The economic argument against protectionism

CANBERRA — Nationalism and protectionism are growing globally. In September, an extremist far-right party took seats in the German parliament for the first time since World War II. It followed historic results for the far-right in the Netherlands, Denmark and Hungary. In France, neither of the traditional parties made the election runoff. In a period of just over two years, between 2013 and 2015, Australia had four prime ministers and trust in politicians was at a record low. Facing inward on matters of politics has become the focus of the growing far-right parties and distrust of foreigners and foreign investment, and lack of support for foreign aid have been outcomes of protectionist policies. On September 27, 2017, however, the Lowy Institute launched a new paper titled Choosing Openness: Why global engagement is best for Australia, highlighting the importance of openness and global engagement for both developed and developing countries. Author Andrew Leigh, shadow assistant treasurer, presented the case for the economic benefits openness brings in comparison to sluggish growth and decline that comes with protectionism. What is the purpose of the new paper? At the launch of the paper, research director for the Lowy Institute Anthony Bubalo explained that the papers produced by the Lowy Institute aim to bring insight into key international issues affecting Australia and the world. “The goal is to make a provocative argument about the big issues and bring the debate to the wider public audience,” Bubalo said. The future of the Australian economy and the country’s ties with Indonesia and Papua New Guinea have been among previous topics of past papers. One on protectionism versus openness, with the focus on the economic impacts of government policies, is timely. For Leigh, the paper aims to achieve three goals — explain the upswing in protectionist attitudes, make the case for openness and look at the policies needed to sustain openness in the current political and economic environment. These are topics he is taking elsewhere in Australia — to Sydney, Melbourne, Brisbane and directly to his colleagues in Parliament — to encourage the government to focus on global engagement, which he deems is central to economic development. Understanding the drivers of protectionism In his discussion, Leigh pointed to a number of issues that instill fear within both developed and developing countries, and build a strong foundation for protectionism and nationalist ideologies. Rapid technological advances, faster news cycles, disengagement with politics, business and churches, and sluggish wage growth have all contributed to a protectionist policy agenda. Leigh explained that, when there is economic growth, it is easy to accept changing trends and innovation, but when things get tough, we turn inward. “In the United States at the end of World War II, nine out of 10 children could expect to earn more than their parents,” he told the audience at the launch of the paper. “Now it is only half.” Throughout the world, with major political parties shrinking as smaller parties grow, the voices of those who believe they will be left behind are growing. Politics was becoming “angry”, Leigh said. The successes of Justin Trudeau in Canada and Emmanuel Macron in France, however, showed globalization still had appeal. Does protectionism create stronger economies? Few nations have prospered by going solo, Leigh argues. He focuses on trade, migration, and foreign investment to support his argument. Enabling countries to focus on specialized products and services would improve living standards in all trading countries. Creating barriers to trade through tariffs, on the other hand, could have a flow-on effect on domestic economies. Products and services could become more expensive, with many of them impacting areas where poorer members of the community end up spend more. Reducing trade tariffs enables competitive markets and drives down costs for domestic economies, allowing household budgets to go further. Arguments that assert trade leads to job losses are unfounded, Leigh said, adding the blame game will lead to missed economic opportunities. Take, for example, job losses in the manufacturing sector in particular — a key argument in increasing trade tariffs within the United States. It has to be recognized that the sector’s share of employment has been in steady decline for decades and not just in the developed world. Manufacturing peaked in the Philippines in 1992, China in 1995, Mexico in 2000 and India in 2012. It is part of a global transformation that needs to be understood and prepared for. The impact of migration on job losses and wages are also unfounded. “An [Organisation for Economic Cooperation and Development] review found very little evidence of this,” Leigh said. Movement certainly improved migrants’ living standards, providing them with better education and employment opportunities. There are indeed organizations taking in migrant employees for lower pay. There is, however, greater opportunity for innovation from people who see things differently. “Migrants have higher patenting rates, are more likely to author a highly scientific research and migrants are more likely to win a Nobel Prize,” Leigh said. The next big breakthrough, Leigh added, could come from a migrant who was given opportunities in a developed country that he or she would otherwise have never had. Foreign investment was the other point of contention for global engagement, with fear that money and jobs would flow offshore while external political and social influences would be imported. Leigh explained that while some benefits move offshore, not all do. Also, foreign investment was an important driver in the creation of more local services, putting upward pressure on wages, and building newer and better local infrastructure. “A country that is open to migration and open to investment should be able to sustain a ratio of capital to labor and, therefore, from a worker’s standpoint, to sustain wage growth,” Leigh said. How ‘open’ is openness? A question Leigh posed was how open governments should be because opening all employment to migrants and investment opportunities to foreign capitalists was not going to happen. What is the balance between catering to domestic needs and growing global engagement? “While no textbook economics would oppose tariffs, few policy economists would favor open migration,” Leigh said. He added, however, that an important part of the political motive for choosing openness was to counter a “cunning backlash” against globalization, similar to occurrences before World War I and World War II. “One of the biggest challenges in this area is around foreign investment — given what we have seen as popular opinion and given Australia’s very big dependence on overseas capital,” Leigh said. Politicians need to be strong in making the right decisions, not the popular ones. “If we turn our back on foreign capital, we will have fewer jobs and lower wages,” Leigh said. While there are other policy areas he would “tweak”, focusing on the misconceptions around foreign investment should be the priority for governments today. Balancing the needs of workers in developing countries While arguing for greater market competitiveness that will drive down process, Leigh was asked at the launch how competitiveness can be balanced with improved working conditions overseas. “You’re right to be concerned about the standard of living of [foreign] workers, but one of the right questions is what the comparator is,” Leigh said. “To say that a Chinese factory worker doesn’t enjoy the same standard of living as an Australian factory worker is to make the wrong comparison for that person. I remember one account where a Chinese factory worker said the work is painful, there are too many injuries, I work for too long and I miss my family. But by gosh it is better than working in the field.” Policies need to encourage better living standards in developing countries, provide opportunities and apply pressure to improve conditions where it is needed, “but were we to cease trade with China, we would not improve Chinese working conditions,” Leigh said. The importance of foreign aid in global engagement Speaking with Devex, Leigh said foreign aid is important to an open, globally engaged country. It should be on top of policies supporting international trade, migration and foreign investment. “I would never cut back,” he said. “It has always seemed to me a poor excuse to say we are open traders and therefore we do not need to be generous. You can give people a job during the week but also put money in the collection plate on Sunday for the poor.” Beyond his Lowy paper, Leigh said there is an important discussion to have on the role of foreign aid. “I discuss this a bit, but not as much as I would have if I was given more than 35,000 words in the paper,” he said. Devex delivers cutting-edge insights and analysis to the leaders shaping and innovating the business of development. Make sure you don't miss out. Become a Devex Executive Member today.