Opinion – Why? Economês in good Portuguese: What does a government program need to contain in trade policy?

We will certainly hear, throughout the electoral campaign, that certain sectors need protection from external competition – because they generate jobs, are innovators, etc.

Often candidates will talk about the benefits but set aside the costs of protectionist policies. And these also need to enter the account — and be highlighted by any government programs.

Protectionism and trade barriers

A protected industry can definitely grow. After all, with less competition, it can occupy part of the market that would be supplied by a foreign producer.

However, this comes at a cost to consumers — in the form of higher prices and a smaller variety of products.

In addition, trade barriers favor the survival of less productive companies. As a result, they end up using resources that could be better applied to companies in other sectors, which are more efficient. This would reduce the productivity of the economy as a whole.

It may be that certain sectors are currently not very productive, precisely because external competition prevents them from growing – this is what we know in economics as the infant industry argument.

The protection can give a “kickback” to firms in this industry, which would grow and gain productivity over time. If all goes well, the industry would become competitive in the international market (being able to generate more income for the country) and protection would no longer be necessary.

This is a rigorous argument in favor of trade barriers. The problem is to identify such industries before they develop.

Thus, to support policies of this type, government programs need to justify why a particular industry would deserve different treatment. Why protect Industry X and not Industry Y? What makes Industry X special?

This is because, if dynamic productivity gains do not materialize, the policy will only generate costs for consumers and reduced productivity.

subsidies

Subsidies have a similar impact as trade barriers. For example, for each product sold by a national company, the government pays it an extra amount.

Or the government provides credit at below-market interest rates, using public funds to cover the difference. All this allows industries to grow even in the presence of fierce external competition.

But there are effects very similar to those of the trade barrier. The difference is that the costs do not fall on the consumers of the product in question, but on the taxpayers.

To finance the subsidy, more taxes are needed, or less spending on the provision of other public services.

Again, these costs need to be included in the public policy account and, therefore, in the discussion of government programs that eventually support interventions of this type.

Policies need a date to end

Even if protection of a sector gives positive results, it needs to be temporary. Determining the exact time is no easy task, but a signal from politicians that there will be an end is essential.

If all goes well and the industry reaches the international level of productivity after a while, it will no longer need protection to survive.

If, on the other hand, it is clear that efficiency gains have not appeared, it will not make much sense to maintain the policies either, because they are only generating costs for the economy.

An end date is also important to give incentives to entrepreneurs in the sector to seek the much-desired productivity gains.

Maintaining protection indefinitely can create a “comfortable” situation in which companies remain inefficient but still maintain high profitability thanks to trade barriers.

Effects of removing barriers to competition

Given the costs associated with protectionist policies, it is not surprising that some candidates are proposing to overturn them. But it is important to remember that there are relevant short-term effects, which fall on a group of workers.

Some companies are expected to close with the most intense competition, and their employees will lose their jobs. As the relocation costs of these people are usually high, they tend to suffer a reduction in income and become vulnerable.

Thus, government programs need to take this aspect into account to alleviate the condition of this group, either through training programs (to facilitate absorption in other sectors), or through cash transfers, for example.

How should trade policy be in government programs?

Government programs that propose protection for certain industries need to have a very clear justification for this kind of special treatment.

Protection must have an expiration date. Otherwise, it will likely bring more costs than benefits to the economy.

And, if the removal of barriers is proposed, it is important to take into account the vulnerable situation of workers in industries that will suffer from the external competition brought about by the policy.

Mauro Rodrigues (professor of economics at USP and author of the book “Under the magnifying glass of the economist”) and the team at Por Quê?