EKIP– Expert Club for Economics and Politics A Different Opinion
During the 2016 US presidential race, both Donald Trump and Bernie Sanders came out as protectionist and expressed clear support for expanding tariffs and other trade barriers on imports, arguing that free trade policies lead to job losses and harm a country's workers and producers by exposing them to foreign competition. Now that he is officially president, Trump continues to talk about protectionism and threaten both companies and entire countries with tariffs on their imports into the US.
The ideas of the new US president are not new and are more widespread than many of you might think. The European Union itself, supposedly founded on the principle of free trade, actually imposes very serious barriers on imports from any country outside its borders. China, whose president recently gave a speech in defense of free trade at the World Economic Forum in Davos, imposes extremely strict barriers and regulations on imports and foreign investment in order to protect specific local producers from competition. The sad reality is that nowadays there is practically no country that fully adheres to a free trade policy – you are either an outright protectionist or a covert one. That is why it is important to know why the protectionist view that trade is a zero-sum game, in which one party wins only if the other loses, is completely wrong.
Free trade does not destroy jobs
Whenever a politician starts talking about protectionism, the conversation always revolves around the topic of preserving and creating jobs. It is true that more competition between domestic and foreign workers as a result of free trade policies can lead to lower wage levels and potentially higher unemployment rates in some sectors of the economy. But this is only a short-term effect. Free competition between domestic and foreign producers leads to lower prices for goods and services that can be imported without restrictions from abroad. As a result, while nominal wage levels fall in some sectors, purchasing power, i.e. the real incomes of everyone in the economy, increases due to the fall in prices.
Thanks to the free trade with other countries, consumers in one country pay less for one group of goods and services, which allows them to buy a larger amount of another group of goods and services. This leads to higher demand and, accordingly, higher profits in the sectors that produce products from the second group, which stimulates investment in these sectors. As a result of higher investment by entrepreneurs, new jobs appear in these sectors. This compensates for the possible initial loss of jobs in sectors where some producers are unable to withstand more serious external competition.
On the other hand, consumers may choose to save the additional real income they have because of lower prices. This increase in the savings rate will lead to lower interest rates on credit, which makes certain longer-term and capital-intensive projects that were previously unprofitable now profitable. Taking advantage of the opportunity provided by this decline in interest rates, entrepreneurs begin to borrow and invest in these longer-term and capital-intensive projects, which in itself leads to the creation of new jobs, but also increases the demand for capital goods, which in turn increases profits in the manufacturing industry that produces such goods. This in turn stimulates investment and job creation in that industry.
Thus, free trade creates jobs either in the production of consumer goods or in the production of industrial capital goods, or both. Consumer choices are rarely homogeneous, so these new jobs are likely to be scattered across different sectors of the economy.
Everyone benefits from free trade
Free trade not only does not "destroy" jobs, but it also stimulates specialization at the national level, which improves the efficiency and productivity of workers, leading to improved living standards for all nations. Trade is not a zero-sum game in which if one country wins, the other loses. When two countries, such as Bulgaria and Germany, trade completely freely with each other, their citizens are encouraged to specialize in those occupations in which they have a comparative advantage. Because of the difference in factors of production, it is best for each country to specialize in the production of those types of goods and services that it can produce relatively most efficiently. A greater level of specialization, through the effect of economies of scale, makes production in each country more profitable.
By specializing in a particular line of production and then trading the goods and services produced for goods and services in which other countries specialize, the population of a country can significantly raise its standard of living due to the increase in their real incomes resulting from improved productivity. In this way, free trade stimulates the flourishing of the division of labor at the international level. Just as a higher degree of division of labor and specialization leads to significantly improved productivity at the intra-national level (i.e., within a country), it can achieve the same at the international, i.e., global, level.
Protectionism makes us poorer
While free trade policies tend to increase productivity in the long run, protectionist policies have the opposite effect. When international trade is restricted by imposing tariffs on certain imported goods, for example, these processes of deepening production specialization and the subsequent increase in productivity are hindered. When the prices of certain imported goods are artificially inflated by tariffs, this allows domestic businesses, which are otherwise inefficient and uncompetitive, to survive under the pressure of international competition. At the same time, consumers are forced to pay higher prices for those goods on which the import duty is imposed, and this in practice represents a hidden redistribution of monetary resources from domestic consumers to domestic producers.
More importantly, because protectionism slows down the process of specialization described above, it prevents improvements in the standard of living of the population, or worse, it may even worsen it. When the profits of relatively inefficient domestic producers are artificially inflated by tariffs, this prevents the transfer of labor from these inefficient sectors to relatively more efficient ones. As a result, because the process of production specialization is slowed down, or even reversed, the benefits of this specialization cannot be realized. Consequently, productivity does not increase (or at least not to the same extent as it could), and therefore real incomes do not increase either.
