The dangers of protectionism

One thing that I have gleaned this week, during my visit back to the UK, is how close many of my friends seem to be to redundancy.

Some have already been made redundant, with a seemingly handsome (though possibly deceptive, given how long this recession could last) pay-off in order for them to leave as quickly as possible. Others seem to be clinging on by their very finger-tips. Others are fortunate to be sitting on an internal committee that is discussing restructuring of the firm; which would appear to be a fortuitous position to hold in the current climate.

But no one feels very secure in their job any more, rather suggesting that attempts to spread rumours of an imminent recovery, particularly by overly-optimistic Ben Bernanke (chairman of the US Federal Reserve) and his more pragmatic European counterparts, are having only a limited effect.

At times like this, the spectre of job protectionism is also likely to rear its ugly head. After all, if you are perilously close to entering redundancy – and, given the current gloom, the prospects of immediately walking into another job are probably slim – then it is easy to feel angry with the current system, and wonder why more isn’t being done to safeguard jobs. Just why is it so easy to hire and fire (particularly the latter) people in the UK?

If you look at the situation elsewhere in Europe – especially in Italy and France – the dangers of such protectionism start to become clear. A common viewpoint I often hear is to describe Europe as an elderly and dying man, destined to gracefully fade into obscurity as it is suppassed by the Asian tigers of India and China on the one hand, and a continually-innovating United States on the other hand. But it doesn’t have to be this way. If European countries could just shake-up their employment regulations, allowed firms a certain amount of flexibility to downsize when times are hard, whilst maintaining the necessary social safety net (which America, alas, does not have) to stave off mass poverty – then this might be the life-saving drug that Europe needs.

The arguments in favour of this are clear. If governments could stop protecting dying industries (the car market, whilst not exactly dying, is an obvious example where competition has become too tough for many firms to compete on their own), and start promoting those industries where Europe still has something to offer, then things can be turned around. Pay large sums of money on retraining staff. Not on protecting them in existing jobs.

No one taught me journalism. I became a journalist because I was exasperated with IT. No one taught me finance. I learnt this particular trade because I realised that being just a journalist, at a time when papers are dying an ugly death, is not enough to keep one off the breadline. I would love to live in the 1970s, where journalists mattered so much more than they do now for dissemination of the news, but I don’t live in the 1970s and I quickly realised that in my career. No one taught me about publishing or marketing a guidebook, or about the layout. I learnt all about this, because we had spotted a gap in the market that we thought needed filling.

I’m not meaning to particularly build myself up here. Just to point out what every worker, and therefore governments, should focus on. Never be afraid of change. Never be afraid of constantly learning. Never be afraid of losing your job, because you are no longer needed in the current market.

The problem is that this point of view is easy to say when you don’t have a stable job, and are actually indirectly benefiting from the redundancies – journalists may have to leave, but the pages of a paper still need to be filled, which is where freelancers come in. But, if you have worked for ten years in the same job, then you are understandable going to feel upset if you are about to lose it. The challenge is to make sure these personal sentiments, decrying job current insecurity in Britain, do not feed into government policy. Because, if they do, all those people who have recently lost their job are going to find it much harder to get back into the workforce when the climate suddenly improves.

In my current place of residence – Turin – Fiat workers consider them fortunate, because they have just been bailed out (again) by the Italian government. The contents of this agreement are a little fuzzy, but it basically means that they can return to work without fear of losing their job. Which is probably upsetting for a few of them, because the government had been paying most of them half-pay for remaining at home (or on the golf course) over the past couple of months; this is a particularly Italian arrangement, when a company hits difficulties. During this time, we ran into a large group of them at a fancy pizzaria in Turin, talking loudly and jovially, and consuming large amounts of red wine. They didn’t seem particularly worried that they might be about to lose their job. Perhaps the economy should be worried that they are not going to.

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4 Responses to “The dangers of protectionism”

  1. sam Says:

    Your title is “the dangers of protectionism”. Can you please explain why protectionist measures such as increased tariff (import duties) are so “ugly”, in a world where clearly companies in Asia/India/Europe are not under the same set of regulations. (and as a side question, why should Europe change its labour laws, and not China/India?)

    In a nation, all producers are under the same national rules governing labour wages, health and safety, quality control of the product, etc… In that national framework it makes sense to remove trade barriers between, say regions, since free trade will work and will be fair: the best products at the lowest price will sell.

    At a global level, this doesn’t work. Take the obvious example, China: regulation tightening the 3 themes I list above are very low, and international efforts to raise them fail again and again. Thus, Chinese producers can sell their products much cheaper than anyone else. They have made substantial advances on the quality side of their products, but are still completely omitting the human health & environmental consequences of the production (not of the product, which is what the consumer buys). If this continues for long enough, and I make a big simplification, Chinese companies will produce everything, paying very low salaries, in a dangerous and damaged environment. In Europe, for example, all companies will close or/and open new factories in China. The people tough, at least in part, have to stay in Europe, but have no jobs.

