We wrote last week about the forces around the world that seem to be moving governments and nations towards a more protectionist attitude to trade and also to government procurement. This is being seen in Europe, Australia, the US, India and various African nations too. At its extreme, it sees government procurement expenditure primarily as a tool to support “local” or national interests and suppliers.
As this movement continues, we are seeing little written in defence of free trade, open access to markets, and the benefits of a public procurement approach that puts other factors – such as value – at the heart of the activity. So we thought it was worth re-stating the negatives around a protectionist approach to procurement, and some of the benefits of openness.
- Protectionism is economically inefficient. The theory of comparative advantage says that It makes absolute sense for countries, companies and individuals to focus on the activities where they have a lower relative opportunity cost. Basically, the UK is good at financial and business services, not building laptops, so focus on exporting more in our strong areas, not trying to protect (or create) our own local laptop industry.
- Protectionism hits consumers and taxpayers. We can see this in public procurement; favouritism for local or national providers where they would not win on purely value grounds must result in either more being paid (by the taxpayer) than is necessary or the buyer accepting a lower quality of goods or services, which hits the user and potentially the taxpayer. This factor is not discussed or considered enough when politicians talk about their “procurement though policy” issues, whether that is supporting smaller firms, local business or even social value goals.
- Protectionism does not encourage innovation or competition. If domestic firms are protected or know they are going to win government contracts come what may, why would they bother to compete with the best in the world, innovate, become more efficient and so on? We wrote a three-part story recently which was published on Spend Matters UK/Europe to demonstrate this fact from a very local level. If you haven’t seen it, take a look here, here and here.
- Protectionism opens the door to corruption, unfairness and a lack of transparency in public procurement. In most cases, these protectionists attitudes introduce a subjective element into procurement processes, because we are favouring some bidders over others based on factors that are not objectively related to the value proposed in the bid. So that can become a camouflage for decisions being made in reality based on payments to the buyer or political favours perhaps.
Now some economists argue that in certain situations, some protectionist behaviour and policy is positive and can help perhaps an industry get initially established in a particular country, with long-term benefits. There are also arguments that countries want to retain some capabilities for strategic reasons (perhaps in the defence industry) and will protect those businesses accordingly.
Those arguments are valid, and equally the benefits of free trade are dissipated if countries “cheat the system”, for instance by dumping products on the export market or providing unfair subsidies to exporters. It is easy to see why that behaviour leads to calls for protection.
But the problem is that we could easily get onto a slippery slope. If one country starts using public procurement in an overtly protectionist manner, then there is likely to be retaliation from other countries. And where does that all end? European governments refusing to buy software from Microsoft, IBM or Oracle while the US public sector dumps SAP? The end – or severe downsizing at least – for big exporting firms like Rolls-Royce, Siemens, Boeing? African countries wasting billions as politicians’ cronies are given subsidies to build factories and make products that will never provide comparative advantage to that nation?
That is where the “buy local” movement eventually ends up if you take it to the logical extreme. Whilst we are a long way off that now, we should remember that there are strong rational and philosophical reasons why we should be cautious every time the politicians or media start talking positively about their favourite “Buy Europe / USA / Australia / Ghana” initiatives.