Rising tides of protectionism will cause more harm than good
It has yet to be probed whether the global economic slowdown has led to the rise of protectionist trade policies, or it’s the other way around. Either way, the fact that protectionism is growing around the world should concern economists and practitioners alike.
International trade, which has invigorated global economic growth in past decades, is losing steam, and trade growth is forecast to remain sluggish in 2016. There is a shared perception among experts that changing this course requires going back to the basics to benefit more from trade. But on the contrary, what we are observing now are rising tides of trade protectionism, reminiscent of the typical common goods problem in the absence of well-functioning international coordination mechanisms. While sizable progress has been made on trade liberalization through bilateral and multilateral level efforts, we are also seeing much bashing of major trading partners, and mounting nationalistic harangues amid election campaigns worldwide. Beyond political rhetoric, the question is whether this trend is indeed ominous of growing protectionism on the horizon.
Although statutory and regulatory trade barriers have become significantly lower across the globe, protectionist measures are also being increasingly triggered as an official trade policy tool in recent years. From a political economy point of view, this may help safeguard the interest of domestic businesses against the seemingly unfair behavior of trade partners, but sometimes vested interests are behind the fair trade logic. Intense lobbying by affected domestic industries can influence governments to serve their interests at the expense of consumers, who are not as organized as businesses. Notwithstanding all these shortcomings, the current trend is likely to continue to increase until we come up with administrative tools that are more effective than the current ones.
Given its growing weight in global trade, Asia is increasingly becoming a prominent victim of the protectionist revival. According to ADB’s Asian Economic Integration Report 2015, up to 1,294 trade intervention measures were imposed on Asian economies between January 2010 and May 2014. Of the total, 517 came from Asia and 443 were remedial actions. The incidence of new impediments and intra-regional trade remedial measures has also grown significantly since 2012 (Figure 1).
One of the most commonly used trade protection measures is imposing duties against dumping, which happens when an exporting country sells a product below its fair value, causing a material harm to the domestic industry of the importing country; an extra import duty can then be imposed to bring its price closer to the ‘normal value.’ Other methods are countervailing and safeguards such as import quotas. All of these trade protection measures have been expanding rapidly in Asia since 2012 (Figure 2), when global trade growth started to lag. This might be because either rising protectionism is one of the causes behind sluggish global trade growth, or the stagnation of aggregate trade expansion is intensifying competition among trade partners.
Either way, even if it does not lead to reciprocal retaliation or the trade wars that have often occurred in the past, rising protectionism will surely reduce wellbeing on a global scale. Protection of domestic businesses is attained at the expense of domestic consumers, who enjoy more choices and lower prices with free trade. In addition, protectionism in the long run also hurts production by curbing the pressure from foreign competition. For instance, an analysis cited by The Economist suggests US anti-dumping policy reduces domestic consumption by 3%, an effect equivalent to a uniform tariff of 7%. Recent research also highlights growing trade intervention as one of the potential underlying sources of tepid international trade growth.
Some trade protection measures, though, are legitimate, seeking to restore fair trade by curbing unfair behavior in a world where only imperfect competitive markets exist. However, the abuse of protectionism serving the entrenched interests of domestic businesses will likely do more harm than good to global as well as national economies and their people. After all, the notion of free trade can be upheld only when collective wisdom wins over nationalistic perspectives. This, of course is easier said than done, and hard to expect from politicians with myopic perspectives aligned with election cycles.
Original article was published at the ADB Blog and duplicated here with permission from the author.