Protectionism Does Not Guarantee Jobs

A repeated trope heard throughout this election cycle is how foreign nations (specifically China) are “stealing” American jobs.  Supposedly, they are “beating” us at trade because they supply many cheap goods to Americans, rather than have the goods made in the States.  There are, of course, many things wrong with this, but for the sake of argument I will grant it to be true.

Assuming that importing more than exporting is bad for the economy, and that it is a universally desirable goal to pay more for domestically-produced goods in order to protect jobs, protectionist measures (tariffs, quotas, etc) are unlikely to generate substantial job gains (if any at all).  The reason is simple: automation.

We must ask ourselves the question: why were elements of manufacturing “moved” overseas (that is, why did it become easier to import vs produce domestically)?  The standard economic answer is that the relative* cost is lower to manufacture overseas and import than manufacture here.  The relative cost of labor domestically was rising compared to internationally.  A tariff seeks to fix this by raising the relative cost of imports, making the relative cost of domestic goods fall.

However, domestic labor is not merely competing against international labor.  It is also competing against other domestic substitutes, such as automation machinery.  If the relative price of labor remains higher than the relative price of its substitutes (in this case, automation machinery), then labor will still be substituted when production is brought back domestically.  In other words, protectionism may bring back physical plants, but there is no promise whatsoever jobs will follow!

Even assuming the politicians right, that trade deficits are bad, it’s quite likely you end up in a lose-lose situation: the costs of goods are higher (since tariffs block out lower-priced imports), and there are few/no additional jobs created.

*I emphasize “relative” here as it is the key for this, and indeed all, economic discussions.  Absolute costs are less important; what matters are the options.  For example, say you are buying a car.  You have two options, Car A and Car B.  Car A costs $10k, Car B costs $12K.  In relative terms, B is more expensive than A, so you will opt to buy A.  Now, let’s say there is a third option: Car C.  Car C sells for $8k.  In relative terms, A is now higher priced even though its absolute price hasn’t changed.  This is because its price relative to the alternative options is higher.  This is key for the discussion in this post.

One thought on “Protectionism Does Not Guarantee Jobs

  1. Good post, Jon! Protectionism is a talking point of many, many bigger government types. It is, of course, nonsense….except if you are looking at it from the interests of politicians and their political cronies. If a company cannot compete economically with foreign competition, what better way to avoid having to compete (and avoid going out of business) than to claim that we need to protect American workers from foreigners and demand government intervention. Politicians jump on the bandwagon to gather campaign contributions and votes from low-information voters all the while pretending to do something (i.e., saving American jobs) while actually protecting political cronies from foreign competition.

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