As we can see, economic logic clearly indicates that, contrary to popular political rhetoric these days, free trade does not “kill jobs.” It can only lead to the transfer of resources (labor, capital, and other factors) from one relatively inefficient sector or group of producers in the domestic economy to other relatively more efficient ones. This process of specialization in the production of those goods and services in which one country has a comparative advantage not only does not destroy jobs, but even leads to an increase in economic productivity in the country, which raises real incomes. Thus, in the long run, free trade, instead of hurting domestic workers, achieves the exact opposite – makes them richer. In fact, protectionism is what makes us all poorer in the long run, including workers, by artificially supporting uncompetitive and inefficient businesses, which leads to a waste of resources and a decline in living standards for all of us.
The article is an updated and translated version of an article that was originally published in English on the Mises Institute website.
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Prof.D.Econ.Sc.Ivan Angelov - ''According to World Bank experts, protective tariffs of up to 20% are permissible for underdeveloped countries. American and European scientists claim that higher tariffs, import quotas or subsidies are needed because the difference in productivity between underdeveloped and highly developed countries is now much greater than 20%....In the initial stages of its development, every country needs protection for its emerging economy until it gets firmly on its feet. There are millions of examples around the world and they date back centuries. In his work in 2002, Ha-Joon Chang proved once again a generally known truth that all current rich countries have used economic protectionism on a massive scale in the early stages of their industrial development. And after the formation of the dictates of the Washington Consensus in the late 1980s, these same countries have not allowed us to do this in recent decades! Moreover, they try to convince us that free trade was beneficial for middle- and underdeveloped economies. This is not true! Trade realities are quite different...the USA, the UK and almost all countries of Western Europe in recent centuries and especially after World War II, and also in Japan and Latin America in the 1950s-1970s. Japan would hardly be what it is now without the large-scale implementation of protectionist policies after 1945, recommended and developed with the help of the economic part of the American occupation administration, then dominated by the ideas of the Keynesian school. The prominent economist and former president of Mexico (from 1994 to 2000) Ernesto Zedillo recommended the wider use of such policies in a special report to the UN Secretary-General in 2000. The then dominant conservative philosophy of the Washington Consensus ensured that this idea was stifled. A serious reassessment of the concept of world trade liberalization is needed. Especially because of the inequality between the competitive highly developed countries and the uncompetitive middle- and underdeveloped countries. Moreover, a similar reassessment is also needed of the conditions of the Common European Market - http://www.iki.bas.bg/english/CVita/angelov/No248.htm
In the book "The World Economic Crisis and Bulgaria", Prof. Ivan Angelov has explained well about state intervention and the management of the "business crises" of capitalism, but state intervention as well as a trade agreement (TTIP) without awareness of the systemic crisis will postpone the problems, deepen them and become irreversible, and therefore a new "system" is needed.
Keynes' theory is a search for an intersection between the interests of the individual, business and the state, in which it is claimed that during growth, taxes and interest rates should be increased, and during recession, taxes, interest rates and government policies should be reduced to increase economic activity and aggregate demand in order to reduce the "business crises" of capitalism, but this is true to some extent because when interest rates increase, if the banks are not state-owned, bubbles result. In short, if when interest rates and taxes increase, the money does not go into the fiscal reserve, which is used to stimulate growth during a recession, we reach the current situation and 320% total debt to world GDP.
The final demand of citizens and the state turns the wheel of the economy and increasing demand increases growth, and the demand of citizens and the state itself is stimulated in two ways: distribution and lending, but with state banks because the interest goes into a fiscal reserve, which is used in a recession to increase demand through state policies. For classical economists like Adam Smith or David Ricardo, it is impossible to understand the functioning of the economy without politics or politics without economics, that is, only an ignorant person can claim that the "invisible hand" will regulate everything and a regulated market economy is needed, but now we need a resource-based and planned ecological economy because the crisis is systemic. In short, leaving aside the topic of the division of labor and productivity, the crisis is systemic because economic growth cannot be infinite, because the final demand from the state and citizens cannot be infinite in a closed system like the Earth, and because of exhaustible energy sources (oil, gas...), and because of global warming - in other words, in order to have infinite growth, we need another Earth and tens of billions more consumers (people) of goods and services.
BUT the current structure of the global financial system due to usury, etc. yields from stocks, bonds need endless growth and since this is impossible, a new ''system'' is needed.
What needs to be realized now is the systemic crisis because the capital pension systems will go bankrupt and I have explained starting from afar with an article on Bulgaria On Air THE INFLIGHT MAGAZINE - https://www.facebook.com/atanas.shalapatov/posts/1752811994997027