    One argument against protectionism is that increasing tariffs on one side will lead to retaliation on the other. In the end everyone will produce domestically. This is true, but this only applies to countries that have a major export business relying on products that foreign buyers are not really desperate to buy. A lot of products (oil, uranium, minerals,coffee,cocoa etc…) will be bought and sold anyway regardless of massive import duties, since countries cannot do without them.

    One example: In Senegal, for Eid, people buy a sheep, slaughter it in the halal way and eat it. Somehow, China now manages to sell halal sheep meat that is cheaper than the local produce. This will obviously kill off the local farming. I doubt China import much from Senegal. Even if they did, Senegal would not have much to loose in increasing import duties on sheep by 50%. OK, they may have to loose Chinese financial “help”, or loans, which are of doubtful nature anyway, since employ mostly Chinese labour, anyhow this gets complicated, but youn get my point htta the trade balance is heavily skewed between both countries.

    In a nutshell, what is so ugly about some protectionism and domestic production for domestic consuming?

  2. blakerig Says:

    Sam,

    Thanks for the comment – very interesting to read your points.

    I suppose that my initial posting was about two separate things.

    First of all, there is the problem with job protectionism, which one finds much of in places like Italy and France. The problem with job protectionism, which I think it is difficult to argue with, is that it protects people currently in employment at the expense of job seekers. This is partly what the riots in France were about some years ago.

    One could argue that, in an ever-expanding economy, this isn’t a problem – since jobs will continue to be created. But, in a moment of crisis (as we have been experiencing for the past couple of years), job protectionism is highly dangerous.

    It can lead to a couple of things.

    In certain cases – the name Fiat springs to mind – governments may face substantial pressure to stump up large amounts of cash in order to bail out a company, under the pretext of having to save jobs from… oooo… catastrophe. But there is no guarantee that the business is actually being run well in the first place, and so the money may simply be squandered. This brings down the whole economy. Moreover, governments themselves are at the moment strapped for cash – look at the spreads on Italian bonds – and so they can ill-afford to bail out inefficient firms.

    Another effect that this can have is that a company, already feeling the pinch of recession, might need to lay off workers in order to survive. If it is burdened with overly-strict redundancy laws, then it is going to suffer a great deal of pain. Not only that, but also – and herein lies the rub – strict redundancy laws mean that, when coming out of a recession, companies will be less willing to rehire workers. This is a crucial point for any successful economic strategy. The employment market always takes longer to recover than the economy (makes sense), and one of the things that determines the length of this is whether firms are willing to hire workers. They will be willing to hire workers if they can fire them again. For a recovery to be sustainable, it must create jobs.

    (A small aside here, just to clarify, is that I’m not saying we should have a totally free labour market, with companies able to hire and fire at will. People do need a certain degree of stability. But there needs to be a balance – which France and Italy have not yet achieved. If the current crisis was part of the normal economic cycle, I’d suggest watching the recovery of the job markets and see which one picks up first; but, since this crisis seems anything but normal and no one really knows how to deal with it, anything could happen).

    Next point, and I’ll keep this brief since it’s similar to the previous point, is the freedom of trade and whether we should protect ourselves, for example, from China imports.

    I argue with my wife about this one a lot, since she is from Italy, which has seen much of its textiles industry go eastwards, causing complete disruption of livelihoods.

    On this issue, I’m slightly more hesitant in pronouncing a opinion, since I can see the two sides of the argument.

    The free marketter in me is inclined to say, “to hell with protectionism, you can’t deliver quality goods at value prices, get outta here”.

    But this is unfair on the people whose livelihoods I have seen destroyed, and who are too old or conservative to do anything else. I feel as though I am imposing my own way of living on those who are not so adaptable. I change job, country and culture regularly with no problem. I understand that others might not have this luxury.

    However, I think there still remains a very big danger to installing protectionist products in Europe, in that doing so can vastly distort the market, with results that can’t yet be predicted.

    My instinctive feeling is: let the work done by Italian taylor women in their sixties go to China. China can do it at a fraction of the price. Give the work to them and then let them export back into Europe for us to buy. But what China CANNOT do is design Guci or Amani suits. Let the Italians do that. They’re good at it. People buy them. And they really boost the Italian economy.

    And then that poor Italian taylor woman who suddenly finds herself out of work could be employed by a company that does add value above what China can do.

