Why protectionism spells trouble for global economic growth

trump 2019.jpg

UN Photo/Cia Pak President Donald Trump of the United States addresses the seventy-third session of the United Nations General Assembly.

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Jonathan D. Ostry, Deputy Director, International Monetary Fund (IMF)


It is sometimes alleged that for all the microeconomic distortions that protectionist policies inflict, there can be a silver lining in terms of macroeconomic gains: more jobs, more output and a stronger trade balance. Indeed, some economies today are seemingly using commercial policy to pursue macroeconomic objectives. Tariffs can dampen imports, boost net exports (the difference between exports and imports, or the trade balance), and so boost GDP, other things being equal.

Economists, however, have generally been skeptical. Since the time of Adam Smith (or maybe even before), open and competitive markets have been seen as most likely to maximize output by directing resources more productively. Tariffs, on the other hand, encourage both the deflection of trade to inefficient producers and smuggling in order to evade them; such distortions reduce any beneficial effects. Further, consumers lose more from tariffs than producers gain, so there is deadweight loss. And the redistributions associated with tariffs tend to create vested interests, so harm tends to persist. Broad-based protectionism can also provoke retaliation, which adds further costs in other markets.

Moreover, economists believe macroeconomic policies (fiscal and monetary policies such as interest rates or the budget deficit) to be the natural instruments for achieving macroeconomic goals, such as raising growth and jobs. Tariffs are more likely to lead to offsetting changes in exchange rates that frustrate the achievement of macroeconomic objectives; less imports and a stronger trade balance increase demand for the domestic currency, and so its value.

The economic effect of tariffs

These results are for the full country sample as listed in Table 2 of NBER WP 25402/CEPR DP13389.

There is in addition a powerful lesson from history. Protectionist policies helped precipitate the collapse of international trade in the 1930s, and this trade shrinkage was a plausible seed of World War II. So while protectionism has not been much used in practice as a macroeconomic policy, most economists emphatically consider that this is as it should be.

But times change. Some economies today are using commercial policy seemingly for macroeconomic objectives. Can we say something about what the likely practical consequences of such actions are likely to be? In a recent study covering the vast majority of developed and developing countries in the world, and half a century’s-worth of macroeconomic data, we examined the responses of six key macroeconomic variables to changes in the tariff rate: real GDP, productivity, the unemployment rate, the real exchange rate, the trade balance and inequality.

We found that tariff increases have adverse domestic macroeconomic and distributional consequences: these effects are robustly and statistically significant, and are large enough in an economic sense to merit the attention of policymakers.

We also found that output (GDP) falls after tariffs rise because of a significant decrease in labour productivity. When firms in the import-competing sectors receive protection, resources are reallocated within the economy to relatively unproductive uses, and this is harmful to the added value generated by the economy. That is, the wasteful effects of protectionism lead to a meaningful reduction in the efficiency with which labour is used, and thus to a fall in output. Nor did we find an improvement in the trade balance after a rise in tariffs, plausibly reflecting our finding that the real exchange rate tends to appreciate as a result of higher tariffs (a prediction that is in line with theory and much earlier empirical evidence). We also found that protectionism leads to a small increase in unemployment, further bolstering the case against protectionism, and that tariff increases lead to greater inequality after a few years.

 

We found that the hit to economic growth from a tariff increase is more pronounced if the tariff increase is undertaken during an economic expansion. It is also larger for advanced countries than it is for developing countries. This is worrisome, since tariffs are currently being used as a macroeconomic instrument in buoyant economic conditions and in advanced economies.

To summarize: the aversion of the economics profession to the deadweight losses caused by protectionism seems warranted. While the case against protectionism has typically been bolstered by theoretical or microeconomic evidence, the macroeconomic case for liberal trade is also strong. Higher tariffs seem to lower output and productivity, while raising unemployment and inequality, and leaving the trade balance unaffected. These results are wholly consistent with conventional wisdom from standard economics, and bolster the case for free trade. Protectionism just weakens the macroeconomy.

