What’s the best way to combat protectionism? Lecture people?
The Financial Times is replete with articles on the perils of protectionism these days. This morning there is an editorial which accuses the G7 Finance Ministers’ communique of fine words but no action. And Wolfgang Munchau warns that the single market is being dismantled. But the one thing that unites these is what, when he was still a European Commissioner, could have been called the Mandelson Fallacy, which is that the way to stop people (or Governments, who are often in practice more prone to it than their more pragmatic citizens are) being protectionist is to tell them how wrong they are! The TUC is opposed to protectionism too, but we don’t think hectoring lecturing will work. Instead, we need to understand why politicians and other people are prone to protectionism, and come up with an alternative.
To be fair, Munchau accepts at least that everyone is at it, which isn’t necessarily the way most commentators or politicians see it. There must be one of those three phrase epithets about this – he’s a protectionist, you’re a [insert word not quite as bad as protectionist but still pretty bad], I’m a free trader. The Germans blame the British, we blame the French, the French blame the Czechs, the Czechs blame … well, pretty much everyone. Lots of politicians who’ve done lots of protectionist things have been very happy to weigh in on the Lindsey oil refinery strikers and so on. Munchau is right – lots of countries are doing more and more protectionist things.
But what’s the alternative? There is a seemingly inexorable trend towards politicians elected in national polls to emphasise that they are doing things in the interests solely of their electors. And they are only faced with the downsides of globalisation at the moment:
- a car plant may move out of the country to somewhere where labour is cheaper, should you only bail out companies which won’t shut French car plants?
- unemployment is rising among your electorate, should you close your borders to Bulgarians and Romanians?
- your currency is overvalued so imports are cheap, should you insist that your Government will only buy American?
No one’s being asked “an Italian company is going to buy a steelworks saving lots of jobs on Teesside. Are you going to ban foreign investment?” (I often point to the union campaign to encourage Chinese car companies to buy Rover as evidence that the British trade union movement isn’t protectionist.)
But it looks like all the traffic is one way, when of course we know it isn’t.
The reason people are prone to protectionism is that bad things are happening which will hurt people. And politicians are looking for ways of mitigating that pain, even if they can’t prevent it. That’s a good thing, not a bad thing. What we need is ways to mitigate the pain which don’t cause worse pain later on. That can include higher redundancy payments to tide people over till the recession bottoms out (those payments tend to get spent, too, which has a reflationary effect), more training opportunities, more energy conservation schemes and so on.
Just shouting at people to stop being so protectionist isn’t the answer.
The FT editorial is really a bit mean on the G7. It accepts that the Finance Ministers have resisted the temptation of deflation, and thus avoided one of the key errors of the 1930s, but it says that’s only to be expected. Actually, I think that’s unfair. Given the incessant whining over the last few deacdes from politicians of all sides about how state intervention is bad, free markets good, the lurch towards Keynesianism has been a major political change. And as I regularly remind anyone who will listen (a bit like the Ancient Mariner), the Bretton Woods conference was 15 years after the Wall Street Crash, so expecting a new financial system to rise fully fledged from this year’s G7, G8 or even G20 is a bit unlikely.