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After this crisis, let’s not give in to protectionism

We don’t need more tariffs

In the wake of the COVID-19 crisis, we are hearing more and more calls for a protectionist economic policy. However, this policy has been intellectually bankrupt for centuries and is detrimental to consumer welfare.

At the political level, COVID-19 has shown us one thing: political positions are very much stuck. All political sides feel confirmed in their worldviews prior to this crisis. The socialists say that this crisis ensures that social security is not developed enough. For nationalists, it is globalisation and open borders that have caused this pandemic. European federalists believe that the COVID-19 crisis demonstrates the importance of centralised decision-making in the European Union. Finally, environmentalists find that the drastic decrease in production allows for a cleaner society and that it is possible to live with much less.

Like all these groups, the protectionists play their own political game and say that we need more tariffs and that we need to “bring production back” to Europe. 

They complain about Europe’s dependence on countries like China or India and that this crisis has shown the value of repatriating industries they consider more “essential” than others. Protectionist ideas have the particularity of being represented as much on the extreme left as on the extreme right and even in the centre of the political spectrum. It turns out that protectionism has been embedded in our political mindset for centuries.

Colbertism seems eternal

Jean-Baptiste Colbert, Minister of Finance under Louis XIV, engaged in an avalanche of granting monopolies, luxury subsidies and cartel privileges, and set up a powerful system of central bureaucracy governed by civil servants called intendants. Their role was to enforce the network of controls and regulations he had created. 

His system also relied on inspections, censuses and forms to identify citizens who might have deviated from the state’s regulations. The Quartermasters used a network of spies and informants to uncover any violations of the cartel’s restrictions and regulations. In addition, the spies monitored each other. Penalties for violations ranged from confiscation and destruction of production deemed “inferior”, to heavy fines, public ridicule and even banned from the profession.

Colbert was also convinced that international trade was a zero-sum game. Drawing on the ideas of mercantilism, he believed that state intervention was necessary to ensure that more resources were kept within the country. The reasoning is quite simple: to accumulate gold, a country must always sell more goods abroad than it buys. Colbert sought to build a French economy that sold abroad but bought at home. Jean-Baptiste Colbert’s set of economic measures was known as “Colbertism”.

Today, this system is known as “protectionism”, and is still quite common in political thinking. In Europe, we have abandoned this economic philosophy (although the European Commission accepts that some member states subsidise their local industries in times of crisis), but externally, the EU has maintained three categories of protectionist measures:

Customs duties through the common external tariff,

Production standards that impose convergence costs,

Subsidies to local producers, through the Common Agricultural Policy (CAP)

The question is whether these measures really protect the European economy. If we need to go back in time to explain the origins of protectionism, we should also draw some lessons from the past. In his 1841 Treatise on Political Economy, the French economist Jean-Baptiste Say explained:

“The importation of foreign products is favourable to the sale of indigenous products; for we can only buy foreign goods with the products of our industry, our land and our capital, for which this trade, therefore, provides an outlet. – It is in money, it will be said, that we pay for foreign goods. – When this is the case, our soil not producing money, it is necessary to buy this money with the products of our industry; thus, whether the purchases made abroad are paid for in goods or in money, they provide the national industry with similar outlets.

To view international trade, especially from a “trade deficit” perspective, as a zero-sum game is wrong. The idea that industry should be brought back to Europe, probably through trade measures, is also misleading. It turns out that liberalising trade links is beneficial to both exporting and importing countries: the incoming resources give us the opportunity to improve our economic situation. 

The act of trade benefits both actors, not just one. To believe that only the seller wins (because he or she makes money) is a serious economic misunderstanding.

Certainly, the COVID-19 crisis is very problematic, and we indeed see a shortage of certain medical materials. However, producing gloves and masks in Europe will not be economically viable and who is to say that the same tools will be needed for the next health crisis? This shows us once again the fatal error of thinking that it would be possible to organise society and its economy through central planning managed by the state.

As Jean-Baptiste Say said in his works, to (re)launch economic activity, we must remove the measures that slow us down, including excessive bureaucracy and excessive taxes. In other words, it is not a question of hindering trade but rather of allowing trade to multiply.

Originally published here.

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