The myth of rising protectionism

CAMBRIDGE – There was a dog that didn’t bark during the financial crisis: protectionism. Despite much hue and cry about it, governments have in fact imposed remarkably few trade barriers on imports. Indeed, the world economy remains as open as it was before the crisis struck. Protectionism normally thrives in times of economic peril. Confronted by economic decline and rising unemployment, governments are much more likely to pay attention to domestic pressure groups than to upholding their international obligations. As John Maynard Keynes recognized, trade restrictions can protect or generate employment during economic recessions. But what may be desirable under extreme conditions for a single country can be highly detrimental to the world economy. When everyone raises trade barriers, the volume of trade collapses. No one wins. That is why the disastrous free-for-all in trade policy during the 1930’s greatly aggravated the Great Depression. Many complain that something similar, if less grand in scope, is taking place today. An outfit called the Global Trade Alert (GTA) has been at the forefront, raising alarm bells about what it calls “a protectionist juggernaut.” The GTA’s latest report identifies no fewer than 192 separate protectionist actions since November 2008, with China as the most common target. This number has been widely quoted in the financial press. Taken at face value, it seems to suggest that governments have all but abandoned their commitments to the World Trade Organization and the multilateral trade regime. But look more closely at those numbers and you will find much less cause for alarm. Few of those 192 measures are in fact more than a nuisance. The most common among them are the indirect (and often unintended) consequences of the bailouts that governments mounted as a consequence of the crisis. The most frequently affected sector is the financial industry. Moreover, we do not even know whether these numbers are unusually high when compared to pre-crisis trends. The GTA report tells us how many measures have been imposed since November 2008, but says nothing about the analogous numbers prior to that date. In the absence of a benchmark for comparative assessment, we do not really know whether 192 “protectionist” measures is a big or small number. What about the recent tariffs imposed by the United States on Chinese tires? President Barack Obama’s decision to introduce steep duties (set at 35% in the first year) in response to a US International Trade Commission ruling (sought by US labor unions) has been widely criticized as stoking the protectionist fires. But it is easy to overstate the significance of this case, too. The tariff is fully consistent with a special arrangement negotiated at the time of China’s accession to the WTO, which allows the US to impose temporary protection when its markets are “disrupted” by Chinese exports. The tariffs that Obama imposed were considerably below what the USITC had recommended. And, in any case, the measure affects less than 0.3% of China’s exports to the US. The reality is that the international trade regime has passed its greatest test since the Great Depression with flying colors. Trade economists who complain about minor instances of protectionism sound like a child whining about a damaged toy in the wake of an earthquake that killed thousands. Three things explain this remarkable resilience: ideas, politics, and institutions. Economists have been extraordinarily successful in conveying their message to policymakers – even if ordinary people still regard imports with considerable suspicion. Nothing reflects this better than how “protection” and “protectionists” have become terms of derision. After all, governments are generally expected to provide protection to its citizens. But if you say that you favor protection from imports, you are painted into a corner with Reed Smoot and Willis C. Hawley, authors of the infamous 1930 US tariff bill. But economists’ ideas would not have gone very far without significant changes in the underlying configuration of political interests in favor of open trade. For every worker and firm affected adversely by import competition, there is one or more worker and firm expecting to reap the benefits of access to markets abroad. The latter have become increasingly vocal and powerful, often represented by large multinational corporations. In his latest book, Paul Blustein recounts how a former Indian trade minister once asked his American counterpart to bring him a picture of an American farmer: “I have never actually seen one,” the minister quipped. “I have only seen US conglomerates masquerading as farmers.” But the relative docility of rank-and-file workers on trade issues must ultimately be attributed to something else altogether: the safety nets erected by the welfare state. Modern industrial societies now have a wide array of social protections – unemployment compensation, adjustment assistance, and other labor-market tools, as well as health insurance and family support – that mitigate demand for cruder forms of protection. The welfare state is the flip side of the open economy. If the world has not fallen off the protectionist precipice during the crisis, as it did during the 1930’s, much of the credit must go the social programs that conservatives and market fundamentalists would like to see scrapped. The battle against trade protection has been won – so far. But, before we relax, let’s remember that we still have not addressed the central challenge the world economy will face as the crisis eases: the inevitable clash between China’s need to produce an ever-growing quantity of manufactured goods and America’s need to maintain a smaller current-account deficit. Unfortunately, there is little to suggest that policymakers are yet ready to confront this genuine threat. Dani Rodrik, Professor of Political Economy at Harvard University’s John F. Kennedy School of Government, is the first recipient of the Social Science Research Council’s Albert O. Hirschman Prize. His latest book is One Economics, Many Recipes: Globalization, Institutions, and Economic Growth. Ends

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The myth of rising protectionism