Protectionism Works

Protectionism is what made every historically major country wealthy and powerful in the last 300 years (including the current free trade pushers like UK and USA). Protectionism should stop being a bad word as Japan and China can testify


The title may make the reader shake head immediately because a kind word is not often found with "protectionism" in the same sentence these days. Although United States industry was essentially built on protectionist tariffs (until 16th amendment of 1913 allowed federal government to start functioning via income tax instead of high tariffs on imports) the last 30 years involved continuous top down push of free trade propaganda. It is thus understandable that protectionism brings a negative psychological reaction even if there aren't ready made arguments to explain why.

If one looks at how world's key societies rapidly became wealthy and powerful (in the last 300 years), protectionism was always the dominating factor to help out native industry. France and England in 18th-19th century, United States, Japan, and Germany in 19th-20th century, and China in 20th are just some of the success stories.

In fairness, we can't overlook a number of small (population and physical size) states that are positioned to thrive in free trade by their geography (ocean reliant ports of Singapore, Hong Kong, Netherlands and Switzerland with its base in ancient Alps trading routes) which often also function as financial hubs. As far as large historically active players on the world stage, all became what they are due to basics like tariffs.

One may begin to argue that protectionism of old was different in that it was an ideological pillar of now "discredited" mercantilism. However, mercantilism never went away and still works wonderfully in more advanced forms in China and Japan (and even in Western Europe to a certain degree). Certainly we can understand the desire of a state to lower protectionist measures once its industries have sufficiently grown and benefited from them. We have seen England begin to push free trade propaganda in 19th century after its factories became the best in the world. Same pattern continued with United States (which had some of the most advanced and some of the only factories left standing) after World War 2.

One would think that United States would learn a lesson from slow decline of British Empire (late 19th century to 1960s) due to transition from mercantile protectionism to free trade and reserve currency imperialism. Surely it would have affirmed that lesson from the rapid rebirth (after the initial breathtaking success of their mercantile industrial expansion in late 19th century) of Japanese and German societies in the 1950s ad 1960s. It was crystal clear what works for national enrichment, job creation, national self respect, technological progress, and higher quality of life for the average citizen.

It can be summarized as follows:

1) Tariffs work, keeping out foreign competition and their advanced imports such as cars works, trade barriers work, high import duties work, allowing foreign companies to set up shop only in partnership with native companies/unions works

2) Free trade doesn't work as well as trade barriers historically when it comes to rapid national development and can even fatally drain a nation

For a number of years before the current economic depression hit, many old time free trade warriors like Nobel prize winning neoclassical economist Paul Samuelson began to realize that the global reallocation of industry can produce a domestic win-loss scenario for United States (especially in its trade contact with protectionist China) where the loss is so great as to be socially catastrophic. Samuelson used to have absolute faith in comparative advantage but his most recent major paper argues that free trade theory needs to be reformed for the modern world if it is to survive. Samuelson is too old (94) to meaningfully contribute at this point but major reallocation of his thought at this age shows the seriousness of free trade problems. One translated Der Spiegel interview has him mouth the thoughts familiar to anti-WTO protesters: that rising economic inequality within "globalizing" nation is a type of win-loss scenario that is unacceptable and stupid to be allowed to happen.

Another crusty dinosaur, Alan Greenspan, has mentioned a few years ago how rising inequality can threaten democratic functioning of United States. When free marketeers and capitalist internationalists utter words like these, it's the equivalent of John McCain saying that perhaps United States naval forces should be cut down in size. It's the equivalent of the Pope saying that perhaps some birth control should be introduced into church doctrine to save lives. Some of American elites (mostly in the nationalist democratic wing of the American oligarchy) have taken notice of this.

At this point, rapid and badly needed protectionist measures may shock United States into falling further into the economic abyss. Chinese retaliation and corresponding rise in cost of imports will not help United States get further away from risk of a hyperinflationary scenario. It would thus make sense for Barack Obama to sneak in defensive nationalist measures gradually. His recent decision to to impose a tariff on Chinese tires may be beginning of such an attempt. Tariffs on foreign made car batteries and materials/parts connected to industries decided to be"strategic" ( like green energy ) may follow. The way protectionism is introduced by the current administration will be vital for any chances of American rebirth within a generation.

