Who Pays for Protectionism?

How soon we forget. ‘Experts’ have us so convinced that current economic sluggishness is ‘different this time’ that we are hyping the same failed remedies we used during similar conditions in the past. Sadly, protectionism is selling well these days, fed by widespread economic frustration. Blaming others – in this case, other countries – is a basic knee-jerk reaction. But it only makes sense if there are truly winners and losers. Data suggest all have suffered in the Great Recession’s wake, and that protectionism will only make things worse. If we go down that road, who pays?

It all seems reminiscent of the trade wars that erupted in the aftermath of the Great Depression. At that time, a blend of tariff hikes and currency devaluations sparked a sequence of retaliatory moves that helped to erase about one-quarter of world trade in just three years. Eight years on, world trade was still more than 10 per cent below the previous peak, despite the fact that overall production was 10 per cent above its previous peak. This strongly suggests a greater isolationism, at a heavy cost: By 1936, US GDP had only just clawed back to 1929 levels, and by 1938, it was still only 2 per cent above the previous peak.

It didn’t take long for us to forget the success of greater global integration. Protectionist rhetoric came to the fore in 2009, as some of globalization’s greatest beneficiaries embarked on ‘us-first’ policies. The ‘Buy American’ program was perhaps the most memorable, but France, China and others were quick to propose measures aimed at containing their heavy stimulus programs within their own borders. There was a rapid jump in global trade restrictions in 2009, and every year since, more have been added. The OECD estimates that there have been some 1,200 additional discriminatory trade-related measures imposed since 2008, which by all appearances is having a similar effect on global trade as in the 1930’s.

Trouble is, we have come a long way from the structure of international trade in those days. Technology has given us instant monitoring of currency movements, a check against competitive devaluations. To date, devaluations have been significantly lower than those of the early 1930s. Also, thanks to the efforts of the WTO and its predecessors, and nations that have devoted significant resources to securing bi- and multi-lateral trade agreements, average tariff rates today are many times lower than what they were in the 1930s. In addition, technology has enabled a vastly greater degree of global integration through complex supply chains, just-in-time logistics systems and many other mechanisms. Prior to the recession, the vast bulk of intra-Asian trade was in intermediate goods. Globally, the share of imported content in exported goods has risen significantly.

This integration has been essential to overall well-being. It has aided a prolonged period of low and stable price increases for basics like clothing right up to major appliances. Competition has encouraged technological development, which has significantly increased the quality of average goods and services. It has also brought many countries around the world, previously limited to trade in basic goods, into the global production system, with dramatic effects on overall growth and employment. Increased protectionism threatens these benefits.

So, who pays? Simply put, a higher cost of trade would instantly reduce demand for goods and services, as companies pass on higher costs at point of sale. Lower revenues would cause businesses to rationalize their expenditures, including labour costs. Investment would also suffer. And that’s just round 1. Initial anti-trade action always provokes retaliation, which magnifies these negative effects across countries. What is more, we likely have a lot more to lose than in the 1930s, given the tightly-knit intra- and inter-firm global linkages and the implied costs of undoing them. The sad fact? It’s all paid for by you and me and billions of other consumers around the world. It’s a lose-lose proposition, and we can only hope that it remains just that.

The bottom line?

Protectionism sells well – and then sells out an economy. Global anti-trade rhetoric will bump up against a reality that will harm the very ones that vote for it, if it goes through. We can all hope that we will not be spending the next years singing Santayana’s lament, but that current proposals will ultimately turn into something akin to an ineffective economic Maginot Line.

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