Protectionism

One of the things that has been heartening about the current crisis is that the world has not lapsed into wholesale protectionism, as occurred during the 1930s. However, this observation, which is frequently made (including by myself), ignores the fact that it actually took a while before protection really got going after 1929. Smoot-Hawley (passed in June 1930) is not really a counter-example, since this represented the culmination of a process that had been in the works since the Presidential campaign of 1928. Elsewhere, the British only broke with free trade in 1931, and Ireland held out even longer. If the world economy were to keep falling at its 2008-9 pace for 2 or 3 years — a scenario that seems to have been averted (touch wood) — who knows what would happen.

That politicians would in such a scenario find it difficult to hold out against the pressures to which they would be subjected is reinforced by this report on the creeping protectionism which has been occurring around the world. The column uses the word ‘juggernaut’, which is presumably a reference to Richard Baldwin’s point that over the past few decades, free trade has been gathering momentum as it creates new outward-oriented constituencies with a vested interest in maintaining open markets. Historically, this juggernaut has more often operated in reverse — think of the long run effects of the Napoleonic Wars in France or the US, or World War I, or the Great Depression. In these cases, disintegration created new companies selling to internal markets who depended on protection for their future well-being — and thus created a powerful political mechanism for ‘locking in’ disintegration.

I don’t think that the juggernaut, which has been rolling in a free trade direction for decades now, has changed course yet. However, the Baldwin analysis suggests the possibility of ‘tipping points’ which might occur in various (hopefully unlikely) states of the world. Things which would make such states of the world less unlikely include major and persistent increases in unemployment, exchange rate misalignments perceived as conferring ‘unfair’ advantages on particular trading partners, and (especially) a combination of the two.

11 thoughts on “Protectionism”

  1. You left out one factor. Climate change hysteria. Waxman-Markey makes provisions and the current administration has left the prospect dangling.

    Nicolas Sarkozy is also a fan and EU policy on this might be in our future.

  2. Carbon trading is also at play.

    Further, much of China’s manufacturing is currently owned by non-nationals. The profits will flow globally, so the bias in creating protection has been reduced, significantly. Labour is at its weakest ebb, far weaker than in the thirties, in many jurisdictions but not in the EU or Australia.

    If the Afghan war can be expended to Pakistan, then many would-be unemployed will be donning uniform. One lesson of the protectionism in the thirties was that it was not so effective but that World War was. 50,000,000 dead and massive restructuring remedied the depression.

    Why engage in prrotectionism if you can get unemployable people to breathe in vaporized Uranium from modern munitions? It keeps unemployment rates down and stimulates manufacturing. Butter and guns anyone?

  3. One factor not discussed in the report is the role of FDI in trade, which is far greater now than during the 1930s. As governments take steps to attract mobile investment, it will lead to distortions of investment patterns and firm activities, resulting in costs that to my knowledge, we don’t have any estimates of. However, since the value of subsidiary production is several times that of trade, it seems possible that those costs will be large.

    Whereas we have many international agreements that limit trade protection, beggar-thy-neighbor policies related to FDI are largely unrestricted. To the extent that agreements do exist, they are of the “equal treatment” form that seeks to ensure that foreign firms are placed on equal footing with local firms. However, nothing stops governments from offering jobs programmes that apply only to job creation within its borders, grants to ensure investment (http://www.irishtimes.com/newspaper/breaking/2009/0923/breaking33.htm), and the like. Given the proliferation of such policies embedded within the stimulus packages rolled out across the globe, I think there is an argument to be made that we are already entering a protectionist era.

  4. Protectionism can also ne insidious, in a kind of “this time its different” way.

    For example Brian Cowen and others condemning cross-border trade shows how protectionist sentiments can creep into the national dialog without being highlighted as protectionist. This type of protectionism is not protectionism.

    Enough countries start talking like that and we have a problem

  5. @Ron

    I think the ‘argument to be made’ that we are entering a protectionist era re FDI is a weakish one, though can’t be dismissed.

    UNCTAD’s 2008 survey of Changes to National Laws and Regulations related to FDI indicates that 110 new FDI-related measures were
    introduced by a total of 55 countries. Of these, 85 measures were more favourable to FDI, while the percentage of less favourable measures for FDI has remained unchanged and stands at 23 per cent. While this data has not been updated yet post the dramatic turnaround in trade, going into the crisis the world was still very much in liberalisation mode. In fact, in a previous publication this year UNCTAD point to a possible wave of FDI that will come as Governments exit from many of the arrangements they are currently becoming embroiled in, similar to the privatisation wave that followed Eastern Euopean free market reforms.

    I think there is a danger in extrapolating from ‘Opel’ type examples, a mistake I frequently see in trade/FDI coverage over the years (the steel dispute in the US was meant to be a sign of the end of liberalisation too). These disputes are almost always conducted with megaphone diplomacy, keeping them front-of-mind.

