Is “Protectionism” Always Bad?

Every evaluation of a concept depends on the evaluator‘s point of view. At the latest, since the Great Depression of the 1930‘s the term protectionism has had a negative connotation, since its isolationism deepened the crisis. The so-called „liberal world order“ after World War II learned from that and saw in borders open for trade and, later, investment, together with Keynesian economic policies the antidote to the devastating Depression with its concomitant vast destruction of human lives and material cost. For more than 70 years, free trade and investment became the Western World‘s trump card for growth. „Free Trade“ was becoming fetishized as an aim in itself. It was sold to citizens as the „unique selling proposition“ („Alleinstellungsmerkmal“) of economic success for everybody. But starting in the first decade of the millennium massive protests against this order, epitomized by the violent protests at G-7, G-20 and Bretton Woods Institutions‘ meetings, the short-lived Occupy movement and soon also parts of academia (Stiglitz, Rodrik, Piketty among them) recognition became wider-spread that so-called free trade was not benefitting everybody, that while profits of large companies and banks soared, wages stagnated, work requirements became tougher, and the natural environment and the climate had suffered from the free-trade dogma. Populations in the Western countries lost trust in the „system“, in their politicians, in the complexities of this incipient new global order and fell for the simplified solutions offered by right-wing populist politicians – who promised „protection“. The „official“ system started to notice.

At the latest since President Trump’s shenanigans the term “protectionism”  has once more become the new taboo-word. His critics argue that his actions, impeding the “free-trade liberal market order” by cancelling trade agreements and levying new tariffs on goods, will hurt the world economy, without achieving his professed aim, to bring production and jobs back to the United States. Tump’s ludicrous arguments that existing or planned trade agreements and WTO trading rules have “exploited” US producers, insinuating that former US authorities (presidents and Congress) have been shortchanged by their trading partners, willfully ignores the fact that the US as undisputed global leader formulating these rules, shaping international financial institutions’ (e.g. IMF, World Bank, WTO an others) was the country which dominated global rules-making for the past 75 years, and broke them whenever they saw fit. Whether his actions will succeed to bring jobs back to the US is doubted by most economists. Imposing tariffs on imports, while generating additional demand in the US through expensive tax cuts, will most likely further increase demand for imports. And while the US economy is the largest in the world, it still does not produce everything that US businesses and consumers want. The recent outcry from electric scooter distributor Bird against the tariffs states that there is no US producer of these highly demanded vehicles. And whether the large car imports from Europe and Japan are only the result of “unfair” trade practices by these manufacturers (who have many production facilities in the US, in addition to the imports) or whether Americans do not desire smaller, efficient and highly engineered cars, is a no-brainer. Of course, this is not to deny that tariffs play a role in trade flows. Trump’s actions also ignore the fact that not only finished products are traded but that US manufacturers rely to an increasing extent on regional and global supply chains, whose interruption will hurt US businesses and consumers and jobs.

In order to label any restriction to existing trade and investment flows as protectionist, hurting economies in exporting and importing countries (“trade is mutually beneficial”, J. Sachs, FT 1..2018) one must assume that completely free trade is a good in itself. Just like the neo-liberals‘ tenet that “market is always good, and state intervention is bad in any case”, this argument elevates free trade to the position of a dogma: it does not need to be argued (as neo-classical economics has done for centuries), it needs to be believed.

However, we know today that the existing trade regime, while overwhelmingly having had positive effects on GDP growth in the past, it has left behind many population groups by raising income and wealth inequality, by increasing profit shares at the expense of falling wage shares, and by damaging the environment by excessive transport activities related to trade. „Hyper-globalization“ (Rodrik) needs to be reigned in, harnessed in order to proviede well-being to citizens and stop hurting the environment. It needs to be pushed under the umbrella of the universally-agreed Sustainable Development Goals.

Increasingly, Western countries are blocking merger and acquisition activities by (mostly Chinese) investors, citing national security concerns when acquirers wish to buy shares in high-tech and/or infrastructure industries: Canada, the USA, UK, Germany and others have most recently blocked such acquisitions, or have launched newly ramped-up scrutiny procedures against such acquisitions.

Behind these new “protectionist” activities by the former propagandists of “free trade” (which they still profess to pursue in general) is the struggle over rules-setting and economic domination, mainly directed against the rising power of China.

There is talk between th US and the EU to modernize WTO rules, in order to make it easier to block Chinese “rapacious” climb to technological global leadership (G5, the next-generation handy network, Artificial Intelligence solutions), with its purported dangers of geo-political exploitations.

Given the popular backlash against the global trading regime, the dangerous slide into nationalism and the inexorable (?) rise of populist leaders in the Western countries, but also in the Philippines, Turkey, Russia and China, a modernisation of the rules governing world trade must go much deeper than “against China”. China must be coopted by the West into formulating new trading and investment rules, lest they go their own way.

New trading rules which command the support of populations in home and host countries, need to respect the following:

1. As a principle trade must benefit the well-being of the populations, must be sustainable in economic, social and environmental terms to the same degree. Trade is no aim in itself, but an instrument to benefit populations and safeguard the environment and social cohesion.

2. The benefits of trade and foreign direct investment must go evenly to businesses and populations in home and host countries, both to highly skilled and less skilled workers.

3. To this purpose an “equalization fund” should be established, e.g. at the World Bank, into which a significant part of the gains from trade are channelled. These shoud be used to establish a more level playing field between trading and investing (both home and host) countries, by e.g. reinforcing social protection systems and higher wages in host (importing) countries and create training and job opportunities for workers in home countries whose jobs have been outsourced.

4. Environmental costs of trade must be fully costed (e.g. transport subsidies, external costs) and included into the trading system.

5. At the WTO level an advisory/scrutiny level for FDI should be established to provide legal/economic/environmental advice to host countries, in order to prevent the exercise of the superior leverage multinational companies have vis-a-vis host investor counties (as a negative example see the eventually aborted Investor Dispute Settlement Agreements of TTIP which has been changed in the recent CETA agreement between the EU and Canada, and been left out of the EU-Japan agreement). At the same time, this panel must ensure that “fair” taxes benefit the host country of foreign direct investments. This implies a more effective fight against tax evasion and tax shifting into low-tax jurisdictions. Multilateral Development Banks should not be allowed to agree and finance ventures registered in low/no-tax jurisdictions.

6. Such activities must not be denounced as “protectionist”, and thus be given a negative connotation. The power of definition must be with those who propose new “fair” trading rules, benefiting all groups of populations.

7. Protection of infrastructure of public services and of businesses of national importance must be given better status by new trading rules. Also cultural/historical identity protection against lobal competition must be assured.

8. As more private capital replaces official development aid, the scale between trade-promoting efficiency concerns and environmental and equity concerns of goods, service and capital flows must be tilted towards the latter. The Free-Trade dogma had its day for 70 plus years. The next 75 years should be devoted to more equity and environmental protection. The Sustainable Development Goals show us the way.


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Filed under Crisis Response, Global Governance, Socio-Economic Development

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