Is Economic Openness an "Enemy of the People"?

April 23, 2015

"Entreguismo," loosely translated from the Portuguese as "handing over," is an old term used by those who argue that openness to trade and investment is akin to giving up the pursuit of domestic interests in favor of those of large foreign companies. The accompanying rationale is that these companies hurt the economy by "stealing jobs" and flooding domestic markets with cheap foreign goods, thus driving out domestic firms.

Fear of openness is pervasive in Brazil, but it is not a uniquely national trait. It exists in the United States with equal force. Take, for example, the raging debate over President Obama's bold push for the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Consider the position of some congressional Democrats, staunch opponents of the TPP because they believe the agreement will hurt American jobs—the TPP is portrayed as a variant of "the great enemy of the people." The debate on trade liberalization is ideologically charged on both sides of the hemisphere with surprisingly scarce knowledge of the facts, despite the vast academic literature and documented country experiences that exist.

The costs of remaining closed to trade and investment are especially pernicious due to their lack of visibility.

Does greater openness adversely affect jobs? Evidently, for those sectors and companies that have lost the ability to compete internationally, the answer is a resounding yes. But despite short-term losses from greater liberalization, there are substantial gains in the longer run. Think of Korea, Singapore, and Taiwan. Consider India and China. These are all countries that attained enviable growth, sustained over long stretches of time. The "handing over" that stirs protectionist arguments reflects an intense concern over specific groups that would inevitably lose from increased openness without taking stock of the countless others who would benefit from liberalization.

Protectionists urge governments to impose trade barriers to shield both jobs and market shares of domestic companies. However, what the economic literature shows is that when these barriers are imposed, the cost of protectionism can be incredibly high. When a country raises import tariffs to protect local products—as Brazil did in 2012 with its famous list of 100 items that included everything from tires to steel, construction materials to kitchenware, plastics to potatoes (yes, potatoes)—it increases production costs for every company that needs these inputs to produce.

Higher import tariffs for tires affect the automotive sector; for construction materials, the real estate industry; for potatoes, well, all those Van Gogh potato-eaters. If companies buy their inputs abroad at higher prices, they will either have to pass these costs on to the consumer or reduce production. Cuts in production will affect not only investment but also employment. That is, the protectionist argument comes full circle not with protection of the people, but with loss of jobs, increased inflation, and falling investment.

The arguments against openness are often convincing, alluring even, because while it is easy to see where jobs will be lost due to increased competitive pressures, it is difficult to see where new jobs may arise because of greater access to new technologies and new markets driven by more trade and investment. But the reality is that by increasing input costs, protectionism allows foreign firms in the same sector to be more competitive than domestic exporters. Thus, protectionism punishes domestic firms as well as domestic workers.

There is ample evidence that exporting companies generally pay higher wages than other firms (for the interested reader, researchers at the Peterson Institute have written widely on these topics). Thus, a worker who could find a well-paying job in an export industry that might otherwise have expanded in the absence of trade restrictions will find it difficult to do so as a result of protectionism. Put differently, the costs of remaining closed to trade and investment are especially pernicious due to their lack of visibility.

Based on facts, it is difficult, if not impossible, to state that greater openness and integration are "enemies of the people," to be avoided at all costs. What the evidence shows is that liberalization tends to facilitate the future, while protectionism tries to reconstruct the past. I leave it to the reader to judge what is best for Brazil.