The topic of restraining imports to "encourage" domestic producers, consumption of domestically produced goods, combined with its nationalist rhetoric, was covered well by Adam Smith. For some reason, even after 250 years, these lessons have still not been understood. Here I will attempt to explain these issues in the present context.
US Steel and AK Steel are two big steel makers in the USA. They want the US government to impose anti-dumping duties on China for "selling steel below cost to get market share" Micron Technology, a producer of memory chips in the US, wants anti-dumping duties to be imposed on Samsung and Hynix memory chips.
The US Government should completely ignore the pleas of these companies which want to restrict imports by anti-dumping duties.
If someone sells something below cost-what's the US consumer's problem??? It is great for the US consumer! There is an abundance of that commodity in the home market (steel, memory chips) and that in turn is great for the US consumer. If US Steel and Micron go bankrupt in the process, that is their problem. The US government, instead of discouraging the monopolization of the home market by local producers, actually encourages it by putting anti-dumping duties! Talk about these companies really convincing Uncle Sam to kill the consumer's interest for their benefit.
In this example of steel from China to the US, most steel is bought by other industries (e.g. pipe makers, rail car manufacturers), which suffer an increase in cost. Eventually all the increase falls on the consumer in higher prices for the finished products using steel. SThe industries dependent on steel are not happy with this steel tariff-see details here.
The goal of public policy should be to reduce costs of everything, to make everything more abundant for the country's consumers. That's the basic philosophy which they should follow. If that means some domestic producers are wiped out by the a foreign producer or a skilled importer, so be it; that is not the government's problem. All they should care about is the consumer. They should not encourage national rhetoric cloud their good judgement-which should always be to favor lowering of costs of everything, or increasing their abundance, which is really the same thing.
The other day I heard about India clamping anti-dumping duties on ceramic tiles for China. The local producers whined about how the importation was killing the domestic industry-and the Indian government fell for this self-serving logic of these producers. The result is that people in India are stuck with bad quality home made ceramic tiles, instead of better quality cheaper tiles from China (keeping price constant, the quality of Indian made tiles is inferior to Chinese made tiles).
If the foreign products are good, the consumer will prefer those (again, keeping price a constant). That means the domestic producers will have to work harder to improve the quality of their product, which is a good thing for the consumer, and what's good for the consumer, is good for the country. If they still can't compete and lose out to the foreign producer, that's still fine, because some other sector must have exported something out of the country to have the foreign good in your country at the first place. Every imported good in your country exists because someone in your country has exported something out, as I have already shown in a previous article.
If the foreign goods are inferior, there is no need to fear-the public will realize this and will keep buying home made goods.
If anything, importation should be slightly encouraged, at the expense of the domestic producer. This will force the domestic producers to be become better. Otherwise they are assured a monopoly over the home market (which they so enjoy) and they will keep producing bad quality goods and screwing over the consumers of the country with the high prices.
Any country where importation is restricted is full of bad quality products. Conversely, the more free the importation, the better the quality of products is. The government should not worry about domestic jobs lost (the people who works for the bad domestic producers will find other jobs) or the interest of the domestic producer; it should only worry about the consumer.
Anti-dumping duties and all sorts of trade tariffs should be abolished in all countries. If some foolish foreign manufacturer wants to sell their goods below cost, to gain market share or whatever, the country should accept that as a gift, and not reject it! What happens to the foreign manufacturer is their problem; if they are truly selling it below cost, they will soon go bankrupt. If they are not, as is most likely the case (who wants to sell stuff below cost?), then the domestic market will have better quality products overall, which will be a great thing for the home consumer.
The domestic producer always invokes the argument of job loss to convince the government to restrict imports; and the consumer suffers by having a shoddy product only in the home market, thanks to the domestic producer and the workers employed by these producers.
