The perils of trade protectionism

The perils of trade protectionism
Published: 21 October 2018 (180 Views)
The recently gazetted import tariffs imposed by the Zimbabwe Revenue Authority on almost all major food items and non-food items — trade protectionism - is a dangerous drift towards the dreaded beggar-thy-neighbour policy whose repercussions can be catastrophic for the country.

Protectionism is a policy restraining trade between states through such measures as tariffs on imported goods, restrictive quotas and a variety of other regulations presumably to allow fair competition between imports and locally-produced goods and services or to protect domestic industries.

Put simply and plainly, what has happened at the stroke of a pen is that Zimbabwe has immersed itself into the hell-hole of protectionism. Hoarding of goods and artificial shortages will creep in at some point, all as a ploy to push prices up or on account of market forces.

The problem with protectionism is that always and everywhere, it has had adverse consequences for consumers. What lies in store for ordinary Zimbabwean consumers now is the bad old days of artificial shortages where local manufacturers are now going to collude and, through a co-ordinated process, begin to create well-calculated artificial shortages of certain products knowing fully well that consumers cannot import them.

The end result of course will be a shortage of those products followed by a corollary price increase on them in the convenient name of scarcity.
Anyone out there who disputes this must do the following simple experiment: that is put all the goods (one item per product range) that have been gazetted for protection against imports into a basket and calculate their price. After three months, revisit the same basket and recalculate their prices and see by how much these goods would have gone up.

As a control experiment, take a basket of goods that have not received protection and do the same calculation and recalculation after three months. The results would speak for themselves. Of course, take into account the fact that Zimbabwe is currently experiencing a combination of deflation and disinflation, implying prices are not rising.

The ugly face of protectionism is that it causes inflation through higher prices as highlighted above.

The unintended consequences or the so-called negative feedback loop, also tends to be a resultant effect of protectionism through its destruction of jobs rather than creating them. The policy of protecting inefficient firms always proves to be damaging as such protected firms seldom get better.

Sunset industries end up attracting new capital that might have been better spent elsewhere. Think about the policy of protecting a company that makes black and white television sets. There is no rationale for protecting such a company anymore because if it becomes innovative, it should not need protection. Since protectionism tends to shield the inefficient industries, it then causes the death of those that can compete as they are left to the vagaries of the market while weak ones are protected.

To cap it all, this first wave of protectionist policies are likely to be followed by more in other sectors.

This will have the overall effect of Zimbabwe becoming a closed economy, like pariah states. However, the root cause of lack of competitiveness is not addressed as protectionism hinders efforts to become quality-oriented, by taking the heat off the worst offenders.

Since innovation generally comes from the free exchange of information across borders, protectionist attitudes slow the exchange of innovative ideas.

Just in case some people wonder what the benefits of competition are. Consider the following: gone are the days of tea leaves that were not inside tea bags. Gone are the days of the need for a deposit when you buy a Coca-Cola, now they are canned. Gone are the days of buying uncut and unwrapped bread; now the bread is sliced and put into sealed plastic bags. The days of nearly losing a tooth when you open a beer are now history as currently they supply one which you simply twist open with your hand. Look at how efficient the transport system now is in Zimbabwe.

Almost every family has a car and that pushes the standard of living for the people up. Had the government continued with the ill-conceived policy of protecting state-owned public transport enterprise Zupco or the inefficient car assembler Willowvale Motors, then the country would still be tottering in the doldrums. Gone are the days of the long transport queues at Bulawayo's Renkini or Harare's Mbare.

All these consumer gains were courtesy of the government's relaxation of protectionist policies. Today, Zimbabwe has the cheapest forms of transport to and from work.

Against the backdrop of the foregoing, for Zimbabwe in this day and age to wrap itself into the toxic mantle of protectionism is similar to printing money as a remedy to increasing local demand, a tragic mistake which can only breed hyperinflation.

Former United States Federal Reserve chairman Ben Bernanke has argued that a retreat into protectionism and isolationism would be self-defeating and, in the long run, probably not even feasible. In the case of Zimbabwe, what has led to the dramatic improvement in the transport system has not been protectionism, but rather the embracement of the many opportunities provided by trade.

Notwithstanding the fact that trade liberalisation makes the Zimbabwean economy stronger, the broad benefits of trade may come at a cost to some local industries. While trying to ameliorate such pain, there is no need to stand in the way of economic growth and an improving standard of living.

In general, a drift towards protectionism is the option with the worst economic return. The Zimbabwean educated former US treasury secretary Tim Geithner has also added his voice against protectionism arguing that the typical political impulse is to try to address directly the source of the competitive pressure and to relieve it, but these measures cannot offer lasting relief. The economic price of protection, in terms of distorted incentives, reduced flexibility and broader costs on the economy as a whole, seem both more substantial and more enduring than any temporary political benefit.

Indeed, economic openness tends to affect some industries and some workers within an economy. But the adverse impact suffered by those so affected are a drop in the ocean relative to the broader and bigger benefits enjoyed by the economy as a whole in line with the economic dictum that what is true of one is not necessarily true of the whole.

The pains of one worker who loses his job due to imports are outweighed by the gains of millions others whose standards of living goes up due to imports.

Admittedly, the natural reaction of those so affected is to resist change, for example, by seeking the passage of protectionist measures. Policy-makers would rather help these displaced workers by retraining them to fit into the new ensuing economy rather than to stifle innovation. In general, economic theory and economic history have provided ample reasons showing that changes in legislation and regulation that tilt toward economic isolation and protectionism are unwise and unhelpful. Others have argued that protectionism is nothing but a tax on the consumer and the businesses that use foreign inputs.

The recent Supreme Court ruling which provided employers with a legal basis for relieving some workers from their payrolls on three months' notice is another interesting aspect of the free market mantra. Flexibility is critical in an environment of maximum competition. Flexible labour markets provide a key element of this environment. People tend to equate labour market flexibility with job insecurity. Despite that perception, flexible labour policies appear to promote job creation.

Another former US Federal Reserve chairman, the legendary Allan Greenspan, once asserted that an increased capacity of management to discharge workers without excessive cost apparently increases companies' willingness to hire without fear of unremediable mistakes. He further argued that protectionism in all its guises, both domestic and international, "does not contribute to the welfare of workers. At best, it is a short-term fix for a few workers at a cost of lower standards of living for a nation as a whole. Training for those displaced by the Schumpeterian process of 'creative destruction' is the answer, not a stifling of competition" … through protectionism.

In conclusion, protectionism is counterproductive and should the neighbours retaliate by restricting imports into their own markets, overall standards of living suffer and the consumers are the ones who are dealt a severe blow as they would begin to experience rising prices and goods of inferior quality. It's a toxic policy.

Ndlovu is a South African-based independent financial analyst and risk consultant. He writes in his personal capacity.

- Colls Ndlovu Financial Analyst

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