Protectionism and the Global
Recession
Chris Milner
School of Economics and GEP
University of Nottingham
GEP School’s Conference
21st June, 2010
Introduction
• A ‘Buy American’ clause in US economic
recovery package proposed by President
Obama raised fears that the world would
revert to protectionist measures in
response to the current world recession
– only US iron and steel to be used in projects
funded by the package
– fear of a return to the trade policy responses
witnessed during the Great Depression of the
1930s
Introduction (cont)
• Fears of domino and retaliation measures
across large number of other countries in
response to domestic political pressures to limit
unemployment at home
– increasing number of sector aid packages, greater
incidence of anti-dumping measures and more buy
national programmes around world
– our own previous Prime Minister warned against US
bailing out struggling automakers, but also promised
British jobs for British workers!
• But danger that jobs protected by restricting
imports would be at the expense of job losses
(possibly even greater losses) in export sectors
– ‘An eye for an eye makes the whole world blind’
(Mahatma Gandhi) !
Smoot-Hawley Tariff Act
• This Act of June 1930 raised US tariffs to
historically high levels
– originally intended to help US farmers against
imports driven up by post - World War I
overproduction of agricultural goods
– the upward revision of tariffs extended across
other sectors as special interest groups
lobbied Congress during the Bill’s passage in
to legislation
US Tariff Rates (selected articles), 1921 and 1930
1921
1930
Raw sugar
1.25 cents/lb
2.5 cents/lb
Cattle
free
3 cents/lb
Milk
free
6.5 cents/gallon
Cream
free
56.6 cents/gallon
Butter
2.5 cents/lb
14 cents/lb
Pig iron
free
$1.125/ton
Cotton
free
7 cents/lb
Wool
free
34 cents/lb
Article
Source: Abraham Berglund, "The Tariff Act of 1930", American
Economic Review 20 [Sept. 1930]
Trade Collapse of 1930s
• By 1933 US imports had fallen to less than one-third of
their 1929 level
– but US exports also fell by 69% over this same period
– in 1933 one in every 4 American workers was out of a job
• Overall international trade also fell by about 66%
between 1929 and 1934
– unemployment rates ranged from 15% to 25% around the world
• The trade collapse was not due to trade policy alone
(some would argue it was a relatively small contributory
factor)
– but the consensus view is that protectionism was not a desirable
(certainly not optimal) component of a policy response to
depressed demand conditions
Recent Trends in Trade
World Merchandise Exports as a % of
GDP
1820
1870
1913
1929
1950
1973
1998
2005
1.0
4.6
7.9
9.0
5.5
10.5
17.2
22.7 (28.1 incl Services)
Theoretical Arguments for
Protection?
• First best
– none for ‘small’ countries, and limited number of
cases where international market power present
(through country size or international oligopoly in
specific sector)
• Second best
– where other objectives could be satisfied or market
distortions could be remedied by other (more
appropriate/less costly) policy measures
• Non-arguments
– eg cheap labour used by foreign producers
Welfare Effects of a Tariff (‘small
country case’)
• Redistributions
– from consumers to producers
– from consumers to government/tax authority
• Net loses
– production loss (from protection of inefficient
domestic producers)
– consumption loss ( from import restriction)
Trade Policy Lobbying?
• Pressures for
protection
– relative power of
producer and
consumer groups
– unions and labourintensive sectors
– constraints on use of
other policy
instruments
– retaliation
• Pressures for
liberalisation
– institutions and
negotiations at regional (eg
EU) and international level
( eg WTO)
– at national level
• growth of consumerism
• influence of multinational
corporations
• external pressure (eg
World Bank on developing
countries)
Assessment (1): Limited
Prospects for Protectionism
• Some economists/commentators advocate
intelligent use of trade policy to manage
adjustment costs of recession, but weight of
evidence and theory that countries should try to
avoid repeat of trade policy mistakes of last
major depression
• Limited by:
– experience ..’that erecting obstacles to trade will
make things worse.’ (Pascal Lamy, Director General,
WTO)
– international institutions (WTO, EU etc)
– greater costs of protection and threat of export losses
due to greater openness and interdependence now
(e.g. international supply chains)
– also more difficult to implement buy national policies
now!
Barbie Doll
Feenstra and Taylor (2008 Worth Publishers)
Assessment (2): Limited Immediate
Prospects for Multilateralism
• WTO members have been negotiating a
further Round (‘the Doha Round’)of
multilateral trade reforms since 2001, but
prospects for agreement still poor:
– complex agenda
– many WTO member states
– new powers at the table (China, India, Brazil)
– growth of regional trade agreements
– recession!