Protectionism and the Global Recession

Chris Milner

School of Economics and GEP

University of Nottingham

GEP School’s Conference

21st June, 2010

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

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) !

                                                                                                                                      

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

US Tariff Rates (selected articles), 1921 and 1930

Article 1921 1930

Raw sugar 1.25 cents/lb 2.5 cents/lb

Cattle free 3 cents/lb

Milk free 6.5 cents/gallon

Cream free 56.6 cents/gallon

Butter 2.5 cents/lb 14 cents/lb

Pig iron free $1.125/ton

Cotton free 7 cents/lb

Wool free 34 cents/lb

Source: Abraham Berglund, "The Tariff Act of 1930", American Economic Review 20 [Sept. 1930]  

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

Recent Trends in TradeWorld Merchandise Exports as a % of

GDP1820 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)

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

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)

Trade Policy Lobbying?

• 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)

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!

Barbie Doll Feenstra and Taylor (2008 Worth Publishers)

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!