Protectionism is not the answer, a focus on comparative advantage is

I read in the paper this morning that NB exporters are worried about Obama’s new jobs bill which calls for preference towards companies that employ Americans in America.  At the same time I get Tweets and Facebook posts from people calling for “a New Brunswick for New Brunswickers” and talking about restricting trade.  My wife sent me an email that someone sent her advocating cleansing your home of everything made in China.

Protectionism has always surged after recessions/depressions.  Even in the late 19th century, when the U.S. economy soured there were efforts to raise tariffs higher and restrict trade.

The challenge today is that we have a mostly open economy and we have structured it on widespread trade.   It would be a huge challenge to put the genie back in the bottle and it would cause deeper economic problems – for just about everyone.

The focus needs to be on comparative advantage – the fundamental premise behind market economies and free trade.   For it to be effective, free trade assumes that each of the parties involved with have strengths the others do not.  If a small handful of countries saw all the benefit and everyone else suffered – particularly in democratic societies – that would lead to an end of free trade.

Canada still bases its comparative advantage on natural resources and a smaller focus on some high value exportable goods and service sectors.  Like Australia, the focus has shifted even more to natural resources in recent years causing people to worry about Dutch disease.  This does cause trouble for smaller places like New Brunswick with exporters trying to compete in a world where the Canadian dollar is at par with the U.S.

I don’t think most people understand the complications associated with this.  If at 70 cents, a New Brunswick exporter was making a strong 25% profit on sales to the U.S. that entire margin has been wiped out in recent years.  Either the exporter finds a way to reduce costs – or they find new markets or they go out of business.

In my opinion, protectionism is not the answer, a focus on comparative advantage is.