Debunking More Republican Protectionist Nonsense


Proponents of protectionist fallacies are never short of sophisticated arguments (sophistry) to support their agendas; they will invoke everything from patriotism to economics, and will even appeal to your emotions by throwing pity-parties for the domestic shopkeepers and laborers that are put out of business due to the "unfair” competition from foreigners.

To their appeals to patriotism I say, “When did America become a nation of whiny little bitches!?”

To their throwing pity-parties for domestic shopkeepers and laborers, I call it what it is; a fallacious appeal to emotion meant to shut down any argument against the protectionist agenda.

But to their appeals to the economic aspects of the problem, I’m afraid a more in-depth analysis is called for, especially in the case of “dumping”. Dumping describes a process by which an exporter of a product will “dump” his product onto a foreign market by selling it (or just giving it away freely) below cost of production. The theory is that by doing this, the foreign market will put the domestic suppliers for that product out of business. Then, when there are no more domestic suppliers of that product, the foreign suppliers raise their prices in order to recoup what they lost by dumping, and as a result, domestic consumers suffer while foreign producers profit by our expense.

For example, suppose it costs a Chinese manufacturer of computer chips $1,000 to create that chip. Dumping theory would have it that the Chinese supplier will then sell those chips to an American importer in bulk for what amounts to $100 per chip. Then, when the domestic supplier of those chips are put out of business, the Chinese supplier will boost the price of those chips from $100 to $2,500.

There is one problem here that should immediately jump out at you, even if you’ve never had any sort of training in economics; if you were the owner of a company that made computer chips and it costs $1,000 to make one chip, can you seriously see yourself selling that chip in bulk to anyone at $100 per chip?  There is an obvious incentive right here to not try to engage in this sort of thing. Ah, but the protectionist will be quick to answer, “No, normally this would bankrupt you, but the Chinese government subsidies it’s exports, so these companies can maintain the loss for long periods of time.”

But even so, this doesn’t guarantee that domestic suppliers will be put out of business. True, there is a huge economic incentive to buy Chinese instead of American in the above example, but there are many people who’ll buy American no matter what. Even today in the real world, there are people who refuse to buy foreign-made cars and will go out of their way to buy American over Japanese for instance.

But, let’s entertain this thought for a moment that this foreign subsidizing of exports will put American suppliers out of business, and that they the foreign supplier will indeed raise his price well above. What this means is that foreign competitors will sharply undercut him. In our example of the Chinese Manufacturer of computer chips, if he indeed raises his price to $2,500, he will be undercut by a Japanese Manufacturer who’ll be competing for the American consumer. He will offer the same chip for $1,500 – $2,000, which puts downwards pressure on the price of Chinese computer chips, and this says nothing about the other countries that are in the computer chip business.

There are two other variables here that must be considered. First, there is the possibility that America might return to the computer chip business. If that is the case, the Chinese Manufacturer now has even more downwards pressure put on the price of his product.

The second variable here (and the one that is most likely to happen in my opinion) is that when the Chinese Manufacturer is dumping the chips in bulk at $100 per chip, American importers are most likely to buy as many of them as possible because they know the price of those chips are eventually going to go through the roof. This way, when the price does go through the roof, American importers of those chips have enough of them to not have to import any more of them. This throws a monkey wrench into the plans of the Chinese manufacturer who planned on profiting at the expense of Americans, and it completely destroys the dumping argument put forth by Protectionists.

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Posted on June 20, 2013, in Economics and tagged , , , , . Bookmark the permalink. 9 Comments.

  1. First of all, let me say that I am glad someone is even engaging in this debate on wordpress, there are very few economic strong-heads that I can debate with here usually.
    Your argument is very well structured, and well written, and I would be inclined to believe you if I didn’t already know something about economics.
    The foreign competitors don’t raise their prices after a while, the prices stay low, subsidised by their own governments. The governments do this to maintain employment levels, and rightly too.
    Protectionism is a fact of the world that you just have to get used to. Like AIDS, or underprivalleged black people in america.
    Its always happened, and has created the large economic powers of the western world that you see today. The only difference now, is that the IMF isn’t allowing third world countries to pursue the development policies that everybody else did, by inventing the notion of ‘free trade’, and by use of conditional loans.

    • “The foreign competitors don’t raise their prices after a while, the prices stay low, subsidised by their own governments. The governments do this to maintain employment levels, and rightly too.”

