PCDForum Column #67,  Release Date January 25, 1994

by Herman E. Daly

Most public discussions of free trade treat “protectionism” as a dirty word. The recent debates on the North American Free Trade Agreement (NAFTA) and current debates on the General Agreement on Tariffs and Trade (GATT) are a case in point. Protectionism to economists usually means protecting an inefficient, lazy and often monopolistic national industry against really efficient foreign competition to the detriment of consumers. This kind of protectionism is economically inefficient and should be resisted.

This does not mean, however, that protectionism is always bad. To the contrary, there are important instances in which protectionism is an essential precondition even to economic efficiency. The most fundamental rule of economic efficiency in a market economy is that the full costs of producing a product must be included in its price. There must be no subsidies.

When the environmental costs of producing a product are passed on to the larger society, this constitutes a form of subsidy by the society to the producer. When a country requires that environmental costs be internalized in prices, this is a step toward greater economic efficiency. However, when a country with policies that support this form of economic discipline engages in free trade with one that does not, the tendency will be for more and more production to shift to the latter. This reduces economic efficiency and should be resisted as vigorously as the protection of inefficient national monopolies.

Free trade also has enormous consequences for the standards a society choses for itself that must be treated separately from questions of pure economic efficiency. Standards regarding the distribution of income exemplify the issue. Whether intended or not, free trade between the countries of North American under NAFTA represents an active commitment to a low wage policy. While NAFTA was often presented as a generous act by Canada and the United States to share their great wealth with Mexico, proponents made little mention of who was to do the sharing. In fact, it is the laboring class, which in the United States has already suffered a seventeen percent decline in real wages since 1973. Lower wages mean that returns to those who own capital in all three countries will go up. In reality the workers in the United States and Canada will not be sharing their declining wages with underpaid Mexican workers so much as with the owners of capital.

We have come to speak of global competition as a major value. Are we competing for a good standard of living for most of our people? Eighty percent of the U.S. labor force is classed as non-supervisory employees. What is the value of competing to lower the incomes of eighty percent of U.S. working people? We could do many unwise things to make ourselves more internationally competitive, such as moving back to child labor. That doesn’t mean we should. There are two ways to make products cheaper for the consumer. One is to increase efficiency. Everyone favors that. The other is to reduce environmental and employment standards. Reducing the wages paid for a given amount of productive work represents a lowering of standards, not an increase in efficency.

Free trade encourages a standards lowering competition as much as it motivates increases in real efficiency. It is important to distinguish between the two. There are real gains from trade, but there are also benefits in maintaining a degree of local self-sufficiency which is very different from autarky. Let me close with a quote from John Maynard Keynes, who in 1933 wrote an overlooked essay on national self-sufficiency. I’ve heard this referred to as the aberration of a great mind. But I think it was the clear thinking of a great mind. He said the following: “I sympathize therefore, with those who would minimize, rather than with those who would maximize, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel, these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible. And above all, let finance be primarily national.”

Herman E. Daly is senior economist at the Environment Department of the World Bank and co-founder and associate editor of the journal Ecological Economics. The views expressed here are his own and should not be attributed to the World Bank. This column was prepared and distributed by the People-Centered Development Forum based on his presentation to a conference sponsored by the Institute for Policy Studies in Washington, D.C.

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