When pound sterling began declining as reserve currency in the 50s and 60s along with British industry, London decided to cut off its foreign colonies for purposes of national regeneration and survival. United States needs to begin a similar process of disengagement from the world to match decline of the dollar as reserve. Since British Empire and United States were both in strong imperial position at the time of their full commitment to pushing free trade on the world, they found it easy to combine lack of protectionism with parasitic existence of unproductive consumption through the use of reserve currencies. In that sense, free trade "worked" for them for a while even as it impoverished small countries that were pushed to engage in it. This period is now coming to an end and a new model has to be formulated.

Some Europeans, like Emmanuel Todd, propose "protectionism on a continental scale" (the article is in French but is very readable with google translate). It may be argued that China already practices that to a degree in that it has the population and economy large enough for import restrictions without being crushed and impoverished. European Union definitely has what it takes for such an action especially if it coordinates with some nearby states like Russia. North American Union and South American Union may one day be such entities to effectively fight off Asian and European imports. Trade cannot be decoupled from production and effective production needs to be able to compete between itself rather than just exist in one part of the world where it's cheapest.

Let's hope some common sense prevails and more people question official orthodoxy of global unification by only one narrow "inevitable" route (the optimism of Thomas Friedman is now laughable in hindsight). Real globalization seems a lot more within reach when self enriching, wealth producing, continent wide economic unions do business with one another in a more equal way.

Lets remember what the 25th president of the United States William McKinley said about free trade at the end of 19th century when he affirmed a commonly held belief among American elites and citizens,

"Under free trade the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man. [It is said] that protection is immoral…. Why, if protection builds up and elevates 63,000,000 [the U.S. population] of people, the influence of those 63,000,000 of people elevates the rest of the world. We cannot take a step in the pathway of progress without benefitting mankind everywhere. Well, they say, ‘Buy where you can buy the cheapest'…. Of course, that applies to labor as to everything else. Let me give you a maxim that is a thousand times better than that, and it is the protection maxim: ‘Buy where you can pay the easiest.' And that spot of earth is where labor wins its highest rewards."

China Mercantilism and New Global Economic Order

China is successfully getting the world embedded in mercantilist system of development by being such a large player with a strategic long term vision. This allows Western world to economically outmaneuver China instead of being sidelined by it.



Modern communication technology has allowed China to achieve a centralized bureaucracy that has a smaller chance of becoming overextended and too top heavy. The danger of parts of central government melting into regional structures with rebellious consequences is diminishing every year. The risk is not totally gone however if rapid economic growth bumps into serious stagnation and even GDP reversal. As of today, China has the creaky uneven centralization of 18th century France and is gleefully engaged in large scale mercantilist practices.

Chinese society is not yet fully urbanized and consolidated. Beijing cannot yet engage in cutting edge mercantilist practices as done by Japan and Singapore. Chinese political center only recently overcame last remnants of feudalism, warlordism, and peripheral regional integration. Having dealt with that, China is pursuing the same economic path that allowed Kaiser's Germany to rapidly grow by taking advantage of British post-mercantilist free trade period. It is very historically appropriate. There is no need for Beijing to emulate Spanish, British, or French mercantilist experiences.

For a nation of 5 year plans, it makes sense to try to skip developmental steps and leap from present macroeconomics of Kaiser's Germany to those of Japan. Today, China has done rapid neomercantilist development by the book:

1) Government imposed positive trade balance through protectionism and currency control (yuan pegged to the dollar)

2) Self sufficiency in agriculture and manufacturing of basic to advanced goods

3) Acquisition of large amounts of money and gold (around a trillion dollars worth as of 2009). Controls to prevent wealth from flowing out of the country through protectionist restrictions on imports

4) Large scale mining and infrastructural projects to increase use of domestic resources and terrain. Hamilton and Quinsy Adams would be proud of what Beijing's coastal elite have achieved in the last 20 years. China has also secured 60% of Africa's resource exports and are structurally integrating Central Asia and Siberian Russia into their resource feeding network.

