Tuesday, September 11, 2007


"France should work for a much more offensive policy of protection, solidarity and regulation," says the French minister of foreign affairs.

The failure of protectionism

Contrary to popular asserted beliefs, the policy goals aimed at the enforcement of protective trade policy results the opposite effects. At the government level, extensive intervention in the form of company ownership reduces the competitive ability of the owned companies to compete in the open world markets.

Government officials have in fact different objectives than strategic investors. In terms of international trade, the restriction of imports from abroad, impairs the ability of gains from free trade and open exchange. In larger terms, even investment can be hampered as capital and technology may not be openly availible in the domestic market. If high tariffs and quotas are imposed on certain imports, the effect is three-fold. First, the enterprises and the economy are forced to pay an extra price for goods that are vitally needed to be purchased as estimated by the firm.

Practically, if a global economic environment of the firm is sourced by cutting-edge technology that could rapidly improve the productivity of the firm per unit of output, but the competitive and productivity potential is swiftly reduced as a possible 10% tariff on high-tech products from India causes an increase in firm's costs.

Second, assume that customers demand improved tech products which can be purchased in the firm which imports those products from India. Then tariff's mark-up on the price would inevitably result in the higher final customer retail or wholesale prices.

And third, high tariffs rate and protectionist trade policy with a bulk of formal and informal barriers, distort the general equilibrium and in this particular case, the only way to match supply and demand is the so called product smuggling resulted in the rise of informal economy which, ceteris paribus, reduces the overall output of the economy.

The anti-social effect of solidarity

Labor unions often expose how labor solidarity should remain an untouchable social value. In the rethorics and slogans of Karl Marx and contemporary socialist terminology, the leaders of the labor unions compose threats such as collective strikes in case if wage-increase demands are not fully accomplished. In macroeconomic terms, the spiral of unparalled wage growth boosts inflation pressures and diminishes the effect of benefits derived from the productivity growth. In effective terms, assume that trade unions achieve the periodic wage increase through collective demands.

After a sudden increase in the growth of real wages, the growth of productivity is negative while the union pressure on wage growth continues. Reasonably, the manager of the company will be forced to cut the exceeding labor quantity by firing to prevent the company's collapse.

Collectivism's Road to Serfdom

In the global economic environment where the regulatory burden and protectionism turn out into comparatively advantageous competitive environment of the firm, the outcome of strict enforcement of protectionism and collective union demands would, as demonstrated above, result in a lagging and stagnating economy facing low output growth rate, rachitic productivity growth and the spiral of upward inflationary pressures.

In fact, as the history has demonstrated many times, collectivism produces anti-social effects.

No comments: