US President Donald Trump says he wants to make America great again and part of his plan is to rip up free trade agreements and bring manufacturing back into the US.
There’s one little problem with his protectionist approach; it won’t work and here’s why.
The greatest value history offers is to help us to not repeat the mistakes made in the past. And when it comes to protectionism, history has shown that it doesn’t benefit a country, or its respective citizens. Instead, it often causes harm. Many countries, the US, Japan and Germany included, used protectionist measures in the early 1900s to grow their respective economies. Indeed, many believe the trade barriers of the 1930s contributed to making the Great Depression worse, leading to higher unemployment as other nations enacted their protectionist trade measures, preventing businesses from growing through exports and leading to the closure of many companies.
Protectionism appeals to some because in the short term, it protects industry and by association, it protects jobs. Long term, however, tariffs, quotas and subsidies don’t save jobs and instead, render companies and industries non-competitive. Trade barriers lead to poorer productivity: if there’s less competition there’s less of a focus–or a need–to be innovative, become more efficient and reduce costs. Trade barriers also result in retaliation. When one country does it, others follow and soon businesses don’t have any means to expand with exports because the doors to other countries are closed.
Civilization is based on trade and it is the best way to grow economies around the world. Trade is one of the main reasons explorers of the past sought out new worlds to exchange goods and it’s the reason trade is necessary today. Protectionism leads to isolation and isolation doesn’t serve any individual or any company well. It results in stagnation. All you have to do is look at countries like North Korea or Cuba to understand that such systems don’t benefit a country or its citizens.
The truth is, the world needs to find a balance between protectionism–small, emerging industries have benefited from some measures that have allowed them to grow and strengthen–and free trade.
It’s important to remember in times of economic and political strife, that closing the trade doors isn’t the solution. Opening them wider is the right approach. SMT