international analysis and commentary

Cycles of protectionism: repeating past mistakes

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We are currently entering a new rhetorical era, in nearly all OECD countries, concerning the role of globalization in the promotion of economic growth and prosperity. The new “wisdom” is that globalization got out of hand in the past few decades. Countries integrated too much with each other and that opened up vulnerabilities and insecurities that will prevent the future success of the global economies. No country is blamed more for this outcome than China, which is now viewed by many as an economic dynamo intent on using its dominance as the largest economy in the world (in PPP terms) to supplant not only whole industries but also the power structure in the world’s economy.

 

The anti-globalization trend has always lingered in the background and there were other times, such as during the WTO protests in 1999 (the “No Global” movement), where it could have supplanted the popular support for globalization. However, the 9/11 attacks in the US in 2001 turned attention away from economic matters and it took another decade or more for these sentiments to resurrect themselves. Momentum picked up after Trump became US President because he immediately withdrew the US from the Trans-Pacific Partnership, blatantly violated WTO commitments by initiating extremely high bilateral tariffs on imports from China and continued US efforts to undermine support for the WTO by refusing to appoint appellate judges and thereby cripple the dispute settlement system.

 

Read also: The past and future impact of Trump’s tariffs

 

Despite criticizing many of these actions, President Biden refused to reverse course when he was elected and instead doubled-down on the economic pressure against China. As recently as May 2024, Biden announced new 100% tariffs on Chinese imports of electric vehicles and raised other tariffs on advanced batteries, computer chips, steel and aluminum. The president’s claim is that these actions will restore US manufacturing of these advanced products and create more US jobs, especially high-paying union jobs.

Creating jobs has always been the promise of political leaders, who have been trained to look at the world from the perspective of business and labor interest groups because these are the typical supplicants who continually jawbone the politicians. Were politicians to listen to consumer interest groups, or to economists, they would hear much more about the other effects their protectionist actions will cause, namely a reduction in product variety and higher prices. Indeed, when considering the full effects of protectionism, the losses to average Americans from higher prices and reduced quality will be much larger than the minimal job gains that will arise for a small minority of citizens.

For example, the much-discussed China shock, which refers to the several million jobs lost in the American economy due to trade with China during the past few decades, has been used to justify the reversal of policies today. The story told is that American workers have suffered greatly due to the unfair trade practices of the Chinese and therefore today’s protectionist actions are a necessary remedy.

However, this interpretation is largely wrong because it focuses on only some of the impacts. It is true that several million jobs have been lost, or displaced, due to trade with China. But these jobs were not lost quickly, but rather over several decades. If we consider the job losses measured monthly, rather than in the aggregate, then the rate of job losses during this time amounts to less than 20,000 jobs lost per month on average. That still may seem like a large number until one looks at the monthly JOLTs report issued by the US Department of Labor. This collection of data shows that in the normal monthly churning in the US labor market there are between 1.5-2 million jobs lost, due to firing and layoffs, every single month of every single year. Twenty-thousand lost jobs per month due to trade with China is less than 1% of the aggregate monthly total and is just a drop in a large bucket that would hardly even be noticed if attention was not constantly being directed there.

In contrast, economists have tried to measure the impact protectionism has on prices and incomes of average Americans. One 2016 study by Fajgelbaum and Khandelwal, estimated the effects upon real incomes in OECD countries of openness to trade versus no trade. In other words, what is the effect on worker’s incomes because a country is open to international trade? Their results suggest that the real income of all working Americans is about 8% higher because it trades internationally. Their study went further though, highlighting the different effects that would occur for workers in different income brackets. For the 10 percent of workers with the lowest incomes, the effect of trade openness was an almost 70% increase in purchasing power.  The way this is felt by these workers is in the lower prices they pay for food, clothing and appliances at retail outlets like Walmart –   what I like to call the Walmart effect.

Because the protectionist actions against China are bilateral, levied against China alone, trade will be diverted to other developing countries like Vietnam and there will be little to no job creation effects in the US. However, if broader future actions occur, the study implies that closing off trade will make poorer workers even poorer, not richer. The few workers who might secure a good union job because of Biden and Trump’s protectionist actions would be paid for by lowering the standard of living of the most vulnerable.

Additionally, the trade policies pursued by both US political parties are fueling uncertainty because of their failure to adhere to the rule-based international order.  Like or dislike the WTO, one of its key advantages is that it offers a set of guardrails, such as maximum tariff rates, that make international trade decisions easier for businesses. While Biden’s administration does not have a well-articulated trade plan, their instincts are inline with traditional Democrat policies supporting workers. Trump’s trade initiatives raise even more uncertainty though because his pronouncements are more haphazard and it’s not clear he believes in much more than the naive “exports-good, imports-bad” view of the world.

 

Read also: Green lighting from America: the green transition and Transatlantic ties

 

In time, the economic instabilities caused by extreme national indebtedness – this is another big problem we are facing in the US in the most OECD countries – will cause economic growth to stagnate and decline. This decline may be inevitable (for demographic reasons and due to the structure of mature economies), but it will be made worse if the world chooses to insulate itself from competition via protectionist actions.

Once this economic downturn occurs, we are then likely to see a revival of interest in trade liberalization, just as we saw in the mid-1930s after the infamous Smoot-Hawley tariffs and subsequent retaliations contributed to the lengthening of the Great Depression. Protectionism follows liberalization which follows protectionism.