Leitmotif

Reason as the Leading Motive

In Defense of Protectionism

Posted by Jerry on June 28, 2007

Ha-Joon Chang, a Korean economist, makes a case for maintaining minimal protectionist policies in the economies of developing countries until these economies become robust enough to enter the global free trade market unabashedly.

Here’re some excerpts:

The wealthy nations of today may support the privatisation of state-owned enterprises in developing countries, but many of them built their industries through state ownership. At the beginning of their industrialisation, Germany and Japan set up state-owned enterprises in key industries—textiles, steel and shipbuilding. In France, the reader may be surprised to learn that many household names—like Renault (cars), Alcatel (telecoms equipment), Thomson (electronics) and Elf Aquitaine (oil and gas)—have been state-owned enterprises. Finland, Austria and Norway also developed their industries through extensive state ownership after the second world war. Taiwan has achieved its economic “miracle” with a state sector more than one-and-a-half times the size of the international average, while Singapore’s state sector is one of the largest in the world, and includes world-class companies like Singapore Airlines.

A level playing field leads to unfair competition when the players are unequal. Most sports have strict separation by age and gender, while boxing, wrestling and weightlifting have weight classes, which are often divided very finely. How is it that we think a bout between people with more than a couple of kilos’ weight difference is unfair, and yet we accept that the US and Honduras should compete economically on equal terms?

Global economic competition is a game of unequal players. It pits against each other countries that range from Switzerland to Swaziland. Consequently, it is only fair that we “tilt the playing field” in favour of the weaker countries. 

Those among my readers who are proficient in technical economic theories (and even others, of course), perhaps you could comment on Chang’s argument.

My initial thoughts are that any calls for government protection necessarily presumes that government has the omniscience to conceive of every possible permutation and ramification of market forces resulting from these policies–both within its own borders and across international borders–and has the omnipotence to act swiftly on every one of the possibilities with the right economic solution for these industries.

This top-down approach of economic planning assumes not only that the government has the resources to handle the infinite range of possibilitites but also that the bureaucrats devising these policies are competent in planning for any imaginable scenario occurring across a wide range of industries. But clearly, these assumtions are wholly invalid–both in theory and in practice, as has been shown in economic history.

Nevertheless, how valid is Chang’s argument?

I wish to add further thoughts to this post and include Kyle Haight’s response to Chang’s argument, which settles the matter satisfactorily for me:

My own thoughts: While having dinner tonight with a friend of mine, I happened to reason out loud a possible distortion in Chang’s argument; namely, by comparing the US and Honduras as unequal partners in a globally competitive field, Chang is distorting the principle *players* in the game of free market trade. It is *not* nations or countries as a whole that engage in global trade but individual businessmen or corporations. And therefore, it is fully possible to have a comparatively rich and powerful “player” from Honduras competing with a relatively smaller and perhaps newer company in the same industry from the US. Thus, Chang portrays the scenario as one of whole nations being the *principal* actors in global trade, whereas it is actually the corporations and businessman. There could be a poor farmer in the US competing with a rich or governmentally protected farmer from China, or there can be a huge corporation from the US competing against a small company from Mexico. So, the analogy with boxers and sportsmen does not apply because these atheletic players are individuals who are the principal players, but entire nations are not the principal players in global free trade.

Of course, if you believe that nations are indeed the principal players in free trade, then it would mean that you support government intervention in free trade, which is not capitalism anymore, in which case, Chang’s argument becomes an indictment of government interference in free trade and not against free trade itself.

Kyle responded with this:

“While this may be true, it isn’t really responsive to the core of Chang’s argument.  The basic issue can be decoupled from international trade, and can be put as follows: In a free market, individuals compete with each other.  If you rank people by their productive abilities, somebody is going to be at the bottom.  It’s entirely possible that the person at the bottom will actually be worse at everything than anybody else in the economy.  So, the question follows, what happens to this poor soul who can be out-competed by everybody else?  Surely he must starve, as he will always lose out in competing for jobs, or sales, or anything else.

The principle of comparative advantage refutes this scenario by pointing out that just because A is better than B at everything doesn’t mean that A can actually *do* everything.  I just paid a guy to repaint the door on my house.  I could have done it faster and better than he did, but I chose to pay him to do it because my time was better spent doing other
things (in my case, software engineering) that he wasn’t capable of doing.  I suspect that if you think about the issue from that point of view, you’ll see instances of that kind of behavior all over the place.

Putting the point back in terms of international trade, it may be the case that American farmers can grow more food more economically than, say, African farmers.  But American farmers can produce more wealth if they stop farming, spend their time and resources building computers instead, and buy their food from Africa.  Same principle, applied to aggregates in the context of international trade.”

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One Response to “In Defense of Protectionism”

  1. Ergo said

    I added some insightful comments by Kyle Haight, above. He also provided some additional reading: “The principle that refutes [Chang’s argument] is called the “principle of comparative advantage”. There is a good discussion of this and related points in George Reisman’s book ‘Capitalism’ in Chapter 9, Section C, Subsection 4 (“The Law of Comparative Advantage”) and 5 (“The Pyramid of Ability Principle”).

    I believe Ludwig von Mises refers to the same principle as the “law of association”; since many of Mises’ works are available on-line you might use that as a search key inside his book ‘Human Action’ to see if you can find a discussion there.”

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