Infernal Ramblings
A Malaysian Perspective on Politics, Society and Economics

Follies of Economic Nationalism

Written by johnleemk on 10:22:19 am Apr 11, 2007.
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One common reason for protectionism that I think not many real economists have addressed is economic nationalism. There is a lot of literature showing the benefits and efficiency of trade, but not so much addressing arguments along the lines of "If we don't have a nation, what point is trading?"

Basically, such arguments for protectionism argue that the country will die if it does not clamp down on the free flow of goods and services in some way. This is of course true; some regulation is always necessary. But how justified is regulating who can bid for government contracts, who can apply for visas and permanent residency, and who can sell us food staples on grounds of jingoistic national security?

In many cases, economic nationalism has irrationally stifled the efficiency of trade. Not too long ago, the American government quashed a successful takeover bid of an American port by a company from the United Arab Emirates (which has been a staunch US ally). Why? Because the media stoked up a fear that terrorists would somehow gain access to American ports and do some hanky-panky.

In reality, the UAE company in question had been taking over a number of American ports without any controversy. It was just doing its job; being the most efficient port administrator and manager, and as a result, being able to bid lower prices for contracts and launch takeover bids of less efficient companies. Why punish it?

It is of course true that real enemies, real terrorists, might use normal business mergers and acquisitions as a guise for militant activity designed to undermine the country concerned. But this merely calls for a greater vetting of the credentials of those bidding for contracts or launching businesses in sensitive areas.

Maybe I am a bit overenthusiastic in this, but I love applying the concept of externalities to cases where it seems that the market has failed. An external cost is imposed on society if there is a risk that a private company will be used as a front for terrorist activity, correct? Thus, simply factor in this external cost into the economic equations.

The government should not outright ban companies from particular countries from engaging in activity in sensitive areas; it should weigh the risks appropriately, rather than tarring all companies with the same brush. Obvious risks can be barred, while less obvious ones can and should be permitted entry — with the caveat of a fee to cover the additional security, etc. required.

In a similar vein, some countries, especially the US, have been limiting how many people can enter the country because of fears that some of them would be terrorists. There is also a rather irrational fear amongst some that immigration would undermine the "pureblooded" people of that country — ignoring the fact that we are all descended from immigrants in some way. (If you go back far enough, one of our ancestors emigrated from Africa.)

The fact is, there's no good reason not to significantly liberalise the restrictive immigration policies that most countries have in place today. If someone loves your country enough to want to settle there permanently, why on earth would you want to keep them from becoming a productive member of your society?

The security argument does not hold much water because it should be easy to ferret out those who are likely to pose a security risk — I'd be surprised if, say, the Americans haven't yet developed a computer algorithm for isolating high-risk individuals when there are so many risk factors they can look at in an application.

Food sovereignty is perhaps the most ridiculous example of poorly thought out economics. This argument that a country should be self-sufficient in its food production might have held water in a world with less integrated economies, but not in one where, as New York Times columnist Thomas Friedman has remarked, no country with a McDonald's outlet has ever gone to war with another such country.

In the first place, absolute food sovereignty is impossible. The Americans and Europeans subsidise the hell out of their farmers, and they still can't attain food sovereignty — so who on earth can without dramatically hurting their economy, as the North Koreans have?

You might argue that some limited food sovereignty is desirable, but if you are subsidising inefficient farmers, you are basically making it more difficult to attain food sovereignty (assuming the resources available to you are suited to agricultural production). If your country is cut out for farming, protectionism is counter-productive because insulating inefficent farmers from competition guarantees that better methods of farming will never be adopted.

And if the country is not cut out for farming? So what? Why should you be afraid to import food from other countries when you can sell them things they want? Even if a war breaks out, if you think you will be unable to find allies willing to supply you with food, I'd suggest you have bigger foreign policy problems than food sovereignty on your hands.

And let's face it — almost any open economy will be able to find reliable trading partners for food. Cries for food sovereignty are basically nonsensical cries for a policy that has no rational basis.

Economic nationalism is a dangerous ideology to indulge in. If you insulate your people from competition, you are basically harming yourself in the long run. Competition ensures that everyone is always looking for a way forward, not relaxing in the status quo. Unless you like being left behind by development, blanket economic nationalist policies will only hurt you.


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