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Friday, November 14, 2008

"The Case for Forward-Looking Protectionism"

When people have asked me about bailing out automakers, my answer has been something like "if I thought the problems automakers are experiencing were mostly due to the problems in financial markets, and that once the trouble passes automakers would be healthy and vibrant again - and hence able to pay off any loans they are given to them now - then I might be inclined to bail them out. But as it stands, I have no such confidence. Their problems can be traced back to before the crisis began, so perhaps a bankruptcy proceeding would be a better option."

The argument below by Ha-Joon Chang applies a similar standard to protectionism more generally, i.e. "Industries that can be revived through re-tooling of its factories and re-training of its workers should be given protection... Industries that have no future should be given strictly temporary protection to ease phasing-out through orderly liquidation and redundancy":

The case for forward-looking protectionism in the US, by Ha-Joon Chang, FT Economists Forum: ...Many of Mr Obama’s economic policies are unlikely to prove contentious. Few would argue against tighter financial regulation, given today’s financial mess. Increased taxes for high-earners would be hard to oppose after the glaring absence of trickle-down from the Bush tax cuts – after all, the majority of the high-earners voted for him.

Mr Obama’s trade policy, however, is already causing controversy. He has vowed to protect American jobs and even argued for re-negotiating the NAFTA. There is already some hand wringing among free-trade economists, worrying that his protectionist policies may destroy the world trading system in the same way the infamous Smoot-Hawley Tariffs of 1930 did after the Great Depression. ...

However, contrary to what most people think, the US is the true home of protectionism. Between the 1830s and the 1940s, against superior European competition, the US developed its industries behind literally the highest tariff wall in the world, with the average industrial tariff rate ranging between 35% and 55%. Even the Smoot-Hawley Tariffs were not an aberration – the average US industrial tariff in 1931 was, at 48%, well within the historical range.

Moreover, the theory that justified such protectionism, namely, the ‘infant industry’ argument, had been first developed by none other than the first Treasury Secretary of the US – Alexander Hamilton... Hamilton argued that producers in relatively backward economies needed to be protected ... before they mature and can compete with producers from more economically developed countries.

Of course, the protectionism that Mr Obama is advocating is protection to ease the adjustment of mature industries... The case for such protectionism is not as overwhelming as that of infant industry protection. However, well-designed and time-bound protection of mature industries can facilitate, rather than hindered, trade adjustment and industrial upgrading. ...

Mr Obama should use protectionism in a similarly forward-looking way. Industries that can be revived through re-tooling of its factories and re-training of its workers should be given protection, but only if they fulfill certain conditions regarding investment and training. Industries that have no future should be given strictly temporary protection to ease phasing-out through orderly liquidation and redundancy.

A forward-looking protectionist strategy will also require a substantial strengthening of the welfare state in the US. A well-designed welfare state with good unemployment insurance and re-training programme can facilitate structural changes by reducing the resistance of the workers to more open trade that exposes them to greater risks. ... Stronger welfare state is why the demand for protectionism is much weaker in the European economies than in the US...

Keeping its market open is not enough for the US to play a genuinely positive role in the world trading system. The US should also stop pushing for trade liberalization in developing countries and give them the chance to use (intelligently-designed, of course) infant industry protection, which it invented and benefited so much from. ...

All these call for a much more activist role for the US government than it has been the norm. Providing protectionism to facilitate structural changes, and not just to protect existing jobs, would require a much closer coordination between trade policy and those policies to upgrade American industries, such as R&D support and worker training. Redesigning the welfare state as a vehicle to promote skills upgrading and labor mobility would push the US government into an uncharted territory.

These are big challenges. However, the US cannot continue its peculiar mixture of free-trade mythology and uncoordinated, ‘reactive’ protectionism that has served ordinary Americans and the developing nations so poorly. ...

I would still be wary of this argument (it is essentially an infant industry argument, i.e. the mature industries need "re-tooling of ... factories and re-training of ... workers," so they are infants as compared to their competitor's level of development.). It is an easy argument to make, you essentially promise you'll do better if you are given help, so I would want a tough standard, i.e. that any protectionism to be justified by overwhelming, clear evidence that temporary protection would in fact allow an industry the time it needs to transform itself and become viable once again, and that, contrary to the firm's history up to that point - perhaps its hands have been tied by previous investment in capital that is now outmoded -  it will actually make the necessary changes.

    Posted by on Friday, November 14, 2008 at 02:07 PM in Economics, International Trade, Regulation | Permalink  TrackBack (0)  Comments (95)

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