levels of debt.

Although Donald Trump has been relatively quiet with respect to specific policy proposals, what little he has suggested would lead to much more distorted markets.  The US, once a relatively undistorted market, has increased its level of distortion and significant productivity gains could be unlocked if it became less distorted.  We believe that if the US eliminated all its distortions, this would lead to an overall increase in productivity of around 450%.  If we assume that policies that weaken openness to trade (trade wars with China and Mexico), increase distortions in markets (such as policies that are aimed at "bringing jobs back to America" -- Buy America sailed under the same flag), and policies that weaken property rights (such as drug re-importation and eminent domain) are applied, then we can reasonably assume that thus could increase America's distortions by twenty five per cent.  Given what he has talked about, this seems a conservative measure.

Applying this 25% increase in distortion yields a productivity loss for the US that translates into the loss of 6 million American jobs and could push as many as one million Americans into poverty.

For Trump or Sanders voters, whose anger with the economic system is largely legitimate, but whose preferred candidates' medicines will kill the patient, the question you must ask is whether you are confident enough that you or your children won't be among that six million whose jobs are at risk or that one million teetering on the edge of poverty?



The original version of this op ed was published in CapX here. Shanker A. Singham is Director of Economic Policy and Prosperity Studies, Legatum Institute, and CEO, Competere Group.

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