5) Keeping the overall population's wages low to increase country's overall manufacturing exports. That is easily accomplished by underdevelopment of Western provinces like Tibet. One child policy is more imposed on the wealthier Mandarin ruling coalition than the periphery ethnic groups. Uneven implementation of one child policy keeps periphery ethnic groups more fertile and poorer. Coastal urban ruling peoples spend more energies on advanced wealth generating employment rather than saving to augment multiple children.

6) Keeping of imports limited to natural resources and large scale buy outs of foreign expert talent in anything from engineering, electronics, economics, and hard sciences

Current opinion and international action has just been reactive so far. Some are mainly focused on China's attempts to prevent rapid devaluing of the bought dollars (before all of them are eventually used on natural resources anyway) through creation of an international reserve currency.

Some focus on how the international recession, can be used by China, to move from less advanced manufacturing to price competing with Germans and Japanese when it comes to advanced electronics and electric cars.

Many are focused on new Chinese confidence of proactively criticizing existing international economic system and offering transformative multilateral steps such as gradual multilaterial global involvement in the IMF.

Very little attention has been paid to the implications of the world being pulled into a mercantilist arrangement. China is becoming more predictable and thus out-maneuverable. Originally, Britain became economically successful because it added free trade theory onto mercantilist practice earlier than Spain or France. It stayed one step ahead of the competition. However, the new economic hybrid has created oligarchic capitalist interests who then used liberal theory to reduce state's involvement in the economy. Wealthy exporting interests (who controlled the house of commons and people's opinion through printed media) used appeals to individual freedom to dismantle the mercantilist/free trade hybrid that made Britain powerful and wealthy to begin with. Britain coasted along but economically declined as hybrid societies were able to build up new waves of industrial assets through neomercantilist practices (Germany/ United States). As Britain declined in industrial might, it focused on its core strength of money management and that lead to the torch being passed down to Wall Street in the 20th century. The great competing banking hubs of Europe (Paris, Berlin, Moscow) were looted in the wars/revolutions. We now see what happens when banking and finance is the core strength and emphasis of the economy.

China is now in the process of moving to the final stage of manufacturing asset concentration through focus on development of advanced products like cars and computers. Rapid economic assimilation of Taiwan and Hong Kong will aid in that process. Western investment in Taiwan created a base for high technology and competitive know how. Many Taiwanese oligarchs have already basically integrated their companies with mainland ones. Ideologically, Taiwan's Kuomintang political center, can now smoothly cooperate with Chinese authorities. People forget how important socialism was in Chiang Kai Chek's original nationalist ideology.

Very soon, China will begin manufacture of high technology goods to compete with Germany and Japan for markets in Russia, Europe, and North America (as well as lower end cheap electric cars sold to developing nations). They will be forced to utilize existing free trade international system (perhaps stabilized by IMF's Special Drawing Rights currency basket) to push these products abroad.

How would Chinese like to see the world once their products flow onto middle class Western markets? They would like to see no protectionism from Europe, Russia, Japan, or North America. They would like to see rule of law and capitalist adherence from everybody in the world. They'd be fine with North America and Europe reduced to South American-esque resource providers and vacation destinations. We can see that if China takes on Japanese level importance in high technology exports, they'll be able to then finally consolidate nationally and relax the amount of force needed to keep social stability.

