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Friday, October 16, 2009

"Myth of Rising Protectionism"

Dani Rodrik says that fears that the economic crisis would protectionist measures have largely gone unrealized, and that "much of the credit must go the social programs that conservatives and market fundamentalists would like to see scrapped":

Myth of Rising Protectionism, by Dani Rodrik, Commentary, Project Syndicate: There was a dog that didn't bark during the financial crisis: protectionism. Despite much hue and cry about it, governments have in fact imposed remarkably few trade barriers on imports. Indeed, the world economy remains as open as it was before the crisis struck.
Protectionism normally thrives in times of economic peril. Confronted by economic decline and rising unemployment, governments are much more likely to pay attention to domestic pressure groups than to upholding their international obligations.
As John Maynard Keynes recognized, trade restrictions can protect or generate employment during economic recessions. But what may be desirable under extreme conditions for a single country can be highly detrimental to the world economy.
When everyone raises trade barriers, the volume of trade collapses. No one wins. That is why the disastrous free-for-all in trade policy during the 1930s greatly aggravated the Great Depression.
Many complain that something similar, if less grand in scope, is taking place today. An outfit called the Global Trade Alert (GTA) has been at the forefront, raising alarm bells..." ... with China as the most common target. ...
The reality is that the international trade regime has passed its greatest test since the Great Depression with flying colors. Trade economists who complain about minor instances of protectionism sound like a child whining about a damaged toy in the wake of an earthquake that killed thousands.
Three things explain this remarkable resilience: ideas, politics, and institutions.
Economists have been extraordinarily successful in conveying their message to policymakers ― even if ordinary people still regard imports with considerable suspicion. Nothing reflects this better than how "protection" and "protectionists" have become terms of derision.
After all, governments are generally expected to provide protection to its citizens. But if you say that you favor protection from imports, you are painted into a corner with Reed Smoot and Willis C. Hawley, authors of the infamous 1930 U.S. tariff bill.
But economists' ideas would not have gone very far without significant changes in the underlying configuration of political interests in favor of open trade. For every worker and firm affected adversely by import competition, there is one or more worker and firm expecting to reap the benefits of access to markets abroad. The latter have become increasingly vocal and powerful, often represented by large multinational corporations. ...
But the relative docility of rank-and-file workers on trade issues must ultimately be attributed to something else altogether: the safety nets erected by the welfare state. Modern industrial societies now have a wide array of social protections ― unemployment compensation, adjustment assistance, and other labor-market tools, as well as health insurance and family support ― that mitigate demand for cruder forms of protection.
The welfare state is the flip side of the open economy. If the world has not fallen off the protectionist precipice during the crisis, as it did during the 1930s, much of the credit must go the social programs that conservatives and market fundamentalists would like to see scrapped.
The battle against trade protection has been won ― so far. But, before we relax, let's remember that we still have not addressed the central challenge the world economy will face as the crisis eases: the inevitable clash between China's need to produce an ever-growing quantity of manufactured goods and America's need to maintain a smaller current-account deficit.

Unfortunately, there is little to suggest that policymakers are yet ready to confront this genuine threat.

I don't think we should draw the conclusion that because social insurance helped to avoid destructive protectionism, the amount of social protection we provide is adequate. In many areas, e.g. adjustment insurance and health care, it isn't.

    Posted by on Friday, October 16, 2009 at 11:41 AM in Economics, International Finance, International Trade, Social Insurance | Permalink  Comments (16)


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