Protectionism and the Global Recession

1. Protectionism and the Global Recession Chris Milner School of Economics and GEP University of Nottingham GEP School’s Conference 21st June, 2010

2. Introduction • A ‘Buy American’ clause in US economic recovery package proposed by President Obama raised fears that the world would revert to protectionist measures in response to the current world recession • only US iron and steel to be used in projects funded by the package • fear of a return to the trade policy responses witnessed during the Great Depression of the 1930s

3. Introduction (cont) • Fears of domino and retaliation measures across large number of other countries in response to domestic political pressures to limit unemployment at home • increasing number of sector aid packages, greater incidence of anti-dumping measures and more buy national programmes around world • our own previous Prime Minister warned against US bailing out struggling automakers, but also promised British jobs for British workers! • But danger that jobs protected by restricting imports would be at the expense of job losses (possibly even greater losses) in export sectors • ‘An eye for an eye makes the whole world blind’ (Mahatma Gandhi) !

5. Smoot-Hawley Tariff Act • This Act of June 1930 raised US tariffs to historically high levels • originally intended to help US farmers against imports driven up by post - World War I overproduction of agricultural goods • the upward revision of tariffs extended across other sectors as special interest groups lobbied Congress during the Bill’s passage in to legislation

6. US Tariff Rates (selected articles), 1921 and 1930

7. Trade Collapse of 1930s • By 1933 US imports had fallen to less than one-third of their 1929 level • but US exports also fell by 69% over this same period • in 1933 one in every 4 American workers was out of a job • Overall international trade also fell by about 66% between 1929 and 1934 • unemployment rates ranged from 15% to 25% around the world • The trade collapse was not due to trade policy alone (some would argue it was a relatively small contributory factor) • but the consensus view is that protectionism was not a desirable (certainly not optimal) component of a policy response to depressed demand conditions

9. Recent Trends in TradeWorld Merchandise Exports as a % of GDP 1820 1.0 1870 4.6 1913 7.9 1929 9.0 1950 5.5 1973 10.5 1998 17.2 2005 22.7 (28.1 incl Services)

10. Theoretical Arguments for Protection? • First best • none for ‘small’ countries, and limited number of cases where international market power present (through country size or international oligopoly in specific sector) • Second best • where other objectives could be satisfied or market distortions could be remedied by other (more appropriate/less costly) policy measures • Non-arguments • eg cheap labour used by foreign producers

12. Welfare Effects of a Tariff (‘small country case’) • Redistributions • from consumers to producers • from consumers to government/tax authority • Net loses • production loss (from protection of inefficient domestic producers) • consumption loss ( from import restriction)

13. Pressures for protection relative power of producer and consumer groups unions and labour-intensive sectors constraints on use of other policy instruments retaliation Pressures for liberalisation institutions and negotiations at regional (eg EU) and international level ( eg WTO) at national level growth of consumerism influence of multinational corporations external pressure (eg World Bank on developing countries) Trade Policy Lobbying?

14. Assessment (1): Limited Prospects for Protectionism • Some economists/commentators advocate intelligent use of trade policy to manage adjustment costs of recession, but weight of evidence and theory that countries should try to avoid repeat of trade policy mistakes of last major depression • Limited by: • experience ..’that erecting obstacles to trade will make things worse.’ (Pascal Lamy, Director General, WTO) • international institutions (WTO, EU etc) • greater costs of protection and threat of export losses due to greater openness and interdependence now (e.g. international supply chains) • also more difficult to implement buy national policies now!

15. Barbie Doll Feenstra and Taylor (2008 Worth Publishers)

16. Assessment (2): Limited Immediate Prospects for Multilateralism • WTO members have been negotiating a further Round (‘the Doha Round’)of multilateral trade reforms since 2001, but prospects for agreement still poor: • complex agenda • many WTO member states • new powers at the table (China, India, Brazil) • growth of regional trade agreements • recession!