The domestic producers who produce shoddy goods will lose their capitals. But that's fine, because the best products, wherever they are made, should be rightfully supplied to the home consumer. If that means a loss of jobs of certain producers at home, so be it. The goal of the political economy is to increase the amount of consumable goods for consumers, not to provide jobs. Communist North Korea has everyone employed, but the overall production of the society is quite low (adjusted per capita). Part of the reason is a protectionist government. In practice, the domestic producers don't fire people; they just compete to make products better. This is exactly what they want to avoid by restriction on imports from a foreign country.
A well-stocked supermarket, with a good fraction of imported products, is a good sign of happy consumers in a countryI got a pretty strong proof of this recently with what the biggest German supermarket chain Edeka did to their stores-they removed all foreign origin products for one day. The shelves were all empty for this day-Germans did not realize that so much of their abundance in their grocery stores depended on products from outside Germany.
Politicians love to create jobs in their home market by restraining imports. Consider an extreme case: what if a country just gives away a product to you, just as a gift? Let's say China decides to give away steel to the US, not charging anything at all, is that good for the country? Well it will lead to steel companies' bankruptcies, which is not good for the US steel producers or their workers, but it can't be bad overall for the country-it is a free gift, and no one became worse off for accepting free gifts! But the job-keepers will argue that even free gifts are bad-because they will result in job losses in the US steel sector. The point is-the domestic products must freely compete with imports, and the consumers or whoever is the buyer of these products are alone the best judge of what's good for them. Tariffs on imports hurt this natural flow of goods-they are like an artificial dam which hinders the natural flow of goods into the country, based on what the country's consumers need. If consumers want to buy domestic products at higher prices for patriotic reasons, they certainly will have that option, but let's not get carried away by the desire of the few who buy only local to the majority who don't care where products are made as long as they are cheaper (for the same quality). I personally couldn't care less if something I buy was made in Brazil, Angola or Sweden-if the product is the same quality as a domestic product, I will certainly buy the imported product.
Argentina and Ecuador have huge restrictions on imports, with heavy duties. You see the shoddiest domestic products in these countries-there is no competition from foreign products. Chile on the other hand is a very free country for importation; and we see excellent quality products from all over the world in Chile. In Temuco, a small city in South Chile, we eat butter from Ireland and France, rice cookies imported from Thailand and drink beer imported from Russia. Argentines come to Chile to buy all sorts of goods-which because of high importation duties are scarce in Argentina (or high priced, which is the same thing). Any country which has free importation is helping it's domestic consumers immensely.
Good domestic producers not only are not afraid of foreign competition; they want to go to a foreign country and eliminate the bad products there! Starbucks and McDonalds are good examples. These US based companies have become worldwide phenomena-because they give good quality products (I must mention that whenever we call a product good or bad, we must always consider the price; i.e. we are saying good products for the same price in comparison to other products. McDonald's and Starbucks offer good products in country X for $Y means that for $Y, you can't get a better value in quality in country X than McDonald's and Starbucks, broadly speaking.) to consumers everywhere. I can personally testify that Starbucks has improved the coffee shop experience in every country it has opened it's shops; the domestic coffee shops are forced to increase the variety of coffees and milks, etc. which Starbucks offers, and in general, the consumer is happy. More choices, lower prices, and happy consumers. That's what importation of foreign goods and services brings.
There is an argument of "retaliation" which is used sometimes-it is bogus. The argument says that if China doesn't allow US imports in, then the US shouldn't allow Chinese imports in as well. China by restricting US imports only hurts Chinese consumers, who pay higher prices because all products are from domestic producers. Even if China doesn't accept any US goods, it still is good for the US to import stuff from China, because the US consumer is helped. Free trade enthusiasts fall for the reciprocity and retaliation argument, not realizing that a unilateral importation helps, regardless of whether China imports or restricts US products. Free trade does not mean that a foreign country opens their borders to our products-it just means that our country opens its borders to all foreign products. Our behavior, our government's behavior, is under our control-and even if a foreign country does not import anything from our country, importing unilaterally is great for us, because it lowers costs for our consumers. If foreign countries do not want to import they are just shooting themselves in the foot. Let them.
