Trade protectionism and cartels threaten democracy

Andris Piebalgs, Member of the European Commission in charge of Development, went to Asunción to represent the EU in the ceremony of inauguration of Horacio Cartes, who was elected President of Paraguay in April this year. (EC Audiovisual Services 15/08/2013).

Andris Piebalgs, Member of the European Commission in charge of Development, went to Asunción to represent the EU in the ceremony of inauguration of Horacio Cartes, who was elected President of Paraguay in April this year. (EC Audiovisual Services 15/08/2013).

Trade protectionism is a very dangerous medicine for economic illnesses. On most occasions it is like a drug that kills the pain and the symptoms but at the same time it dilutes the possibility to cure the illness that causes them. If an economy loses its competitiveness in a certain sector or in the entire productive machine, protectionism is usually the first cure that the administration and the government put on the table.

Incidentally the European Commission published yesterday a report on trade protectionism across the world. According to it “There has been a sharp increase in the use of measures applied directly at the border, especially in the form of import duty hikes. Brazil, Argentina, Russia and Ukraine stand out for having applied the heaviest tariff increases”. It’s not by chance that in all those countries their bigger or smaller democratic deficit goes hand by hand with the protectionist attitude in applied economic policies. The common denominator is that all of them suffer from a pronounced ‘statism’ in politics and the economy.

At the beginning protectionism has no political cost internally because foreign producers do not vote in the country. On the contrary it ‘sells’ easily under a nationalistic banner. At the same time however it undermines slowly but surely the abilities of the local producers to become more competitive and stand out in local or foreign markets. Protectionism is also an addictive drug and usually the patient needs all the time increased doses.

Then a time comes when the commercial partners of the protectionist country decide to do the same. It’s not exactly a trade war but the consequences are equally devastating. At the end of the day international trade is drastically reduced and every country produces only for internal consumption using expensive resources and outdated technologies. The higher cost to produce more internally, leads invariably to a fall of the overall output after some time because consumers cannot afford to pay dearly for everything.

From protectionism to rationing

If the logic of protectionism is dragged to its limits then a large part of the home markets becomes ‘black’ with smugglers of cheap foreign products gaining the advantage. Then severe administrative measures are needed and the inadequate internal production ends up being rationed. This is the end and the country will soon collapse not only economically but politically too.

Argentine and Venezuela are the closest examples of this process. The monetary part of the Argentinian crisis was the last act in the sequence. After years of protectionism and inadequate internal production to cover the needs of the country and increase exports, the government tried to maintain artificially the parity of the peso with the dollar, in order to indirectly subsidize the internal consumption of imported products. A negative external account however brought soon internal monetary disintegration and crisis.

Still today Argentine is trying to restart its economy on the same protectionist principles and the small success it achieved during the past few years cannot be attributed to a betterment of the economy and an increase of internal productivity. It was the rise of raw material prices in international markets that helped Argentine, because the country is well endowed in this domain. But this blessed with abundant natural resources country can today barely feed its population.

It is true that the abundance of natural resources in many countries has become a ‘curse’, because it nurtures a rentier attitude to the local elites even to entire populations. In Argentine and more so in Venezuela this tendency led to ‘populist’ politics and semi totalitarian rule promising everybody to live as a ‘rentier’ on a public employ’s salary. In Venezuela where an army officer, the late Hugo Chavez, governed the country as President for fifteen years, promising everybody to live like a rentier. The result is that this country also blessed with huge deposits of oil, coal, bauxite and even gold to barely be able to feed its people. Both Argentina and Venezuela applied and still impose severe trade protectionist measures, while the governing elites cultivate also a chauvinist and xenophobic attitude in politics and the economy, to facilitate the longevity of their closed political systems.

Democratic deficit

All in all the free economic play needs also a free political system. The problem is that our world doesn’t suffer only of ‘statism’. Our free and democratic western economies are now threatened by the alarming trend for more and bigger monopolies and cartels in key industries. The latest acquisition of Vodafone’s operations in the US by Verizon for $130 billion stands out in this respect.

Protectionism and ‘statism’ in the developing world and monopolies and cartels in the West present increasing threats to democracy and the economic liberties.

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