2016 marked a dramatic sea change in global politics. By year’s end, Britain had voted to leave the EU, while Americans had elected a reality show star as their new President.
How did this happen?
Recently, the popularity of protectionist policies has risen in tandem with working-class economic anxiety. However, this begs the question – has protectionism ever worked? We’ll dive deep into this subject, but first…
What is protectionism?
Protectionism refers to government policies meant to rein in international trade. This is done to protect domestic industries by raising the prices of competing foreign products.
Proponents of protectionism assert that the resulting price signals incentivize consumers to buy more products from domestic producers. This would boost their performance, thereby improving the state of the economy.
But do they? Protectionist policies have been attempted by various governments over the years. Let’s travel back in time and see how things worked out for them.
Protectionist policies in the past: outcomes and effects
The roots of modern-day protectionism emerged during the Renaissance era. In the 16th century, a school of economic thought known as mercantilism gained widespread acceptance among monarchs in Europe.
A zero-sum philosophy, mercantilism opines that in order to gain, someone has to lose. The application of this economic philosophy severely restricted the importation of competing goods made in foreign nations and forbade the use of gold or silver to pay for indispensable goods like silk or beaver pelts.
As good as this sounded, mercantilism led to the exhaustion of resources in many European fiefdoms. Nations eventually turned on each other, sparking a series of wars over resources.
This also brought about the age of colonialism. Shortage of materials at home compelled affected nations to subjugate other realms. From the Americas to Asia, mercantilism brought misery to peace-loving people around the world. It also encouraged more war, as competing colonial powers sought to gain monopolistic control over the flow of exotic goods by seizing control of trade routes from their opponents.
The 19th century brought change, as nations increasingly abandoned mercantilism in favor of freer trade. For instance, the repeal of the Corn Laws in 1846 decreased food prices for British workers, increasing their disposable income, a change which stimulated growth in the wider economy.
Soon after, though, momentum towards liberalized trade policies was arrested by the mother of all economic shocks: the Great Depression of the 1930s. This massive collapse plunged America into a prolonged era of double-digit unemployment.
Desperate to appease the restless, President Herbert Hoover lobbied Congress to pass a bill that jacked up tariffs on almost every foreign industry. In 1930, the passage of the Smoot-Hawley Tariff Act taxed imports at an average rate of 20%.
This measure did little to help domestic producers, as it failed to address the Great Depression’s underlying causes. Most Americans lacked disposable incomes at that time, as low wages and crippling debt loads forced them to lead a hand-to-mouth existence.
This protectionist policy delayed recovery for years. When Hoover imposed his tariffs, affected nations retaliated. This made it difficult for everyone from farmers to manufacturers to sell their goods abroad.
Only the outbreak of World War II pulled America out of recession. Soon after the cessation of hostilities in 1945, the United States signed on to GATT, a multilateral trade agreement encompassing 23 nations.
Protectionism in modern times
Despite the hard lessons of the Great Depression, protectionist sentiments have once again reared their ugly heads. However, we must be fair: the institution of trade policies that were laissez-faire in their orientation set the table for the reemergence of protectionism.
From the 1980s and onward, agreements were signed which forced many labor markets to compete with those in low wage countries. Suddenly, auto workers in Detroit making more than $40 per hour were up against Mexicans willing to work for $8 per hour.
NAFTA, normalized trade relations with China, and other agreements made it intensely profitable for corporations to move operations overseas. What was good for investors was bad for workers, though – some were able to find stable work after losing their job, but many were left behind. Those lucky enough to retain their jobs have seen their wages stagnate, all while the cost of living has soared.
A similar trend unfolded in the United Kingdom. Once the workshop of the world, displaced working-class Britons have been increasingly forced to take service jobs which barely pay enough for them to get by.
With frustration mounting in both countries, it finally culminated in a populist backlash from voters in 2016. In June of that year, 52% of Britons voted to leave the European Union. In November, Americans in the Rust Belt gave Donald Trump a 304-227 Electoral College victory.
Both winning parties hammered on protectionist themes throughout their campaigns. This drew support from disaffected workers who had once known prosperity but had struggled to make ends meet after losing their former job to economic decline.
To be clear, Brexit and the eerily mercantilist trade wars being waged by President Trump are not a panacea for the economic ills of their supporters.
In the UK, the pound sterling plunged immediately after the Brexit result became official, and losses have continued to this day. In fact, today’s GBPEUR rate is 1.13 – a once unthinkable rate which has caused prices of all imported goods to soar.
It is still too soon to assess the impact of the Trump tariffs in America. However, given early anecdotal evidence (e.g. workers in a Caterpillar plant in North Carolina have had their hours cut due to the massive increase in the cost of aluminum and steel), it is likely prices will rise and net employment will decrease.
Protectionism: legitimate government policy or smokescreen?
Protectionism will always appeal to those negatively affected by gyrations in the economy. Yet, despite its ineffectiveness, vote-hungry politicians continue to promote protectionist policies in order to get elected.
However, it is also important to realize that excessively liberal free trade agreements have played a huge role in the rise of populist figures. Tragically, though, it is these politicians who are promoting the same destructive policies which kept America mired in the Great Depression for an entire decade.
Protectionism is certainly an effective political smokescreen, but vilifying those who vote for it won’t fix things. Instead, business and governments need to find the middle ground between building walls and an anarcho-capitalistic approach to trade.
If we fail, the pendulum will continue to swing between these two extremes, and history will repeat itself ad nauseum.