I’m taking a graduate course on international trade (using the Krugman, Obstfeld, Melitz [2011] textbook) and the professor opened by asking: why are industries like textiles, apparel, and agriculture usually amongst the most protected? My answer has to do with path-dependency and his, much better, explanation has to do with low market entry barriers. Being as stubborn as I am, though, I think both answers together explain more than each alone.

The path-dependency theory may run as follows. More competitive and productive agriculture, along with industries like textile, are generally characteristic of economies just beginning to industrialize. Textile, specifically, was a huge sector of the markets of countries such as England and Spain. As early as the 16th and 17th centuries these were already amongst the most protected industries. Agriculture gradually lost its competitive edge to manufacturing as rural productivity grew, but farming interests were historically well represented in governments of the time (and still are). Textiles faced a similar fate with growing productivity and the diversification of industrializing economies, but these industries were also protected from competing with each other — England and Spain, in particular, are well known for their protections of the textile sector from foreign competition (isolating their colonies as export partners). My argument is that these protections, and the culture that evolved around them, have never faded, suggesting a significant degree of path-dependency in our regulatory framework. (Maybe the fact that these early centuries are usually known for the spread of mercantilist thought reinforces my idea.)

My professor’s theory is more sophisticated and helps explain why there has never been an interest in ratcheting back these protections. Agriculture and textiles aren’t only a staple of a 16–17th century economy, but also of emerging markets in the present day and throughout the 20th century. The firms involved in these sectors are usually labor intensive, making it preferable to produce where wages are relatively low. In “advanced economies” wages are typically higher than elsewhere, meaning that labor-intensive textile and agricultural firms become gradually less competitive as economies grow. Thus, in order to avoid having these firms lose out to competitors abroad, the government affords them comparatively broad barriers.

If these two theories aren’t complimentary, then they should part of the same, more complete, explanation. One thing which the second answer doesn’t quite explain is the protection of capital-intensive versions of the same industries — I have in mind capital intensive agriculture. This is where my path-dependency idea comes into play. I think that, to a substantial degree, modern farmers have inherited the political pull that American farmers enjoyed during the 19th century and early 20th centuries, which was an era during which agriculture lost its dominance in national production. Farmers sought protection not just from foreign competitors, but also from reductions in incomes as a result of the centralization of the industry into increasingly larger firms (farms) and the flow of labor and capital to manufacturing. To get an idea of how much power agriculture inherited think of the bracero program.

These protections are harmful to all, including the protected in the long-run. The most recognizable consequence is the impact they have on the developing world; related industries in third world markets don’t have access to all the exporters they may otherwise have (e.g. buyers who are, in a sense, forced to purchase more expensive, local products instead). As a result, they also hurt consumers in protected economies. There’s another way consumers are hurt, other than paying a higher price for the same goods. Means of production that are retained in relatively unproductive sectors are disallowed from being applied towards higher priority ends. The cost is unseen (it’s an opportunity cost): we forgo the satisfaction of more pertinent ends. In the long-run, this hurts all incomes, because it affects the wealth of society as a whole. None of this is particularly controversial (or should be), which to me reinforces the “path dependency” facet; these industries have considerable political clout, accumulated over the decades (if not centuries).

Coincidentally, Mises’ life offers an excellent example of the kind of agricultural pressures that have plagued most advance economies. In Mises: The Last Knight of Liberalism, Jörg G. Hülsmann discusses Mises’ stint at the executive office the Lower Austrian Chamber of Commerce and Industry, abbreviated Kammer (pp. 187–193). The Kammer itself was not an institution of free trade, having been known for essentially cartelizing some of the key industries of the Austro-Hungarian Empire, but during Mises’ tenure much effort was expended in balancing out regulations which affected the agricultural and industrial sectors. Specifically, Mises fought a great deal against things like taxes and regulations by pointing out the fact that they challenged each sector differently — in other words, agriculture was being treated much more favorably than manufacturing. In fact, Hülsmann points out that much of the legislation Mises fought against was proposed, or in some way induced, by farming interests. While Austria-Hungary is not the United States, the status of American farmers has not been much below that of Austria’s, if at all.

While I stress path dependency, it’s important to acknowledge that my professor explains why such strong path dependency exists. Industries that enjoy relatively high protections tend to be those that have been around the longest, which also implies that they are some of the easiest to form as markets industrialize. This explains the heavy competition between different European markets as these industrialized, and the modern competitive pressures from emerging markets. There has always been something pushing representatives from these industries to use their political power to weave legislation in their favor. Another way of framing how our two ideas compliment each other is to say that competitive pressures explain the motivation behind the actions of farming and textile representatives. Path-dependency, or focus on the accumulated political power, explains why these efforts have been so difficult to slow and repeal — that is, why free trade interests (and, in my opinion, fact) have not been able to liberalize some traditional sectors of our economy.

For the sake of spinning these concepts to explore a related topic: I wonder what kind of consequences come from capital flow liberalization (not just inflows, but outflows, which can also be regulated by means of the tax code [i.e. penalizing firms for moving operations abroad]). There are various industries that are affected by globalization, but some of these in different ways. Firms might not ask for trade barriers if they reduce their costs of production, and therefore their competitive edge, by moving some of their labor-intensive manufacturing to low-wage countries. Suppose that emerging market restrictions on farming (a lot of the third world has restrictive farming policies to protect local farmers) were lifted to one degree or another, allowing large U.S. agricultural firms to invest abroad. How would this affect the agricultural political platform in the U.S.? How has it affected traditionally relatively heavily regulated industries? Is there a sort of political feedback loop between a growing share of multinational firms and falling trade barriers?