      If the prices stay low, then we can engage in comparative advantage. Let me show you what I mean. Suppose it takes America 1 hour to produce 20P and 2 hours to produce 10T. In 6 hours, America will have produced 120P and 30T. China on the other hand takes 2 hours to produce 10P and 1 hour to produce 25T. In 6 hours, China will have produced 30P and 150T. Comparative advantage is where we allow another country to specialize in what we produce least off. America therefore would let China produce T and China would let America produce P. In the same 6 hour time period, total production this way is 120P and 150T. This is called “The Ricardian Law of Association” or “The Law of Comparative Advantage”. Returning to our example of computer chips, what this would mean is that we would let China handle the production of computer chips, and we would take the labor/resources that would’ve gone into making computer chips and put it to some other means of production. This way, ultimately, everyone benefits.

      Also, subsidizing your export industry doesn’t create employment. As Henry Hazlitt brilliantly pointed out, the entire reason you have exports is to pay for your imports. Without imports, you can’t have exports, and vice versa. A country doesn’t enrich itself by loaning a foreign consumer money to buy it’s good or by subsidizing it’s companies to export to other countries at a loss. Far more often than not, those loans are never repaid anyway.

      “Protectionism is a fact of the world that you just have to get used to. Like AIDS, or underprivileged black people in america.
      Its always happened, and has created the large economic powers of the western world that you see today.”

      Whatever achievements the West has had has been in spite of protectionism, not because of it. To further kill this idea that protection creates prosperity, let me show you another example. Suppose an American supplier of Semi-Conductors is selling Semi-Conductors at $1,000 per Semi-Conductor. A foreign supplier begins selling them in America at, once the currency is converted over, $750 per Semi-Conductor profitably. This angers the American supplier because he knows he can’t compete head on with the foreign supplier, so he petitions the government to put a tariff on all foreign semi-conductors. The government agrees, and what is the result? The punitive tariff causes the price of the foreign semi-conductors to go up to $1,500 per semi-conductor and the American supplier raises his price to $1,250 per semi-conductor. Here’s the problem; those who bought Semi-Conductors at $750 had a second buying opportunity with the $250 saved; he could’ve invested it in business, he could’ve went out and spend it on perishables, he could’ve put it away in savings, etc. But because of the tariff, he’s not only having to forego the $250 buying opportunity, he must make due with an additional $250 just to satisfy his initial want for a Semi-Conductor. That is in effect a $500 loss as a result of the tariff, a loss in which the protected supplier pockets as profit at the expense of everyone else.

      “The only difference now, is that the IMF isn’t allowing third world countries to pursue the development policies that everybody else did, by inventing the notion of ‘free trade’, and by use of conditional loans.”

      First of all, the IMF (the brain-child of John Maynard Keynes) can’t do anything in the name of the free-market or free-trade. They are not, and cannot be, a free-market entity. Secondly, regarding your mentioning of conditional loans; so does that mean you would prefer to see loans as unconditional? But that creates a laundry list of other problems, which I won’t list here.

      • The law of comparative advantage doesn’t work, because governments can choose to support an industry of their choice, which they know would benefit their country/people economically. South Korea is a good example here. If we let each country specialise in one thing, then international competition (which you seem to think is so important) would be lost, because no country would be challenged in their field of expertise. Global trade is not a sacred covenant, and certainly shouldn’t be protected at the expense of jobs.
        You seem to think that by raising the price of the foreign good, the home firms would immediately take the oppurtunity to raise their own prices, and squeeze the public. This isn’t true, because firstly, they realise that people are less likely to buy their product, and because competition amongst themselves would stop this. Their government has just given them an economic advantage, which they wouldn’t be so eager to squander by raising prices.
        You also seem to think that protectionist western governments in the age of insustrialisation put up random tariffs, which they didn’t. You need to have strict central planning of production so that you can get the right things at the right time. If you look at what I said in the last paragraph, the idea that home firms would immediately raise their own prices is flawed. Therefore, so is your second argument.
        Whatever the case, those home firms are now doing better off as a result of government intervention, and those workers will now spend, and increase prosperity. Its all about keeping the capital in your own country.

      • “The law of comparative advantage doesn’t work, because governments can choose to support an industry of their choice, which they know would benefit their country/people economically.”

        While governments can support an industry of their choice, not only isn’t this cause for saying that comparative advantage doesn’t work, the support that the government gives that industry comes at the expense of the consumers as well as other industries.

        “South Korea is a good example here. If we let each country specialise in one thing, then international competition (which you seem to think is so important) would be lost, because no country would be challenged in their field of expertise.”