Digression: A similar thing happens with visa regimes-where countries often require reciprocity to allow visitors from other countries. But smart countries do not do this-Europeans and Americans can enter Ecuador and Thailand (two smart countries in this sense) without visa, even if their citizens cannot enter Europe and USA without a visa. It is beneficial for tourists to come to your country-regardless of whether other countries accept tourists from your countries.
When someone chops off their hand, you don't chop off yours and think you are retaliating. That's what barring imports of a country which doesn't import my products is.
Love thy importers-they bring the best products to you
In every country I have been to the world, I have seen that imported products are better than domestic products (for the same price).
Important Note: You can compare goods keeping the same price, and you will find imported goods are better quality; or you can keep the quality the same, and you will find that imported goods are cheaper for the same quality. Whenever we compare product quality and say X is superior to Y, we automatically mean that the price is the same.
Think about it for a second-an importer uses their judgement about the home market to import products. If the same products or similar quality products were cheaper in the home market, why would they bother??? They can always become distributors of the home products, and everyone is happy-they don't have to go through the hassle of importation, paying extra costs for transporting something, customs and government approvals, etc. They are risking their capital more when they import than when they buy something from one part of the country and sell it in another. They will do this only when they are sure that the foreign product is better quality (for the same price), and while true that sometimes every businesswoman makes a mistake, as a general rule, importers bring good products from the world to you. You can actually use this to you advantage everywhere-when I go to Argentina I will buy a product X from Brazil or Paraguay, than something made in Argentina, because the importer has probably done their due diligence and realized that the importer product is better. Similarly, I would buy a Russian product in Italy than buy an Italian product, trusting the acumen of the importer. Domestic producers are generally an indolent bunch, and have their established channels of sales, distributors, etc (read: little monopolies) and unless they are threatened by imported products, they will remain that way. Importation helps them improve, helps the domestic producers learn from better quality foreign products. And in the meantime, the consumer, who is the most important part of the whole country, benefits. If the domestic producer learns their lesson and becomes better, you will see that importation will automatically go down.
In some cases, whole industries are outsourced to a foreign country or producer. For example, textile products and household kitchen items are really good quality (or cheaper, for the same quality) in China. If the US imports all its textile materials-clothes, etc. and kitchen items from China, it may find that most domestic producers in these sectors do not exist anymore. However, this is nothing to worry about-their bad luck in these sectors makes labor and capital available for other sectors, e.g. US High Tech sector, where US has a big edge; and instead of the country (US) trying to do everything-from making clothes to semiconductor chips, it only dedicates itself to semiconductor chip production, and buys all the clothes it needs from China. That way lower skill products are in general always going to less developed countries; and a developed country like the US can dedicate all it's capital to what it does best-product technology products for worldwide use (Apple and Google make more money outside the US than inside it). This is your classic specialization and exchange of Adam Smith at work, at the country level.
Can a country import too much? That can't happen, because the total amount of imports into a country can never exceed what it exports to the world, as I have shown in a different article here.
Mergers of competing companies reduce choices for the consumers (or companies, if they are selling to business). This reduces competition and raises prices. Mergers of competitors should for the same reasons never be approved. More details in this article.
Do unto others...
There is another interesting moral issue there as well. If you are against importation, and if you believe in "Do unto others as you want them to do unto you" you must be against exportation as well; because the other country's domestic producers are being inconvenienced by your exports to it. If you think that you have the right to export goods, and compete in foreign lands with their domestic producers, in a simple matter of fairness, you should allow goods from those countries to come in freely into yours. You can't be pro-exportation and contra-importation if you are fair country. Every country wants to export more and import less-which is not possible for any country, as I have already shown here in asserting the equality of exports and imports.
Encourage foreign capitals in your countryA related subject is foreigners opening shop in your country. Should that be restricted or encouraged? They should be encouraged.
