A Short-Lived Affair with the Protectionist Temptress

The world will, in the end, reject the deceptive comforts of the protectionist temptress. Yes, India did recently raise tariffs and place other restrictions on some imported steel products, and Ecuador raised tariffs by 5 per cent to 20 per cent on 940 different products. There have been similar actions in other countries and more are likely in the months ahead.

But that kind of “backsliding” is permitted under World Trade Organisation rules. The WTO affords some flexibility to governments to occasionally indulge protectionist pressures, which allows the system to bend rather than break. The risk of such measures causing a perceptible drop in global trade flows is remote.

According to recent estimates from the International Food Policy Research Institute, if all WTO members raised all tariffs to their maximum allowable rates, the value of global trade would fall by 7.7 per cent over five years. That’s a substantial decline from the 5.5 per cent yearly rate of growth during this decade, and would be quite painful.

But, to put matters in perspective, global trade plummeted 66 per cent during the protectionist pandemic in the first half of the 1930s. The absence of rules in the 1930s meant that there were no proffered courses of action, no sources of adjudication or remediation, and no limits to the actions governments could take in response to external economic policies. Today, we have rules and respected institutions that have worked reasonably well to ensure the integrity of the trading system. Nearly 400 disputes have been resolved successfully during the 14-year history of the WTO, and there have been no trade wars.

In the 1930s, there were far fewer domestic constituencies advocating against protectionism. Today, there are burgeoning interests in a diversity of countries who favour lower tariffs because their livelihoods depend on access to imported raw materials, components and capital equipment. The fact that most WTO members’ tariffs are well below their maximum allowable rates suggests that something besides the rules compels openness to trade.

Perhaps it has something to do with the fact that trade barriers are costly to the country imposing them. Higher prices, fewer choices, lowerquality goods and services, and the absence of competition to motivate local business have always been ingredients of economic stagnation. But the proliferation of transnational production, cross-border investment, multinational joint ventures, and equity tie-ups has rendered the “us versus them” characterisation of global competition less applicable.

Global commerce is less “our” producers competing against “their” producers as it is a competition between global supply chains to produce and deliver products in multiple countries. The most successful supply chains encounter the fewest frictions – physical and administrative, including trade barriers.

While “Buy American” proponents perpetuate the myth that imports have destroyed US jobs, there is astrong correlation between imports and job growth, and between imports and economic growth.

That dynamic is easier to appreciate when one considers that 55 per cent of all US import value in 2007 consisted of raw materials, intermediate goods and capital equipment – the kinds of products the construction and manufacturing sectors purchase. Put in this light, it is more obvious that tariffs raise the costs of production, which undermines economic growth – or, as in the current case, economic recovery.

Although governments might indulge in occasional protectionist trysts in the months ahead, a durable commitment to global engagement will emerge in the end.