In one of my first contributions to this blog, I tried to define protectionism and deplored the lack of balanced and honest debate on issues surrounding international trade. I had almost forgotten my frustration during a lovely summer when I came across an online publication issued by the British Department for International Development (DFID). This collective report written by the so-called Trade Policy Unit dates back from 2009 but reflects the current fascination for free trade. Most contributors are renowned scholars and policy-makers but the tone is very much ideological – if not religious. The report’s title could be mistaken with that of a horror film (The Collapse of Global Trade, Murky Protectionism and the Crisis) and the opening paragraph sets the tone for the next 100 pages: “The Trade Policy Unit welcomes a strong academic debate on the best ways to address the dangers of protectionism, which poses a very serious threat to global prosperity”. In other words, the authors are open to debate as long as the discussion does not deviate from their ideological framework; the dangers of unimpeded trade and possible benefits of protection – addressed by a number of past and present economists including Alexander Hamilton, J.M. Keynes and Ha-Joon Chang – shall not be addressed. A very “strong academic debate” indeed!
Further down, a former IMF official – the usual suspects – praises trade liberalisation in a passionate fashion:
Since 1945, the world economy has experienced unprecedented growth [...] fuelled in significant part by the great liberalization of trade in goods and services, and by capital flows. Virtually all analysts and economic historians regard the reduction of policy trade barriers and of transport and communications costs as having been essential in spurring growth. Countries such as Korea, China and India have been able to make huge gains in living standards and the economic well-being of their people relying in significant part on the international market.
As touching as it may be, this statement is far from accurate. According to the author, free trade as promoted by the WTO and like-minded institutions since the Second World War is a powerful magic potion responsible for economic growth, employment, world peace and the alleviation of poverty. One question does come to mind: can it also cure cancer? On a more serious note, the economic history of the last sixty years is not as simple as many seem to suggest. Empirical studies on the links between trade openness and poverty show mixed results. Trade liberalisation is not always beneficial for the poor; some reckless liberalisation programmes have actually led to increased poverty and inequality in the developing world. Moreover, history teaches us that economic development and high tariff barriers can certainly coexist. In his book Bad Samaritans (which I reviewed a few months ago), Chang remarks that, despite being one of the most protectionist states in the world until the mid-20th century, “the US was also the fastest growing economy”. In fact, some countries praised in the DFID report for their trade openness – especially India and South Korea – still have particularly high tariff barriers.
What is it, then, that determines different trade policies across countries? My current dissertation research focuses on factors influencing trade restrictiveness. A simple statistical analysis demonstrates a strong positive relationship between trade openness and GDP per capita (see graph above). In other words, developing countries tend to be much more protectionist than industrialised ones. Besides, emerging economies tend to be very protectionist – especially in Latin America. Trade policy is also impacted by countries’ reliance on either imports or exports, in line with the infant industry argument developed by Hamilton, Raymond & List in the 19th century. In short, import-dependent states are more protectionist than export-led ones to shield their own industry from foreign competition; besides, government revenue from tariffs can help offset the trade deficit. The case of Nepal is particularly interesting: with its inhospitable environment and over 27 million inhabitants, this very poor country exports little else than carpets and herbs but has to import vast quantities of food, machinery and petroleum. Switzerland, on the other hand, enjoys one of the highest standards of living in the world and an export-led economy with a very strong industrial sector – it’s not just chocolate and watches. As one would expect, Nepal is one of the most protectionist states while Switzerland champions free trade. Keeping this in mind, it would be senseless and certainly disastrous to advocate the same trade policies for both countries.
Beyond the empirical evidence, the arguments found in the DFID report and elsewhere also pose a serious logical and almost philosophical problem. Indeed, most neoliberals cannot escape their ideological framework when it comes to trade. This one-size-fits-all approach relies heavily on a dubious yet unquestioned assumption. To put it simply, free trade should be praised as virtuous per se; in that context, denouncing protectionism is as natural as combating poverty or conflict. No need then for rigorous argumentation or consistent historical evidence.
Jagdish Bhagwati’s short contribution to the DFID report epitomises this flawed logic. As one of the most respected free trade apostles in the academic world, the Columbia professor has a very broad definition of protection which apparently includes most forms of government intervention and regulation – such as the taxation of multinationals. For instance, he criticises Obama’s urge for tougher labour standards in his dealings with Mexico as a “protectionist demand that is clearly aimed at raising costs of production”. Indeed, who cares about decent wages and working conditions, as long as “murky” protection is avoided? The end justifies the means, as the saying goes. Bhagwati’s article is not only questionable but also strikingly unscientific with religious and at times ridiculous language: protectionism is a “sin” and Obama should lead a “crusade” against this “dangerous virus”. Heretics like myself often wish pure free traders such as Jagdish Bhagwati applied the same conviction to defend world peace and social justice.