Chile sometimes resists foreign miners from investing in the country to take away Chilean natural resources (copper, gold, lithium). They prefer if the capital is domestic, and the citizens are seen protesting that the foreigners are robbing them off their natural resources, off their wealth.
A foreign mining company brings their own capital to invest in your country. It is like a rich man coming into a poor village to start a business. It is good for the country! The foreign company certainly deserves their share of profits. They are not robbing anything-on the contrary, they are doing a tremendous favor to the country by taking capital risk in this country than some other. The mining company employs mostly people of Chile (a small percentage may be foreigners, but more than 95% of the total are domestic workers). Therefore in extracting the minerals, a large number of Chilean workers are benefited. Once the operation is running, the company also pays some taxes to the Government, and that is an additional benefit to the country. The foreign company does get profits from it's investment, which they should (after all, they did not come here for charity).. but look at the massive benefit for the country in employing all these people from Chile, and the taxes and improvements (e.g. roads, canals, etc.) in the country! While it is true that the "mineral wealth" of Chile is sent outside-but it is not sent outside for free, it is not being given away. Chile is benefiting from the whole operation immensely.
The same is true for all other industries. Whether it is a foreign McDonald's or a Starbucks cafe, it always helps the consumers of the country-who get more choices to spend their money. The foreign companies are doing a tremendous favor to risk their capital and invest in the country, and it should be encouraged, not discouraged.
Presence of foreign capital stores hurts the domestic companies, who now have more competitors, and have to lower prices, or raise the quality of their goods (for the same price). But as shown above, whenever you have to choose between domestic producers and consumers, you must always favor the consumers. And having foreigners open up stores in a country is a great thing for the domestic consumer. If the product is bad the consumer will not buy it anyway; so there's nothing to fear. But if the product is good, as is normally the case, the consumers of the country will tremendously benefit, will have more choice.
In the case of retail producers like McDonald's or Starbucks, both the consumers and workers are domestic, and it is therefore a tremendous benefit for the country to have a foreign company open stores. In the case of mining, since the mined minerals are most often destined for export, the domestic consumers do not benefit; only the domestic workers are benefited. But for all cases, investment by foreign companies into the country should be encouraged.
In some countries foreign companies are allowed to set up shop rather grudgingly. China and India require auto makers to source 20% or 30% of the auto parts from domestic producers. Another restriction is to have a local partner in any domestic operations-a joint venture of sorts. All this inconveniences the foreign companies, who are discouraged to set up shop in these countries, to the massive loss of the consumers and workers in these countries who would have more choices or more jobs respectively if the foreign companies were allowed in more easily.
As often happens in governments, one part of a government promotes an idea and another part acts to restrict it. Many developing nations want to encourage foreign direct investment (FDI), and a minister will go around world tours trying to attract foreign capital. At the same time, another department in the government will have onerous rules to prevent foreigners from operating in the country easily. The touring minister would help her country a lot more if she worked harder to loosen the restrictions at home, which is the main reason why foreign companies do not set up shop in her country. If a country welcomes foreign capital and secures returns (so they can repatriate funds out of the country easily), capitalists flock to such a country very quickly, and there is no need to go on FDI encouragement drives. Capitalists are always looking to expand their operations around the world, and all you have to do to encourage them to come to your country is to get out of the way!
The summary of this article is-take care of the consumer if you are in the government or in any high position to affect such decisions. The producers, the capitalists, can take care of themselves. For every one person who is a capitalist, there are about 10 or 20 who are workers. The group of consumers also includes children, people who do not work temporarily, and old people. It also includes most workers of the government at all levels (state and national). If you sum this up, you probably have 20 consumers for every one person who is living off the earnings of their capital or rent (i.e 5% of the people are living off capital and rent). It makes sense to take care of the majority of the people morally, and economically. What's good for the consumers, what increases their choices, what provides abundance to them, is ultimately good for the country. And removing restrictions on imported goods (free trade) and encouraging foreign companies to set up shop in the country are ways of implementing this very fundamental idea of economics.