        Your assumption that if we let each country specialize in one thing relies heavily on assuming that countries actually specialize in one thing. This isn’t true. Countries specialize in a multitude of things, which are traded on the world market. Comparative advantage simply states that you let another country handle what is hardest for you economically to produce, and by doing so, both countries will produce more than if one country had tried to produce both of those things at the same time. This doesn’t mean that Country A won’t be challenged in it’s area of expertise at a later date, when in fact it probably will be.

        “Global trade is not a sacred covenant, and certainly shouldn’t be protected at the expense of jobs.
        You seem to think that by raising the price of the foreign good, the home firms would immediately take the oppurtunity to raise their own prices, and squeeze the public. This isn’t true, because firstly, they realise that people are less likely to buy their product, and because competition amongst themselves would stop this. Their government has just given them an economic advantage, which they wouldn’t be so eager to squander by raising prices.”

        To return to my example of the American supplier of Semi-Conductors raising his prices from $1,000 to $1,250, I’m sorry but protected industries are notorious for raising their prices. In fact that’s how they usually sell the idea of protective tariffs to politicians. They say something along the lines of, “If you will protect me from my foreign competitor, I will raise my prices. This will allow me to hire more workers, pay more in wages, and as a result of my worker’s higher wages, other national industries will benefit as a result.” But, let’s assume for a moment that you’re right and our supplier won’t raise his prices from $1,000 to $1,250. The fact still remains that his customers are facing a lost buying opportunity of $250 as a result of the tariff, and this extra profit that the American supplier makes is in fact at the expense of the public at large.

        “Whatever the case, those home firms are now doing better off as a result of government intervention (at who’s expense?), and those workers will now spend, and increase prosperity. Its all about keeping the capital in your own country.”

        If that is indeed true, then India’s weaving industry should’ve been a major engine of Indian prosperity in the 1980’s, but in fact, it was an example of how protection cripples industry and stagnates prosperity.

        “In reply to your last point, I don’t see globalisation or aid as being ways out of third world poverty. Neither of them will work, because globalisation exposes them to highly competitive western firms, and because aid is likely to be drained away into the pockets of corrupt officials.”

        Globalization is inevitable. There is nothing you can do to stop that, except for destroying all planes, getting rid of all of our high-performace freight ships, getting rid of the internet, etc. And to the extent that globalization exposes Third World Countries to competition, it also exposes the Third World to investment; there is always a demand for labor in one sense or another. The only reason companies wouldn’t invest in the Third World would be due to government policies; taxes, regulations, political instability, things like that. And, you’re right about Foreign Aid. That doesn’t work anyway.

      • In reply to your last point, I don’t see globalisation or aid as being ways out of third world poverty. Neither of them will work, because globalisation exposes them to highly competitive western firms, and because aid is likely to be drained away into the pockets of corrupt officials. A common misconception is that we are too generous to the third world, which isn’t true, because we see much larger returns on the aid we give them in the form of money spirited into tax havens, and away from their government coffers.

  2. You fundamentally misunderstand the nature of global trade. I believe your argument fell into two main points, and so I’ll reply to both of them:
    PROTECTION COSTS CONSUMERS- How to organise my thoughts. My thoughts are these. Protection might not be necessary for developed countries, but is defintely necessary for developing economies. You seem to think that conumer benefit is key, when it really isn’t. We haven’t had this craze with consumer satisfaction for long, and thank god for it. The companies might raise their prices a bit after tariffs have been installed, but they would not go through the roof. Mainly because of the consumers anyway.
    When I’ve had this debate before, people always talk about lazy industries applying to their governments for protection. THIS IS RARE. Governments do it because they know that it will benefit their economy. Explain why it would come at the cost of the other industries?
    COMPARATIVE ADVANTAGE- On the face of it, this theory sounds acceptable. And it certainly is when discerning between different manufactured goods, the problem arises when we cross over between primary, secondary and tertiary industries. If Angola listened to you, and continued to focus its economy on low cost agriculture, and imported technology from America, America is clearly the winner there because these things have different values on the world market, and because historically countries have developed by encouraging manufacturing, not by sticking with what they’re best at.
    GLOBALISATION- When I say globalisation, I mean something different from you. The internet is something which has huge potential, and whether I like it or not, could and should be put to good use. The problem is that currently it has’t been. Another problem with globalisation is the liberalisation of third world markets. When countries open themselves up to western exposure, they do it at the cost of their own industry, and condemn themselves to rely on western influence for ever, like some sort of drug. Their own industries are wiped out, and they are forced to rely on foreign firms, which can choose to leave at any time, and which can demand and recieve whatever they want of the government, usually at the cost to the workers. Globalisation drives down working standards. Historically speaking, development has come from home firms, not the fickle investment of foreign investors. The power of capital is a huge factor in htis debate.
    The financiers can take their short-term investment out of the country whenever anything- no matter how slight- happens. It may not be anybody’s fault, but it will send a country into economic upheaval all because of some silly reason, like a political problem, or an earthquake. In times of a natural disaster, we need stability, not frightened investors turning tails and running, taking prosperity with them in a matter of seconds.

