Davos Discussion – The Paradox of Protectionist Policies

In recent years, many countries (not only in the U.S. under Donald Trump) have been imposing punitive tariffs and other trade barriers to protect their domestic economies. In fact, however, protectionist measures damage the national economy. Nevertheless, these decisions are often supported by a majority. This paradoxical phenomenon can be explained by Anthony Downs’ political-economic considerations.

The Political Economy of Anthony Downs

Even if a protectionist instrument can help a sector in the short term, it causes damage to economy as a whole that is greater than the increase in income in the protected sector. Why do policy decisions come about whose benefits for a small group are less than the losses suffered by society as a whole? An answer to this question can be found from Anthony Downs in his reflections on the “Economic Theory of Democracy“.

The core assumption of his thinking is the conviction that both politicians and voters act as maximizers of their benefits. Voters want to maximize their own benefit through their political actions. Politicians strive for pay, power and prestige. To achieve these, they must be elected to positions of power and best of all take over the government. Politicians therefore act as vote maximizers.

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Protectionist Policies: Winners and losers of a tariff

Against this background , the influence of citizens on a country’s trade policy can be explained as follows: Even if politicians know that a protection is harmful to the economy as a whole, it does not mean that the measure is automatically rejected. If, for example, politicians expect the imposition of an import tariff on steel to bring them a net increase in votes, they will opt for the tariff.

A tariff on imported steel benefits business owners and employees in the steel industry. These people have a lot to lose. It is about jobs, the income they generate and the loss of capital invested. For them, it is therefore worth investing time and money to persuade politicians to introduce import tariffs. Moreover, the profiteers of this duty are a small group in which free rider behavior is quickly recognized and socially sanctioned. This leads us to expect that more or less all persons concerned will participate in the political persuasion process.

The economic burden of the import tariff is borne by domestic consumers. They have to pay a higher price for all steel products. However, since consumers spend their money on many products, the loss of purchasing power caused by this tariff is relatively small. So because consumers have little to lose, it is not worth spending time and money to influence politicians. In addition, consumers are a large group in which free rider behavior is not recognized.

Given this motivation, it is not surprising that political decision-makers are more likely to listen to the minority and vote for protectionist measures, even though this damages the economy as a whole.

What needs to be done?

For a democratically organized society, there are, in my view, two crucial screws for influencing political decisions in support of non-  protectionist measures.

On the one hand, more transparency should be created about the macroeconomic damage caused by tariffs and other protectionist instruments. Increasing society’s awareness of the disadvantages of economic foreclosure tendencies increases the likelihood that political decision-makers will not listen to the particular interests of individual economic sectors.

On the other hand, people working in sectors that are no longer competitive need to be better involved in the income growth of an open economy. As already outlined in an earlier article, many policy areas are involved. Three areas play a special role here:

1. The tax and transfer system is the classic instrument for a broader distribution of trade profits. Social security systems in particular play an important role, as they cushion the negative effects on income. This facilitates structural adjustments resulting from international trade.
2. Education and training makes it easier for people to switch to sectors that benefit more from foreign trade. When people work in exporting companies, this benefits them twice over. On the one hand, they have a relatively secure job. On the other hand, exporting companies usually pay higher wages than companies that sell their products only domestically (page 28–31).
3. The use of mobility support (removal costs, travel costs and affordable housing) is an option for flanking measures: even if there are vacancies in a region with strong exports, it is not yet guaranteed that they will be filled. If these jobs are in regions where there is no affordable housing and that is not accessible by public transport, the jobseeker may be discouraged from filling the vacancies.

If political decision-makers are to listen to the majority and promote policies that benefit the economy as a whole, democratically organized societies must take steps to change the incentive system through increased transparency and wide-spread involvement of impacted citizens. .

Note: These considerations were first published in German by the “Zentrum liberale Demokratie”: “Warum Pro­tek­tio­nis­mus mehr­heits­fä­hig ist“.