Self-Protectionism: The Politics of Trade

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“I’ve got a terrible problem with the grocery store – I give them money all the time, and all I get in return is groceries. It’s totally unfair!” That’s not a conversation you’re likely to have with anyone, but it captures the thought behind most politicians’ views on international trade. The mercantilist position that dominated seventeenth, eighteenth and much of nineteenth century thinking about trade saw money as the measure of a nation’s wealth. Imports were a source of concern because they had to be paid for with money, which then flowed out of the national treasury.

Adam Smith famously debunked that analysis in The Wealth of Nations back in 1776, and Smith’s conclusion that wealth should be measure by the things we have and the value we place on them – not the money we have to buy things with – has long since become accepted. Indeed, it is the one proposition on which economists of all stripes agree. The notion that there are “gains from trade” recognizes that trading to get things we value more than what we spend for them is good and increases, not decreases, our wealth. We understand that instinctively in our everyday lives. That’s why we don’t complain about our relationship with the grocery store.

At some level everyone now understands that money isn’t the best measure of wealth or well-being. But the public conversation about trade proceeds as if it is. From a political standpoint, exports are good (they bring money back home); imports are bad (money goes out the door); and more exports than imports is a terrible thing, presumptively showing that someone is behaving unfairly to produce that awful result. When politicians talk about “unfair” trade, they strictly mean trade that increases our imports or decreases our exports. It’s unfair because someone else winds up with more of our money and we just wind up with more things.

Trade politics stands ordinary sense on its head. As with the grocery store, things are what we want – they’re what we work to have. In the same sense, nations export to earn money to pay for imports (something less obvious in a country accustomed to borrowing vast sums from other people’s savings). But politicians’ desire for more exports is what moves them. The threat of reciprocal trade restrictions haunts discussions of the steps nations should take to combat the current economic crisis, with a 1930s style global trade contraction (trade fell by two-thirds in just five years) as the nightmare scenario no one wants to repeat. World leaders’ desires to keep markets open for their own export industries prompts somber warnings of the risks protectionism entails, most often in joint pronouncements like the one issued after last November’s G-20 meeting and again this week at the G-20 summit in London. But few of the leaders mean quite what they say in group settings like this, and fewer yet will take the hard steps needed to back up their rhetoric. The same leaders who warn that protectionist measures could risk sparking a global tit-for-tat of trade restrictions also promote or tolerate a wide variety of protectionist measures at home because they truly don’t appreciate the core case for open trade and truly do appreciate its political consequences.

Trade is the ultimate form of competition. Centuries of experiments have driven home the lesson that competition brings benefits no other system has been able to match. That message is scant comfort, however, to anyone forced to make difficult, sometimes personally devastating, changes to adapt to competition, and political forces almost everywhere tilt to protecting against those changes, especially when competition has a foreign face. In addition to tariffs – visible trade barriers still used by many developing nations to protect favored domestic industries – both developed and developing nations impose special licensing requirements on imported goods, tailor technical standards to disadvantage market-leading foreign products, and use competition law regimes to discourage competition by strong foreign firms. They encourage exports through rebate programs, impose health and environmental standards that lack scientific support, limit protections for the intellectual property of innovative firms, and exploit other regulatory and financial tools to favor domestic producers over more efficient foreign competitors.

Far from evaporating in the face of financial distress, the protectionist instinct shows every indication of growing stronger. The World Bank found that, in the first few months following agreement among G-20 leaders to eschew protectionist measures so they could combat the global economic crisis together, at least 17 of the 20 nations imposed new protections for domestic industry and agriculture. Argentina imposed new licensing requirements on auto parts, toys, and leather goods. Indonesia limited imports of clothes, shoes, electronics and food to just a few ports. The United States adopted a “Buy American” provision, though less sweeping than originally proposed, as part of its most recent stimulus plan. Russia placed new tariffs on auto imports. China banned Irish pork imports and limited other food imports. India banned toys from China. Both India and China increased export subsidies. France made it harder for foreign firms to take over French ones. And nearly every nation has given subsidies to industries to stave off the effects of the downturn, with finance and auto industries prominent recipients of new state aid.

As governments invest vast amounts of public resources in propping up weak businesses and trying to end the downward spiral of deleveraging, credit contraction, job losses, and reduced consumption, leaders face both popular anger at perceived misuse of taxpayer funds and intense pressure from domestic constituencies – not least, workers who see their jobs at risk. Both groups want money spent where it will be most effective, and, even more, where it will have the greatest prospect of coming back to them. Neither has much sympathy for spending that advantages foreigners. The public isn’t clamoring to cut off trade, much less to spark a trade war, but both the broader public and intensely interested groups strongly support measures that look to tilt the public money their way. The Buy American provision and President Sarkozy’s call for French auto makers receiving government funds to safeguard jobs in France are examples. With governments increasingly intertwined with once private firms, new requirements at odds with open trade – even if not boldly violating international legal obligations – inevitably will proliferate.

Judging by recent evidence, world leaders will boldly decry trade restrictions in general and even stand up to a popular domestic initiative on occasion, but few will be eager to give up protections that substantially advance their own political interests. The hard work for those who care about national success is to make political leaders understand why trade should matter so much to ordinary people, to workers whose jobs depend on letting markets work, to those who benefit directly from open trade and to those who benefit in a thousand less visible ways from the increased choices, improved products, and reduced costs that competition spurs. More than 230 years after Adam Smith, this remains a challenge far more serious than getting a good press statement at a summit. As the G-20 heads of state leave London, it takes real audacity to hope they will make good on what they’ve promised – again.

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