    • I apologize in advance for the sheer length of this response.

      “How to organise my thoughts. My thoughts are these. Protection might not be necessary for developed countries, but is defintely necessary for developing economies. You seem to think that conumer benefit is key, when it really isn’t.”

      If consumer benefit isn’t key, how are businesses supposed to make a profit? Capitalism is mass production to supply the masses. The satisfaction of the consumer is the only way (in an economy free of government granted monopolies and subsidies) that a business can possibly make money and continue to exist. In fact, the only reason businesses exist for any extended length of time is because they have proven that they can satisfy the consumer profitably, and if they fail to do this, they go bankrupt.

      “When I’ve had this debate before, people always talk about lazy industries applying to their governments for protection. THIS IS RARE.”

      This isn’t as rare as you would like to believe. An example of this is the Shrimp Import Tariff (you can find more information of that here http://mises.org/daily/1551), and it’s not a question of industry being lazy, it’s industry realizing that, currently, it simply cannot compete with the foreign firm. Maybe the foreign firm has smaller labor costs, or maybe they have better access to materials. Whatever the case may be, the foreign firm can sell much cheaper than the domestic firm and still make a profit (this is assuming that the foreign firm isn’t trying to engage in dumping).

      “Explain why it would come at the cost of the other industries?”

      Precisely because the protected industry will raise their prices (which protected industry is notorious for). A protected steel producer for instance will charge another company looking to buy his steel much more than he would have if he hadn’t had the protection in the first place. The result is a bigger shift of resources to the production of steel (due to the higher prices) and less to other industries, and while domestic competition will hinder the increase in prices somewhat, it won’t have the effect that it should’ve had because it’s not the type of competition both the consumers of steel and the market overall needs. Let me give you an example:

      Suppose there are 5 domestic producers of steel, and they charge for their steel ~$10,000 per ton ($5 per pound), with minor differences in price between them. While they are indeed competing with each other for the consumer, they can’t compete with the foreign firms (for the sake of this example, we’ll assume 5 foreign producers of steel), who are charging, when the currency is converted over, ~$6,000 per ton ($3 per pound). This angers the politicians, so they decide to make importation of steel unprofitable by putting a very punitive tariff on foreign steel, so that the price of foreign steel goes up to ~$15,000 per ton ($7.50 per pound). What this means is that now everyone who used to import steel from the foreign producers now have a massive incentive to buy domestically produced steel. Econ 101: if Demand increases, then assuming Supply remains the same or grows at a slower pace than Demand, prices go up.

      The price of domestic steel is going to go up regardless, simply due to the forces of Supply and Demand. If domestic steel just goes up moderately to ~$10,500 per ton ($5.25 per pound), the fact remains that there is a massive opportunity cost here to the tune of ~$4,500 per ton of steel bought because of the tariff. As a result of this opportunity loss, the companies who are now importing domestic steel have that much less capital to hire workers, pay wages, increase production, etc. And to make that even worse, the final products of those buying the protected steel are going to cost more because of the higher-than-necessary cost of the steel. The result is less sales made (due to the increased price which must occur), which also results in less profit for said company. If there are less profits for a company, that is necessarily less money that said company has to pay higher wages, hire workers, increase production, etc. There is another bit of information here that must be considered; in the face of the added production expense due to the tariff, the companies who buy steel for productive purposes may try to get their workers to accept less in wages, which creates other issues I won’t get into here.

      To give you a further illustration how other industries pay for one industry’s protection; suppose we have a company which makes cargo ships. Each cargo ship has to have a total of 100 tons of steel to complete the ship. Using our previous prices, if this company could import the foreign steel, it would cost ~$600,000 for the steel needed to complete the ship (this isn’t counting other expenses, such as wages). But, due to the protective tariff, it would cost the company ~$1,050,000 (I keep using the ~ symbol because, remember, there are 5 domestic steel producers and they are competing with each other) for the same amount of steel in order to build that exact same ship. This is a whopping ~$450,000 increase in cost. This cost will be passed on to the companies who use cargo ships, and the result will be increased shipping costs in order to cover the additional expense that was created, ultimately, because of the tariff. Increased shipping costs further increases overall prices, which hurts businesses as well as individual consumers even more.

