Beware protectionism

Beware protectionism
9 July 2009

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Hi,

In times of crisis, people have a normal reaction: they want to protect themselves. And many believe that one way to protect our jobs is to make imports more expensive through tariffs and quotas. They say that we should force consumers and businesses to buy goods and services produced here. This would increase economic activity and maintain jobs that would otherwise disappear.

This solution may be based on good intentions. But it is short-sighted and can only have disastrous consequences. All economic history teaches us that protectionism makes us less prosperous, not more.

Why is trading beneficial? It’s easy to understand. I will explain with a small economic unit that you are familiar with: your family.

Imagine that you and your family cut their links to the outside world. You have to grow all your food, make your own clothes, create your means of transportation, and even build the computer which allows you to watch me right now. It’s obvious that you would not be able to do all this and that you would be much poorer.

If instead you concentrate your efforts on one type of work, the one you chose as a trade, and you exchange what you make for other stuff that other people make, you will then be able to access all the goods and services available on the market.

This is what we call the economic advantages of the division of labour. When each of us specializes in what we do best, it takes fewer resources to produce more stuff, more efficiently. That benefits everyone. Of course, we lose these advantages when we close our borders to goods from elsewhere.

The logic of the division of labour is the same when you apply it to larger entities like a region, a province or a country. Those who believe that protectionism is good for the economy should ask themselves this question: why apply it only at the national level? Should we close the borders of Manitoba or New Brunswick to foreign products? Or perhaps restrict commercial exchange between Kitchener and Hamilton?

It’s also inevitable that as we close our borders, we encourage other countries to do the same to our own exports. One of the measures that contributed most to the Great Depression is the adoption of the Smoot-Hawley tariffs by the American government in 1930. Other countries then retaliated and international trade collapsed by two thirds within a few years.

At the end of the day, protectionism means that we prevent people from buying what they want. It means limiting freedom of choice. And it means making everyone poorer in order to protect some businesses that cannot face competition from abroad. It may help save jobs in some industries in the short term, but we’re going to lose at least as many in other industries that depend on foreign markets.

Our government firmly believes in the benefits of trade, including in times of crisis. This is why we are currently negotiating an ambitious free-trade agreement with the European Union. And why two weeks ago, the minister of International Trade, Stockwell Day, asked our American friends to enlarge NAFTA, in order to also cover spending by states, provinces and cities.

Protectionism is an illusion. Let’s not repeat the errors of the Great Depression. Let’s keep our markets open and leave people free to decide what they want to buy.

Talk to you again soon.