Long-Term Protectionism is Unnatural and Not Likely

July 1, 2020 — Leave a comment

Quiz!

Which of the following are expected results of protectionism (e.g. taxes on imports, quotas to limit imports)?

  1. Saving jobs.
  2. Lowering costs of products.
  3. Better products.

Long-Term Protectionism is Unnatural and Not Likely

Protectionism (e.g. tariffs = taxes on imports, quotas to limit imports) is done for two reasons:

  1. Temporary: negotiations between countries on different topics, alternatives to wars.
  2. Long-term: protect local producers from competition from foreign producers.

There is a concern about long-term protectionism (#2 above), that can affect stock prices. Long-term protectionism is unlikely for the following reasons:

  1. Unintended consequences: While higher prices save jobs in one industry, it costs jobs in other industries. It does so in two ways:
    1. Consumers have to pay a higher price for products, leaving them with less money to spend on products and services of other industries.
    2. When the consumer is a company, it has to raise its own prices to make up for the higher input cost. This makes the company less competitive with foreign producers that have lower input costs.
  2. Net loss: The higher cost to the consumers goes to benefactors beyond retaining jobs in the protected industry, including company profits (investors), manager bonuses, and higher pay to employees. For example, it cost consumers $826,000 per year for every saved job in the sugar industry in 2002 (Federal Reserve Bank of Dallas).
  3. Online Shopping promotes globalization: The coronavirus accelerated the transition to online shopping, where comparing prices is much easier than going to multiple physical stores. This gives a boost to cheaper products that are imported from countries with cheaper labor.
  4. Improved Quality: There was a time where buying from China involved a tradeoff – lower quality for lower price. The quality of products improved significantly and is no longer a concern, improving their exports.
  5. Economies of scale: Protectionism limits trade and reduces the number of buyers from each company. This hurts the scale of companies, leading to lower efficiencies.
  6. Specialization: Protectionism limits the market for each company, and reduces the opportunities to specialize.

Quiz Answer:

Which of the following are expected results of protectionism (e.g. taxes on imports, quotas to limit imports)?

  1. Saving jobs.
  2. Lowering costs of products.
  3. Better products.

None of the answers is correct. Specifically:

  1. Protectionism saves jobs in the protected industry, but takes away jobs from other industries. The overall effect is lost jobs.
  2. Protectionism artificially inflates the prices of the product coming from abroad, leading to a higher price.
  3. Protectionism limits the market of companies, leading to lower specialization and lesser economies of scale. At best, the quality of products stays the same, and at worst it is hurt.
Disclosures Including Backtested Performance Data

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Gil Hanoch

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