Protectionism is one of the oldest fallacies economists have had to battle. The idea has its roots in mercantilist thinking. In its simplest form mercantilism states that wealth is money. Thus foreign trade is bad because imports cause wealth, that is, money, to leave the country. Further, buying foreign goods means that domestic producers lose out on business.
A large motivation in the early days of economics as a discipline was to fight that fallacy. The mercantilists were seen as the villains in Adam Smith’s work, and this continued into the nineteenth century and up to today. Today’s document, a Henry Hazlitt Newsweek Business Tides column from March 13, 1961, helps to show how alive and well protectionism was in the 1960s.
So why is protectionism a fallacy? First, wealth is not money. When we buy goods and services from abroad, the money leaves the country but something we value even more replaces it; trade is mutually beneficial. Wealth is an increase in the things that make us better off, money is our medium of exchange. Second, when domestic producers are outcompeted by foreign producers this frees up domestic producers to make something else that we were not able to make before. Now we get the goods we purchased abroad plus other goods we value. Society sees a net gain, not a loss. And finally, trade is two-sided. When we buy something from abroad with dollars, in the long run those dollars must come back, either through the purchase of domestic goods or investment in domestic industries. So buying foreign goods eventually stimulates domestic production.
As a result protectionist policies hurt domestic consumers. The extent of the division of labor is reduced, and resources are made more scarce. With the scope production narrower than it would have been, we are less, not more, wealthy.
Economists have long pointed out the absurdities of protectionism. Frederic Bastiat, in one of the most famous and best allegories in economics, ironically “called for” measures to protect French candlestick makers from unfair competition from — the sun! If we are to protect domestic producers from other foreign competitors why not stop one that competes with them for half the day?
Clearly this would be an absurd use of resources and would make everyone worse off.
This is why nineteenth-century economists had such an affinity for the smuggler. As Nassau Senior put it, “[T]he smuggler is a radical and judicious reformer.” In countries which excessively prohibit the importation of foreign goods, he said, “the smuggler is essential to the well-being of the whole nation.” Economists such as Senior saw those who defy these bad laws as our only protection against the ruin these laws bring.
Protectionism may sound like a good idea but it misses most of the picture. In reality it helps a few at the expense of everyone else. It is pretty obvious that the sun is not our enemy, but neither are foreign producers of the goods we love to consume. If they can be consumed at lower cost than domestic producers can provide them, then this is a good thing.