      “On the face of it, this theory sounds acceptable. And it certainly is when discerning between different manufactured goods, the problem arises when we cross over between primary, secondary and tertiary industries. If Angola listened to you, and continued to focus its economy on low cost agriculture, and imported technology from America, America is clearly the winner there because these things have different values on the world market, and because historically countries have developed by encouraging manufacturing, not by sticking with what they’re best at.”

      How can there be a “winner” if there’s no competition? Angola gets low cost technology from America, and America gets low cost agriculture from Angola. Both parties benefit. If Angola believed that they weren’t better off as a result of the trade, they would either renegotiate or they wouldn’t trade at all. And regarding your historical point, you’ve completely misunderstood the Law of Comparative Advantage. For one thing, you view the Law of Comparative Advantage as simply “sticking with what they’re best at”, when in fact Comparative Advantage, as I have shown before, says nothing of the sort. Suppose you have two countries (Country A and Country B).

      Country A can produce the following quantities of items in a two hour time period:

      54c
      34d
      67e
      23f
      8g
      78h
      43i
      45j
      87k
      65l

      Country B can produce the same commodities, but at different rates in the same two hour period:

      27c
      56d
      34e
      98f
      33g
      65h
      31i
      55j
      47k
      49l

      Now, Country A’s lowest production on this list is Commodity G, while Country B’s is Commodity C. Comparative Advantage states that Country A would let Country B produce Commodity G, and Country B would let Country A product Commodity C. The result is Comparative Advantage, and there is no way that either country will be worse off.

      “The problem is that currently it has’t been. Another problem with globalization is the liberalization of third world markets. When countries open themselves up to western exposure, they do it at the cost of their own industry, and condemn themselves to rely on western influence for ever, like some sort of drug.”

      You don’t seem to understand that if domestic industry is adequately satisfying the wants/demands of the consumers, foreign industry can have little to no impact on domestic industry. The reason foreign industry puts domestic industry out of business is precisely because domestic industry is inefficient; they are not satisfying the wants/demands of the consumers as adequately as they should be or as adequately as others can. The consumer is no worse off, and in fact, foreign investment creates new jobs, new processes of production, and improves the lives of the foreign population as a whole. The only thing which would keep this from happening is government policy/political instability of a given territory.

      They say the same thing about Wal-Mart. Wal-Mart moves into the neighborhood and puts all of the “Mom and Pop” stores out of business, but is the consumer worse off? No. The reason Wal-Mart puts those “Mom and Pop” stores out of business is precisely because the “Mom and Pop” stores are inefficient as compared to Wal-Mart in satisfying the wants/demands of the consumers at large. The consumers benefit through lower prices. The money the consumer saves by paying $5 for an item that would’ve costed him $8 at the “Mom and Pop” store is money that he can spend at another business, and thus, an opportunity for another business to thrive is created.

      “Their own industries are wiped out, and they are forced to rely on foreign firms, which can choose to leave at any time, and which can demand and receive whatever they want of the government, usually at the cost to the workers.”

      If a domestic government has indeed liberalized their markets, then the foreign firm will get nothing from the government. No subsidies (tax breaks are NOT subsidies), no bailouts, no special favors, nothing. He will get the opportunity to do business within the private sector, and that’s it. So you needn’t worry about foreign firms getting something from domestic governments if they liberalize their markets.

      “Historically speaking, development has come from home firms, not the fickle investment of foreign investors. The power of capital is a huge factor in htis debate.
      The financiers can take their short-term investment out of the country whenever anything- no matter how slight- happens. It may not be anybody’s fault, but it will send a country into economic upheaval all because of some silly reason, like a political problem, or an earthquake. In times of a natural disaster, we need stability, not frightened investors turning tails and running, taking prosperity with them in a matter of seconds.”

      Financiers can’t tale prosperity with them in a matter of seconds. This is a myth.

      All in all, your comment is, once again, a collection of economic myths and fallacies. Regarding protection, I have something you might take interest in; a petition written by Frederic Bastiat for protectionism.

      http://bastiat.org/en/petition.html

  1. Pingback: Protectionism- A LONG debate with kenpruitt666 | The Red Threat

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