Protectionism: A guest post

I often preface my posts on economics by saying “I’m not an economist” – I also often have discussions with my friend Ben – who is an economist – and based on his uni results and work history, a good one, before posting things. Today, rather than rehashing his comments on protectionism and the economics involved I’ll just reproduce them verbatim.

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Okay, you have a bunch of people working in for an Australian company in Australia. They get $20 and all profits remain in Australia. Assume a competitive industry so they receive the fair market price for their goods.

Compare with an overseas producer, who has labour costs of $5 a unit. There are arguments that offshore employees are less productive than domestic workers, but I don’t know about that. Anyway, they also have export costs of $2 to transport the items to Australia.

Thus, per unit the offshore company is always going to make $13 more per unit. In a competitive market, the price should come down to the opportunity cost of producing the item. Given as many offshore competitors should be able to enter the market as they want, the price of the item at market value will be somewhere around $15. There is no way that this item can be sold at a rate covering the value of the labour in Australia.

What does this mean? Well, most likely the level of protectionism we have isn’t just keeping shirt prices high, but also wages. If there were true globalisation, that should extend to a worldwide labour market, and a close level of parity of wages.

If the company went overseas, it would increase demand for labour upwards, and labour costs would go up to $6 per unit. Some Australians would now not be able to find employment at the same level, and would take jobs at $19 an hour.

So those are the first degree effects. If the market was always competitive, this shouldn’t have much effect on the market price of the good. if the level of protectionism inflated the market price, then there should be some drop in the price of item. In the current situation in Australia, the latter is the case, and there should be a drop in prices.

The idea of free trade is that people displaced from employment would move elsewhere, generally to industries that the nation has a comparative advantage in.

Let’s explain comparative advantage.

Country A:
wheat costs 2 units to produce
computers costs 5 units

country B:
wheat costs 10 units to produce
computers costs 50 units

In this situation, country A can produce both wheat and computers for less resources than country B. However, thought of differently,

country A:
wheat costs 2/5 unit of computers
computers cost 2.5 units wheat

country B:
wheat costs 1/5 unit of sugar
computers costs 5 units of wheat

Country A has a comparative advantage in producing computers, B in producing wheat.

now, for 100 resources:

A could make 50 wheat or 20 computers. B could make 10 wheat or 2 computers.

A focuses on making its comparative advantage, computers. It makes 20 computers. It trades 3 computers and gets 10 wheat. It now has 17 computers and 10 wheat, which it could not have produced before. And country B has 3 computers, which it couldn’t have obtained before. Any linear combination between A trading 0 and 4 computers for wheat can result in both countries obtaining a different level than otherwise obtainable.

So I guess that is the basis for why trade benefits all countries.

You mentioned farmers in your post. And in particular rice. Here is my comparative advantage of rice production for Australia vs. the world:

Australia
Rice costs 1000 units to produce
all other goods (a basket of other good) costs 10 units

Rest of world
Rice costs 1 unit to produce
all other goods costs 8 units.

Work through that example. Australia should never produce rice.

One good thing about free trade is our rice industry should take a dive, which is fair enough. I still think our farming industry retains inefficiencies due to our ridiculous farm protection policies. I think when you think farm protection, you are thinking maintaining farms. I think it would just result in a shift in farming to more efficient products/farming techniques.

But back to my point, and I touched on this in my thesis, when people nearing retirement lose their manufacturing jobs, they don’t really shift into other industries. There is less incentive for employers to retrain them given they only have a few years of working left, and the workers have low incentive for a range of reasons (including the fact they are angry hold men). And this grudge remains well into retirement, leaving a group of people who will always be anti-free trade.

I also don’t buy the whole ethical argument suggesting they are exploiting offshore labour. I think this is generally used as an emphatic argument that carries little weight but often thrown against companies who source labour overseas. The first point alone doesn’t make much sense, that the workers don’t get a lot of money for their work. On so many levels. If they weren’t getting much money they wouldn’t be working. True, their conditions may be worse than ours, but better than their current standard. Allowing full free trade should resolve this issue, as noted above. It’s only when trade trickles to these countries that their progress in workplace development is stunted. those people might not be getting a “fair” wage, but then you have to extend that argument to domestic matters, where it would appear the workers much by mirroring the argument also not be getting a “fair” wage (but a greatly inflated one). The “loss of traditional skills” argument I don’t think is relevant, again refer to the comparative advantage deal, and if it’s a free labour market there should still be a required allocation to the relevant markets. I don’t like to use analogy, but in the western world, the proportion of people today compared to prior to the industrial revolution, not many now know how to tend the fields, hustle cattle, build cottages, etc. why the developing world needs to be further stunted for the argument of losing traditional skills just seems like a kick in the face.