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Solar competition unfair say candlemakers

8 February 2011

Frédéric Bastiat (1801-1850)

In Economic Sophisms, the 19th century French economist Frédéric Bastiat wrote a petition from candlemakers asking parliament to ban sunlight, to protect the country from being flooded by cheap foreign imports.

Among other benefits, he pointed out that: “If you grant us a monopoly over the production of lighting during the day, we and our numerous suppliers having become rich, will consume a great deal and spread prosperity into all areas of domestic industry.”

This would be consistent with other policies that prevented consumers getting access to cheap coal, wheat or textiles, and all the more justified since sunlight was not only cheap, it was free.

He was making a serious point. Protecting your own jobs and industries seems like a good way to boost growth and employment, but who does such a policy actually benefit? In the short term, maybe a lot of people – the protected firms and workers for a start. That’s what makes this approach so attractive – the benefits are immediate and visible. As are the consequences of losing your job.

In the longer term, though, the protection against cheap foreign imports would soon prove costly. Most international trade in goods isn’t in finished products, it’s in intermediates – components like circuit boards used to make other things. So the protected company would find itself paying more than international competitors for the same essential parts, if imports were allowed.

Then consumers would have to pay more to maintain profit margins on goods that were increasingly expensive to produce. Soon, there would be more losers than winners.

What about the opposite case? Imagine what would happen if the world’s main economies, the G20, decided to reduce protectionism. A new OECD paper looks at the impact of trade liberalisation on jobs and growth. It finds that jobs, wages, and exports would all benefit, even in the least developed countries.

If G20 economies reduced trade barriers by 50%, they could gain:

More jobs: 0.3% to 3.3% rise in jobs for lower-skilled workers and 0.9 to 3.9% for higher-skilled workers, depending on the country.

Higher real wages: 1.8% to 8% increase in real wages for lower-skilled workers and 0.8% to 8.1% for higher-skilled workers, depending on the country.

Increased exports: All G20 countries would see a boost in exports if trade barriers were halved. In the long run, many G20 countries could see their exports rise by 20% and in the Eurozone by more than 10%.

Benefits for developing countries: If all countries cut tariffs by 50%, the least-developed countries of Asia and Africa could see an increase in exports and in employment for high-skilled and lower-skilled workers alike.

And, of course, cheaper candles.

Useful links

OECD work on trade liberalisation

OECD Insights International Trade: Free, Fair and Open?

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