In a few decades, the communist leadership in Beijing will then be able to claim that not only did they bring the nation out of poverty but they:

1) beat Westerners at their own game like Japan did (but without a period of war over resources)
2) created real feeling of nationalism, inter-ethnic peace, and modern nation state like Chiang Kai Chek wanted
3) avoided Soviet Union's mistakes when undergoing Perestroika while properly utilizing communist fruits of mass literacy and emphasis on science/engineering
4) took the torch from United States as the Global role model when it comes to free trade, peaceful co-existence, lack of harmful interference in other societies' business, isolationism, respect for borders of small states, and business cooperation
5) built more for the developing world than the financially oriented English speakers by swapping resources for real engineering construction projects
6) helped create a stabilizing one world currency for more even international development

Such claims will allow Communist party to win election after election for a number of decades even if they allow political pluralism. Many Asian states continued to have one party rule for decades even after democratizing. Cultural collectivism and emphasis on agreement allows power elites to work smoothly together. Taking into account Britain's experience, China can easily continue to pragmatically evolve, build a financial center through Hong Kong, bring new resources (such as Helium 3 from space exploration), and guide humanity by being its center of progress.

History has shown that leading global elites will not allow such unimpeded ascendancy. Cutting off resources and containment is too blatantly hostile. Japan and Imperial Germany have demonstrated that. Advanced hybrid of mercantilism and free trade (from a society strong enough economically and technologically) will be the only way to counterbalance Chinese ascendancy. Only European Union with English and Russian speaking allies has what it takes to effectively compete and prevent formation of a long term hegemon that is culturally and psychologically uncomfortable for Westerners.

Earlier in the article it was mentioned how Chinese bureaucracy has a small chance of being destabilized again. There is precedent for this happening at numerous times in China's history with horrible civil wars and revolts from poorer less developed periphery. China's gini index (that shows country's income inequality between the rich and the poor) demonstrates that China is even more economically unequal than United States. Today, Beijing's authoritarian rule keeps the lid on trouble from elites from either the oligarch coastal factions, rural/regional factions, and urban West emulating liberals.

European Union's job to deal with the near future involves:

1) Being proactive rather than reactive to Chinese, American, or Russian moves

2) Acquiring valuable allies to augment influence. That means working first with Russia to kick American/British influence out of central Europe and then with England to diminish American influence inside NATO. NATO can then be ended/transmogrified and America approached as an equal power to work with.

3) Being pragmatic and not looking at human rights when acquiring resources from other nations. Europe still has time to lock onto substantial amounts of resource exports from the third world, especially Africa. It can join Russia in developing the Arctic energy reserves and help Russia outbid Chinese resource extraction/exploration companies in Central Asia.

4) Consolidate EU structures such as the European Parliament so more coherent action can be undertaken with more popular trans European legitimacy.

5) Use advanced collective protectionist methods to keep an edge in high technology products to stay a step ahead of China. Contribute even more constructively to global currency formation through IMF where Westerners still dominate.

6) Work with United States and England to manage the geopolitical, social, and economic decline of United States peacefully and productively. Invite young American professionals to European Union to displace social pressures from relying on less assimilative Muslim immigrants. Become the stable adult co-equal mediator between Russia and United States so the two former superpowers can productively contribute and provide nuclear protection. Open borders to young educated Westerners from around the world to counterbalance aging of Europe.

7) Develop strong ties to regional powers like Japan and India to counterbalance Chinese cultural influence. To do that, rapidly expand economic cooperation with them in the sphere of building climate change infrastructure, energy, military, and space

8) Comprehensively educate the public on climate change and loss of technological edge to China in non-confrontational terms. Take the lead in recognizing petty-infighting (like Poland's mistrust of Russian cooperation in Europe) and offer tangible economic and developmental incentives to major actors to overcome them.

Brussels has enough time and communication technology to still effectively consolidate before China does. It will require the same long term vision, developmental eye, and good historical sense as the one possessed by their Chinese politburo counterparts. Europe is more economically egalitarian than China. It has more power elites with a global reach and cutting edge professionals. It must find a way to be protected by Russo-American nuclear umbrella (without being controlled by them) so not too much money is spent on integrated European defense. Together, Western peoples of the world got close to a billion people and have as much of a shot as Chinese (less than half the Chinese speak the ruling dialect of Mandarin). Western civilization has the qualitative expertise to provide solid competition that will benefit all of humanity.