How much protectionism is good?

A European perspective on how protectionism is not a remedy or an economic strategy is found in this VoxEU piece which traces the history of the US Smoot Hawley tariff to present day dynamics. It avers that high tariffs in the 1930's had led to more unemployment in the subsequent years.

The post dwells on the general trend across the world on looking inward - on shielding importers and domestic manufacturers, on promoting self-reliance and shunning external reliance.

The example of Great Depression protectionism is instructive for the world today. We are yet again at a point in history when protectionism is on the rise – and when governments are considering (and already pursuing in some cases) ‘beggar-thy-neighbour’ policies in the belief that such measures will boost jobs and growth. “America First” seems to be the guiding ethos of US international economic policy. Europe is debating whether it needs ‘strategic autonomy’ in a post-Covid world, and China is accelerating its own ambition of creating ‘indigenous innovation’ by restricting markets to foreign firms. Many supporters of these concepts are not shy about the essence: shielding domestic economies from imports.

On the way forward, the piece warns that more protectionism is not the answer to the challenges countries are facing - more trade, openness and reduction of barriers are. 

Like in 1930, there are loud calls for more protectionism which, for the most part, draw on ideas and policy initiatives that were conceived long before the pandemic started. Even if these ideas are dressed-up in popular-sounding terminologies – ‘America first’, ‘strategic sovereignty’ or ‘value chain repatriation’ – they all boil down to the same intention: reducing imports and reducing dependency on others in the belief that such actions create more jobs and prosperity. The anniversary of the SHTA should remind us that protectionism can lead to unintended and unwanted outcomes, and that trade restrictions during an economic crisis would make the situation worse rather than better. There are very real challenges posed by the current crisis which need to be confronted directly.  Else we may prove Mark Twain correct yet again: “History doesn't repeat itself, but it often rhymes.”¹

However, this is easier said than done. Policy makers and political leaders face political consequences of their actions. This includes being answerable to their constituiences for the economic condition they are in. Arguments of economic efficiency and openness may not sell amidst growing unemployment. Losers in the business of open trade need to be addressed. Mere acknowledgement that there will be losers does not suffice. Whether compensatory programs are enough to turn the tide are debatable.

Again it is an issue of balance. How much does one liberalise, where and how? Can a calibrated system work? Can there be a rolling back of options? What about history and legacy - the most open societies were once highly protectionist in their initial years of industrial growth.

Neither unbridled protectionism nor the love for free trade is perhaps the answer. Then is it left for every country to chart its own course on the level of protectionism? That would lead to a chaotic world again. However, this is what multilateral negotiations are all about - how much to liberalise and at what costs.