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Ebola outbreak in DR Congo declared over, now let’s tackle other health challenges: WHO chief

For small island nations, climate change is not a threat. It’s already here

Accelerating a more sustainable industrial revolution with digital manufacturing

EU gas market: new rules agreed will also cover gas pipelines entering the EU

‘Cataclysmic events’ in Hiroshima, Nagasaki, began ‘global push’ against nuclear weapons says Guterres, honouring victims

MEPs and EU ministers agree on closing information gaps to enhance security

Stricter rules to stop terrorists from using homemade explosives

What the Corn Laws tell us about Brexit Britain

New EU short-stay visas: more advantages for legitimate travellers

President David Sassoli to visit Skopje: “Remain on the European track”

A Europe that protects: Continued efforts needed on security priorities

US resolution to condemn activities of Hamas voted down in General Assembly

World must ‘step up’, match Pakistan’s compassion for refugees, says UN chief

The world wide web is 30. Here are 8 things you should know about it

Can indoor farming feed the world?

WHO chief underscores need to address climate change following visit to Bahamas

Education expenditure in the EU not hurt much by crisis

Commission paralysed before the banking leviathan

India should ‘unlock’ freedom curbs in disputed Kashmir, urges UN human rights chief

Entrepreneurial leadership: what does it take to become a leader?

Commission launches two projects to support cooperation and innovation in Romanian regions and cities

EU’s unsparing question to UK: now what kind of future relations do you want?

World Television Day celebrates an integral part of modern life

The most unlikely innovators are changing ICT for development – it’s time we took notice

Youth2030: UN chief launches bold new strategy for young people ‘to lead’

The Red Cross’s health chief explains how business must respond to coronavirus

Relieving the suffering of dying: Home Palliative Care as a spiritual coping strategy

Cyclone Idai: emergency getting ‘bigger by the hour’, warns UN food agency

“We are in Europe, but not of it”, from Churchill to Cameron: British Exceptionalism now threatens the entire EU Edifice

We can use plastics to change the world for the better

Three reasons to be optimistic for the future of Asia

More than 3,400 classrooms damaged or destroyed by Cyclone Idai in Mozambique, says UN Children’s Fund

Solidarity Corps: more opportunities for young people

An ageing workforce isn’t a burden. It’s an opportunity

What if we did everything right? This is what the world could look like in 2050

After the Italian ‘no’ and the Brexit, Germans must decide which Europe they want

‘Crippling to our credibility’ that number of women peacekeepers is so low: UN chief

The India–U.S. trade dispute and India’s evolving geopolitical role

Why the ECB prepares to flood the markets with more and free of charge euro; everybody needs that now

Questions directors need to ask in the age of stakeholder capitalism

Decisive international action needed to end Israeli occupation: UN rights expert

Women still struggle to find a job, let alone reach the top: new UN report calls for ‘quantum leap’

‘Critical moment’ for sustainable development, UN chief tells major financing forum

How Japan and Singapore are reinventing old age

What the world will look like after the Iran and 5+1 deal; the US emerges as major power broker in Middle East

Hungary has made progress on greening its economy and now needs to raise its ambitions

Progress made in UN talks to end Yemen war, Envoy lauds ‘positive and serious spirit’

MEPs back first EU management plan for fish stocks in the Western Mediterranean

Coronavirus could worsen hunger in the developing world

6 ways to future-proof universities

MEPs adopt plan to keep 2020 EU funding for UK in no-deal Brexit scenario

Energy Union: EU invests a further €800 million in priority energy infrastructure

Frontline workers vaccinated in Uganda over Ebola fears, as top UN officials visit outbreak epicentre in DR Congo

UN rushes to deliver aid as key Yemeni port city is ‘shelled and bombarded’

Parliament boosts efforts to improve its environmental performance

New York to London in 90 minutes? These companies think it’s possible

Businesses are thriving, societies are not. Time for urgent change

COVID-19 shows we need a broader definition of safe mobility

Zimbabwe ‘facing worst hunger crisis in a decade’

Sweden well ahead in digital transformation yet has more to do

More Stings?

Advertising

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s