"Normal economic theory says protectionism makes the pie smaller for everyone"

Some odd wording. The theories would say that the TOTAL pie would be smaller. It makes no distributive claim.

This is a bit of a subtle point. In theory, free trade between countries A and B makes the pie larger (or, at least, no smaller depending on your precise model) for A and B compared to no trade. What is at issue is how the surplus pie is distributed. For instance, if you start off with each country having 10 slices, and trade creates an addition 5 slices, basic economic theory would allow for country A to end up with anywhere between 10 and 15 slices.

What protectionism does, from a theoretical standpoint, is provide some control over the distribution of the surplass.

Having said all of that, it should be remembered that we do not live in a spherical void. In practice, it is entirely possible for "free" trade to leave a country worse off then they would have been with no trade.

I tried to work through a proof of “free trade makes the pie no smaller,” and it seems like it only works if you’re considering one good.

I reasoned thusly:

1. Country A can produce good X at price p_a < price p_b the price at which domestic X is available in B.

2. No deadweight trade loss, so X is available at p_a in B

3. Thus for the same quantity n of X, B has a surplus of n(p_b - p_a).

4. But domestic producers of X have lost income, and if there isn’t something else for them to do, the total shrinkage in B’s economy may exceed the surplus (I haven’t worked out this term but it should be pretty easy), thus leaving B worse off.

Factor in deadweight losses and free trade definitely could leave B worse off, by forcing some of its economy to be unproductive.

> we do not live in a spherical void

This got me thinking how odd it is that economic theory only gets invoked in so far as it advocates free trade: https://en.wikipedia.org/wiki/Comparative_advantage#Criticis...

You can't really aggregate trade at the country level. Well, people do that all the time, but you can't expect it to follow the same rules as the real market.

People participating on the international trade are better off. There are plenty of cases of market failures (monopolies, etc), inertial problems (deflation, etc), or human capital destruction (due to worsened wealth distribution) predicted by theory already. Any of those can overwhelm the usual net positive contributions of trade.

>What protectionism does, from a theoretical standpoint, is provide some control over the distribution of the surplass.

Protectionism provides a mechanism to increase comparative advantage.

American economists drank a little too much of their own ricardian kool aid in the 90s and early 00s when they paternalistically tutted at China for enacting protectionist policies against her own good.

Now that China has stolen comparative advantage in electronics manufacturing, the CFO of Huawei is under house arrest and the tutting has all but dried up.

I think normal economic theory is that information isn't perfectly and instantly communicated through the market (see, for instance, post-earnings-announcement drift). A consequence of that is that new competitors operate at a disadvantage: even if a competitor is better, consumers don't know that yet. So I'd think protectionism to preserve an established producer at the cost of competitors makes the pie smaller for everyone (because it just reinforces a market imperfection that already exists), but protectionism to promote smaller competitors at the cost of an established producer can go either way, depending on whether the competitors are better.

> economic theory says protectionism makes the pie smaller for everyone

This theory is really lacking when it comes to modeling the effects of real world protectionism.

Imagine a country A, with all the natural resources, a country B, with a well developed pharma industry, and a country C, hosting an industrial sector.

Without protectionism, the pie might be large, but most of it is allocated to country B and C. Country A ends up with depleted natural resources, no factories, and a trade deficit which denies them access to drugs and industrial goods.

With protectionism, country A can manage their trade deficit, which allows them to bootstrap the industry it direly needs as soon as all their natural resources have been mined and exported.

You don't even have to use a hypothetical scenario. You just described the Indian state of Jharkhand in "A". Extremely rich in natural resources, as underdeveloped and exploited as it is humanely and inhumanely possible overall (yes, there are small pockets like Tata Nagar but that's about it).

If that were true, when we impose sanctions and embargoes on countries, their economies would surge.

It's readily visible that Country A wouldn't go anywhere without trade, so I don't know why you would think that sanctions and embargoes (which are actively hostile to a country's economy) are a drop-in replacement for protectionism in the model. There are a trillion ways to tie your shoes wrong, and only a handful ways to do it right. It does not help when the one who does the tying is the one who wants you to fall.

They can always trade their labor and offer a business-friendly legal environment. They can also borrow money to start businesses.

Think of developing products as searching a space. Normal economic theory says, your algorithm should just be to uniquely take your current best candidate, throw out all the others, and then greedily hill-climb that candidate.

This is not, it turns out, a particularly effective algorithm, which is why things like genetic algorithms, simulated annealing, etc., have mechanisms to protect and allow "non-best" candidates to survive.

Similarly protectionism can generate better outcomes over the long term.

What kind of “developing” product includes this case? You have got beverage made from sugar and water with well established brand. You being kicked out market, there will be free space. OK, there is always needed take in account national specifics. But nowhere in post-soviet union teritory local copies of coke won market

An interesting angle is in the export of donated clothing to the third world.

