Domestic protectionism has a domestic cost

June 17, 2009

Since Barack Obama vowed to punish US “corporations that ship our jobs overseas,” the backlash from offshore locations against such a move has spread to officials from government, industry associations, and leading outsourcing service providers. And while they say they want to wait for more details, they are also clearly concerned about the implications such policy would have.

While today’s highly interdependent global economy renders Obama’s 19th-century notion of “our jobs” meaningless, the bigger issues are the impact such a move would have on the Indian economy’s ability to continue being a major consumer of US-manufactured products and services, and the likelihood that other countries would react to Obama’s protectionist stance with their own equally unproductive and trade-reducing positions.

As Bob Evans has said:

“If protectionism would solve the problem and lead to things like “full employment,” I’d be all for it. If government-mandated limits on what level of profit businesses can make would make those companies more competitive and successful and lead to higher employment, I’d bang the drum loudly. No matter how painful it is to see the impact on some American workers as the global economy unfolds, we cannot attempt to create a future that’s a frozen image of a past that’s just not compatible with today’s round-the-clock, round-the-world economy.”

Protectionism is defended by two major arguments. The first is that protectionist policies save jobs in domestic industries. This argument reasons that if a domestic industry is forced to compete against a foreign country that provides services more cheaply, such as India, then that domestic industry will have to lay off hundreds or thousands of workers in order to stay competitive. Entire communities whose livelihoods depend on the service or industry will be decimated by poverty.

The second argument, a corollary to this one, is that eventually, left to compete for too long against an offshore location, a domestic industry might collapse completely, leaving the protectionist-prone country dependant on foreign operations. This, the argument goes, could be devastating as it would find itself unable to provide a badly needed resource.

So the question, when times are is not, “Should we save these jobs?” It is, “Should we save these jobs at the expense of other jobs, or should we let economic efficiency decide where people and resources are best employed?”

Domestic protectionism always has a domestic cost. Most of the time, however, the costs of protectionism go unnoticed, because protected jobs in one industry are concentrated and easy to see, while the costs throughout the economy are widely dispersed, over a hundreds of industries and millions of consumers.

If offshoring becomes “the” industry that the US seeks to repress, it’s my opinion that this protectionism will cost the US domestic economy much and achieve little.

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