    Ah, but of course, that won’t happen – because the said Italian firm knows that, if it does employ, said taylor woman, it’s going to be a bugger to get rid of her come the next recession.

    I sometimes feel that Europeans have this innate ability to delude themselves, protecting dying industries at the expense of industries that could flourish, and then belatedly taking action when they realise their mistake.

    We need some more flexibility in this dying continent.

    But all of this comes with a large proviso. I’m pretty young. I’m fairly flexible. I’ve lived in about seven countries in the past ten years. I’ve had dozens of jobs so far in my career. I’ve run a business, been a journalist for a number of different outlets, been a software developer. I can adapt – and I do recognise that other people are not able to.

    Therefore, all of what I have said above (basic free market philosophy) must go hand-in-hand with, oddly enough, a pretty strong social aspect. We need governments to spend money, not on protecting jobs but on retraining workers and enticing them back to work.

  3. sam Says:

    Hi,

    Thanks for the reply. As you can imagine, I am not convinced. Though I agree with you that pouring in public money to save dying companies (such as Fiat) just to save the jobs for another x months is a waste of funds.

    Now, there are several interesting things in your reply that I need to point out. Sorry it’s a bit long…

    First, you did not reply on the environmental impact (and basic health and safety) of cheap production in China /India… In a sense that kind of confirms my opinion that the free market theory doesnt factor in such annoying things. It will take a while (and massive environmental damage) before people get so fed up of living in a dump and drinking toxic water, so as to push goverments into enforcing strict environmental rules. In the meantime, Europe faces tight regulation on that aspect, companies have to pay for recycling, treating the dirty water they pump out of their factories, etc… RE the debate on increased carbon tax in France…

    So not even mentioning labour costs, European companies are already at a disadvantage because the population wants to live in a less polluted place.

    Second, Armani & Gucci. You argue that Italians are good at designing those clothes and will keep those jobs. I say, that will not last for long. (1) The Chinese industry has become incredibly good at copying all the top clothes & phone brands (for example) and sell fakes for a tenth or twentyeth of the price that look,and just about function as well as the real. I guess that counterfait stuff is a side-problem and is theoretically already illegal, but I live in the Middle-East, and those products are eveywhere. However sometimes there is a big grey area in defining what is counterfait (i.e. the same product with a different name). (2) Much more importantly, emerging companies from Asia are becoming incredibly good and talented at what use to be western products. Take cars : these Chinese Chery are more popular everyday, and have taken over a massive part of the market in no time here, owing to their low price, and, I am told, good quality). Same thing is happening with trains, and will (in a few more years) with planes.

    So, basically I don’t buy the argument that europe designs and china manufactures. That was true, but is changing.

    To come back to protectionism, you didn’t really answer my question, i.e. what is wrong with increasing import duties and promoting domestic production for domestic consumption. The only answer I could find in your reply was : “doing so can vastly distort the market, with results that can’t yet be predicted.” I would reply, is that so bad, given the current situation of (in my view) appaling results? In any case it would certainly massively reduce our carbon emissions; it would also promote self-sustainability in areas such as Africa, which for the moment cannot sell their products (even locally!) as they are squeezed between the chinese manufacturing giant and those multinational companies (based in Africa) that make their profit from exporting their produce worldwide. Many big companies would become smaller, because their export market would shrink, but loads more small companies would spring up nationally. Sure I can imagine the big stock markets, board members and investors would not be happy to start with, and would have to rethink their strategy (partly) to deal with so many more small companies concentrating on the domestic sector. However it remains to be demonstrated to me that this would be a bad thing for jobs, environmental heath, and quality of life worldwide (in case you were thinking, the dubious and minor role of protectionsim (trade barriers) in leading to the 1929 crisis is not an answer unless accompanied by sound arguments)

    I can’t help but comment on this paradigm “you can’t deliver quality goods at value prices”. But my friend. Use slaves (or forced labour, which is slightly more expensive), dispose of all the rubbish into the river or sea, use the cheapest source of energy available (be it the most polluting). You get high quality things such as the tallest tower in the world (Dubai)! OK, this is an extreme example (true nevertheless), but look at chinese cars and the new world record for speed set by a chinese train.

    Anyhow, I’m not trying to sell my way of thinking here, I am truly trying to understand what are the DANGERS of protectionism (as in trade barriers for goods). I’m also young, and all for moving around,dialogue between cultures, hoping between jobs, etc.. but I clearly see that our current model of free trade, no barriers, with different rules everywhere , simply does not work for the majority of humans.

  4. Solving America's Problems Over a Beer | Accidental Entrepreneur Says:

    […] to the fear of having to forge ahead and find something new (here is an interesting view on it from Europe). It will only inhibit our ability to compete in a global economy and we will see more jobs move […]

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