It's not that the locals really want the shirts with the logos of our Super Bowl losers and the outfits even Goodwill couldn't unload domestically, but it's what they've been forced to settle for.

It gets dumped on their market so cheaply no local manufacturer can compete, even if they can offer choices better for local styles or needs. Clothing manufacture is fairly low tech and not really location sensitive, so it's something that most countries can do to start moving up the economic ladder beyond raw extraction.

Give them a protected window of a few years without cheap imports, and you can ramp up supply and distribution networks (so you can compete more effectively on price) and also potentially improve local standards of living enough that the workers can afford to buy the goods they're producing.

> Normal economic theory says protectionism makes the pie smaller for everyone

And when those theories are discussed by serious minded people they are frequently forced to qualify the discussion with "except for those left behind," mostly because of the unavoidably obvious destruction all around them.

"Those left behind" being a euphemism for the working class of otherwise extremely wealthy countries.

When you've heard enough of this for enough decades it eventually dawns on you that it's just about cheap, exploitable labor. The rest is the professional class b.s. spin used to rationalize it.

This assumes already established local companies. For example, Coca Cola has had decades and decades of head start on its supply chain and economy of scale. On that alone it may be enough to outcompete a superior product that is in its earlier stages.

I believe the bigger issue with a playing field not being even is that people who "don't deserve" the reward end up accumulating the profits they wouldn't have otherwise, and then not providing the resources to the actual innovators; this isn't to say that the system isn't broken on the other side of the coin, where innovators are simply amassing resources and perhaps not efficiently reintroducing them into the market for everyone's gain in quality of life, etc.

To me the more important attribute of soda is that the main way to differentiate it is marketing. Were the Indian sodas really worse?

Probably less experienced at bottling, a worse global sourcing network, less marketing expertise, etc. They've almost certainly caught up by now.

Which is sort of my point, it's not like cars where there's an endless amount of improvements you can make and protectionism leaves you with an inferior product forever.

After the revolutionary war, the US used protectionist policies to get domestic industry going. It worked. George Washington, probably the most wealthy person in the new US, famously put aside purchasing things overseas and bought American made.

Very few policies and political theories are correct for all times and all cases.

What's "normal economic theory"?

What history shows us is that protectionism is a necessity for less developed countries to develop and catch up to more developed countries.

The US, Germany, Japan, Korea, Taiwan, China, etc all used protectionism to help local industries and companies develop.

The US became the largest economy in the world due to protectionism. Germany, Japan, Korea, Taiwan, China, etc all copied our template to become successful economic powers.

>What's "normal economic theory"?

What the established economists are paid to peddle in countries that have already taken advantage of centuries of protectionism to build their economies and industries and now want everybody else (regardless of the stage they are in) to open to their wares.

>Normal economic theory says protectionism makes the pie smaller for everyone

Then again normal economic theory is peddled by people whose careers are tied to the establishment. They can't afford to speak in favor of protectionism if they still want their careers and grants and policy advisor positions.

"Normal economic theory says protectionism makes the pie smaller for everyone"

If A protects, and B and C are open, A can get way further ahead by strategic investments, dumping, etc..

'Free Trade' only work if A, B and C work.

If A doesn't open their markets, then B and C should close theirs to A as well.

To my downvoters:

This 'strategy game' type dilemma is why 'Free Trade' negotiations actually exist in the first place.

If 'open markets' benefitted both parties irrespective of what the other party was doing, then most nations would simply 'open the kimono' as wide as possible to everyone, essentially reaping the benefit, waiting for the 'full benefit' to be yielded when the other parties eventually open up. Negotiations wouldn't really be needed.

But it doesn't work that way.

During the establishment of free trade, there's considerable negotiation around tit-for-tats on protected industries like telecoms, agriculture etc.. Also, there's a lot of rules in such agreements about how governments are allowed to subsidize specific industries.

If the Canadian gov. is giving massive loans to the lumber industry below market rates, enabling Canadian lumber makers to sell very cheaply and therefore wipe out their American counterparts, and then of course acquire them for pennies on the dollar ... well, this would be considered a 'subsidy' and you can see the problem aka 'strategic dumping'. (FYI this is almost a kind of problem right now - Canada leases 'Crown Land' (i.e. government land) on the cheap to forestry corps. and US believes that's a subsidy)

Hence 'Free Trade' only works if the parties play by an agreed upon set of rules.

Without such agreements, and assurances that counterparties are playing by a set of rules, then a degree of protectionism is warranted.

If one side cheats, they can win in a much bigger way.

All of that even when parties are ballpark in the same sized economies, at similar levels of development, i.e. France-Germany.

But with US-Venezuela for example, it's another ballgame as unprotected access to undeveloped markets can possibly lead to a total takeover of the economy, rendering one state a commercial vassal of the other.

In reality there are no perfect, textbook scenarios for fully bilateral and open trade agreements which is why there are always special cases and things to be negotiated.

Canada's banks and telecoms for example, are not up for sale in NAFTA/USMCA.