    In any case, FDI (and trade) are now subject to many of the more recent bilateral trade deals (though not multilateral), so a country may have to tred carefully if it is to become truly protectionist.

  6. A classic case of a modern protectionist move was France’s decision in the 1980’s to route imports of Japanese VCRs through a minor port in the south-west of the country. Think of the hassle in using a third country to transfer shipments onto a vessel plying the small port route! The Irish State food agency Bord Bia, had a plan to launch a “Just Ask” campaign on the origin of meat served in restaurants, at the behest of the Irish Farmers’ Association (i don’t know if it was implemented). Seems harmless but protectionists in another market could claim Irish pigmeat is doused in dioxins.

    Some years ago, Democrats in the US Congress, at the behest of the Teamsters union, ordered a ban on Mexican trucks entering the US. Mexican trucks are permitted only along a narrow strip north of the border to transfer cargo to US trucks.

    High energy costs may be a bigger threat to globalisation than ad-hoc protectionist measures.

    While shipping costs have collapsed in recent times, in the first half of 2008, it cost US$8,000 to ship a standard 40-foot container from Shanghai to the North American east coast, including in-land transportation. That was up from just $3,000 in 2000 when oil was US$20 per barrel.

    The impacts of these rising costs were seen in capital intensive manufacturing that carry a high ratio of freight costs to the final sale price, such as steel production. Soaring transport costs, first on importing coal and iron to China and then exporting finished steel overseas, had more than eroded the wage advantage and suddenly rendered Chinese-made steel uncompetitive in the US market.

    I recall Peter Mandelson saying when he was EU trade commissioner that 70% of the tariffs paid by developing countries are to other developing countries.

    I get the impression from Asia that trade values are widely understated to reduce tariff payments.

  7. @ Michael Hennigan

    Good point. Best piece on energy cost implications for globalization I have seen is CIBC’s “Will Soaring Transport Costs Reverse Globalization?”
    from last year. Available here:

    http://research.cibcwm.com/economic_public/download/smay08.pdf

    Nevertheless, I think it’s worth highlighting the protectionism / trade distortion data and debate as Kevin was trying to, as well as thinking about broader potential barriers to globalization like energy costs.

    When thinking about protectionism, it also makes sense to think beyond simple tariff barriers which appear to be the focus of Evenett’s paper. Here I think China-based economist Michael Pettis’ blog is regularly instructive. http://mpettis.com An example is the post: “Trade – it’s not just the currency” (direct link seems to be broken, search for the article on the site)

    “One of the reasons why trade-related discussions can seem so off-the-mark, I think, is because the conditions governing international trade are much more complex than we often realize. The determinants of the international balance of trade basically include anything that affects domestic consumption and domestic production, which pretty much means nearly everything in economics. Among other things this means that there is a very wide range of government policies that can affect trade – sometimes explicitly and sometimes implicitly…To repeat, any policy that affects the relationship between production and consumption must affect the trade balance because the excess of production over consumption is the trade surplus (or deficit, of course, if consumption exceeds production)….This means that many policies that may seem on the surface to be purely domestic policies are actually trade policies too, and legitimately subject to scrutiny and even criticism from abroad. ”

    It would be interesting to see Evenett’s analysis broadened to deal with this wider conception of trade-related policies. My sense is that the picture would be even more bleak than he paints it when looking mainly at tariff barriers. And the chances of genuine policy coordination of the type he is proposing, even lower.

  8. When I was a garsun in short pants I remember sitting on my Nana’s knee as she the told me in graphic terms what happened after the US and the UK slammed the gates on Irish goods. Limerick ham was the first casualty, this was cured and smoked ham which sold well mostly in the US. The second casualty was beef which sold mostly to the UK. Overnight in 1932 40% + penalties on imports from Ireland were imposed first in the US quickly followed by the UK and other countries.
    Farmers’ were reduced to butchering their own pigs and putting them in salt barrels, the alternative was to kill them and bury them. Months down the road they simply gave away the salted bacon in return for a few spuds or whatever people had to barter with. Beef was even worse, at the cattle market every second Wednesday the jobbers bought cattle for a pittance. They then drove the cattle down to the bank of the Feale river beside the bridge on the road to Tralee, skinned them and threw the carcass into the river. In a nutshell the only market was for cattle skins which could be turned into leather, the rest of the animal was worthless. The family had a wood turning business, implement handles, wagon wheels and so on, business dropped over 90%, mostly repairs to previously sold goods. The lesson I learned from the people who lived through the dirty thirties was that Ireland is extremely vulnerable to the trade policies adopted by our trading partners and that protectionism can break out without advance notice. I hope this fleshes out the meaning of protectionism.

  9. I moved my previous post to O’Rourke- Protectionism which is where i should have put it in the first place. If someone can cancel it here please do so.
    Thanks

Comments are closed.