The Confused and Backwards Thinking of Protectionists

Scott Alexander’s latest post, about the link (or apparent lack thereof - the Easterlin Paradox) between wealth and happiness, on his Slate Star Codex blog is interesting and thought-provoking as always.  I recommend reading the whole thing.

Scott makes some good points and I find myself in complete agreement with his conclusion that:

“...I am forced to acknowledge that happiness research remains a very strange field whose conclusions make no sense to me and which tempt me to crazy beliefs and actions if I take them seriously.”

I do have one objection to his argument.  Specifically, it’s with the way he discusses free trade and protectionism in part II of his post.

Here’s Scott:

“Suppose that some free trade pact will increase US unemployment by 1%, but also accelerate the development of some undeveloped foreign country like India into hyper-speed. In twenty years, India’s GDP per capita will go from $1,500/year to $10,000/year. The only cost will be a million or so extra unemployed Americans, plus all that coal that the newly vibrant India is burning probably won’t be very good for the fight against global warming.

Part of me wants to argue that obviously we should sign the trade pact; as utilitarians we should agree with [Scott] Sumner that lifting 1.4 billion Chinese out of poverty was ‘the best thing that ever happened’ and so lifting 1.2 billion Indians out of poverty would be the second-best thing that ever happened, far more important than any possible risks. But if Easterlin is right, those Indians won’t be any happier, the utility gain will be nil, and all we will have done is worsened global warming and kicked a million Americans out of work for no reason (and they will definitely be unhappy).”

I think Scott’s thinking here is confused.  I don't mean to pick on Scott here, he’s not alone, I think this is an issue where many people's thinking is very confused.  For now, let’s put aside the question of whether or not raising people’s income can make them any happier or not; as this is not relevant to the point I wish to make here.

The way he words this is as if:

1. The US government has the option to take some action X (in this case signing a free trade pact).
2. Positive consequences of X are: a >6 fold increase in the material well being of over a billion people, who are mostly extremely poor by US standards, in just 20 years.  (Additional positive consequences not identified by Scott include some combination of reduced prices, improved quality, better selection and/or improved availability of certain goods and services to American consumers - and to other American producers not in the protected industries.)
3. Negative consequences of X are: 1 million people, who are mostly well off by global standards, lose their jobs and additional fossil fuels are burned, contributing to global warming.  (Note that most of these 1 million people will eventually find other work; some will take early retirement; some may set up businesses of their own.)

Should the government take action X?

I think this gets things backwards.  Here’s what I think is a more accurate way to look at this:

1. The US government has the option to take some action Y (in this case imposing tariffs, quotas and/or outright bans on US imports from India).
2. Positive consequences of Y are: 1 million people, who are mostly well off by global standards, can remain in their current jobs and don’t have to be forced to retrain, find other work, or be forced into early retirement.  Also, less fossil fuels will be burned, leading to less global warming.
3. Negative consequences of Y are: severely retarding the improvement in the material well being of over a billion people, who are mostly extremely poor by US standards.  Higher prices, worse quality, more limited selection and poorer availability of various goods and services to American consumers - and to other American producers not in the protected industries.

Should the government take action Y?

Some people will look at the above and ask what’s the difference?

The difference is free trade is what would happen anyway unless the government actively goes out of it’s way to prevent it from happening, if it didn’t erect barriers to trade between people who happen to live in different countries.  Free trade does not require a free trade pact to happen, it just requires that government doesn’t get in the way.

Here’s Scott again, later in the post:

“If we were to actively try to keep the Indians from industrializing, that would be pretty awful. But that’s not the argument at hand here. The argument at hand is ‘are we morally required to sacrifice our own economy in order to help the Indians industrialize?’”

I think many (most?) people would answer 'no' to the above question.  However I think this question is a red herring.  Even more than that, I think the quotation above perfectly highlights what is so confused about many people’s thinking on international trade, globalisation and protectionism.

What does the phrase "our own economy" mean?  It seems from the context and from common parlance that it means "the US economy".  However, it needs to be emphasized there is nothing economically or morally relevant about political boundaries.  Trade between someone in New York and someone in New Delhi is no different, in any economically or morally relevant way, than trade between someone in New York and someone in New Jersey.

Or, as one commentator, j r, put it:

“We don’t use these sorts of rationales to restrict trade between California and Utah or to stop a white American from going to a Chinese American dry cleaner.

What’s the basis for using the nation state as an intrinsically valid moral or ethical unit?”

It seems to me that the argument at hand really does revolve around actively trying to keep less developed countries from industrializing.  Consider the question: what is protectionism?  Protectionism is the active effort of government to prevent, limit or restrict trade across political boundaries.  No active efforts are required on the part of government to allow mutually beneficial free trade.  All this requires is that government doesn’t stop it from happening by erecting artificial barriers to trade.

Contrary to the implication of the question: “are we morally required to sacrifice our own economy in order to help the Indians industrialize?”, free trade does not involve any sacrifice.  It is what would naturally happen if governments and others were to refrain from butting into other people’s business.  Protectionism is an active attempt to retard the economies of the countries which it is directed against (not to mention the adverse unintended consequences on the economy of the country imposing the protectionist measures).

I would rephrase the argument at hand as: “can we morally justify sacrificing the Indian economy in order to help a minority of domestic producers?”

I think many (most?) people would answer 'no' to the above question.  However, our political system often produces outcomes that would appear to suggest an affirmative answer to this question.  I think this is largely a result of the confused thinking about these issues.  Many people’s intuition causes them to get this issue precisely backwards.