World trade: it’s not the 1930s

Doug Irwin’s paper is pub­lished in a (free) VoxEU book­let “What World Lead­ers Must Do To Halt The Spread of Pro­tec­tion­ism”, a col­lec­tion of short essays that I’ve pre­vi­ous­ly rec­om­mend­ed. In sum­ma­ry, he observes:

  1. Coun­tries today have many more pol­i­cy instru­ments now for address­ing eco­nom­ic crises. Dra­con­ian mea­sures were need­ed to achieve inter­nal sta­bil­i­ty when exchange rates were fixed (the ‘gold stan­dard’) and mon­e­tary con­trols almost non-exis­tent.
  2. In the ear­ly 1930s, coun­tries imposed high­er trade bar­ri­ers uni­lat­er­al­ly with­out vio­lat­ing any inter­na­tion­al agree­ments or antic­i­pat­ing much for­eign reac­tion.
  3. Today, unlike the ear­ly 1930s, for­eign invest­ment has trans­formed the world econ­o­my; phys­i­cal markets—like cred­it markets—are close­ly inte­grat­ed and pro­duc­tion is dis­persed across inter­na­tion­al net­works of goods and ser­vices sup­ply chains, mak­ing sim­ple bor­der pro­tec­tion a less obvi­ous ‘win­ner’ for e.g. ‘sav­ing jobs’.
  4. Unlike the ear­ly 1930s, the US—still the largest and most open econ­o­my— acknowl­edges its inter­na­tion­al respon­si­bil­i­ties and is pre­pared to exer­cise its lead­er­ship to pre­vent an out­break of pro­tec­tion­ism. [At least, we hope so—PWG].

These dif­fer­ences in the pol­i­cy envi­ron­ment and mar­kets are a rea­son to be skep­ti­cal that the dra­mat­ic bor­der pro­tec­tion of the 1930s will reap­pear. But that does not mean, of course, that gov­ern­ments will nat­u­ral­ly adopt appro­pri­ate poli­cies. There are still many oth­er mis­takes to be made (com­pet­i­tive sub­si­dies and ‘buy-local’ poli­cies in the name of fis­cal ‘stim­u­lus’ for exam­ple).

Still, there is one ques­tion now that is more or less the same as the ques­tions posed in the 1930s: will trade agree­ments help to fore­stall these pol­i­cy mis­takes and encour­age col­lab­o­ra­tive solu­tions? Or does our expe­ri­ence of the dis­ap­point­ments of Doha and the “essen­tial­ly direc­tion­less” WTO dis­cour­age us from once again turn­ing to the grand mul­ti­lat­er­al solu­tions that, even­tu­al­ly, allowed the lega­tees of the 1930s depres­sion to guide the recov­ery of the world econ­o­my (albeit more than a decade lat­er)?

Here’s a longer extract from Doug Irwin’s paper; but I encour­age you to read the whole thing.

Coun­tries today have many more pol­i­cy instru­ments now for address­ing eco­nom­ic crises. Gov­ern­ments then took no respon­si­bil­i­ty for prop­ping up finan­cial insti­tu­tions and were unable to pur­sue refla­tion­ary mon­e­tary poli­cies because of fixed exchange rates under the gold stan­dard. In fact, those coun­tries that remained longest on the gold stan­dard also imposed the most dra­con­ian import restric­tions (tar­iffs, quo­tas, and for­eign exchange restric­tions). They did so in an effort to reflate their econ­o­my and dis­cour­age imports from coun­tries with depre­ci­at­ed cur­ren­cies. Restric­tive trade poli­cies were at most a third-best or fourth-best pol­i­cy for address­ing econ­o­my-wide prob­lems, but coun­tries resort­ed to them because they lacked oth­er macro­eco­nom­ic pol­i­cy instru­ments, main­ly mon­e­tary pol­i­cy, to sta­bilise the finan­cial sys­tem and improve eco­nom­ic con­di­tions.

In the ear­ly 1930s, coun­tries imposed high­er trade bar­ri­ers uni­lat­er­al­ly with­out vio­lat­ing any inter­na­tion­al agree­ments or antic­i­pat­ing much for­eign reac­tion. Today, WTO agree­ments restrict the use of such dis­cre­tionary trade pol­i­cy by WTO mem­bers. And coun­tries that are tempt­ed to vio­late WTO agree­ments can have no illu­sion that they will avoid swift for­eign retal­i­a­tion if they choose to do so. If a coun­try is cer­tain that its exports will face new imped­i­ments abroad if it choos­es to impose WTO-incon­sis­tent import restric­tions, it will think twice about restrict­ing imports. How­ev­er, this threat applies with the great­est force to devel­oped nation WTO mem­bers, since the devel­op­ing nation mem­bers have either not bound their tar­iffs or bound them at lev­els that are often far above the actu­al tar­iffs applied. As such, devel­op­ing nations have plen­ty of room to raise pro­tec­tion with­out vio­lat­ing WTO com­mit­ments.

Unlike the ear­ly 1930s, for­eign invest­ment has trans­formed the world econ­o­my. Lead­ing firms around the world have become so multi­na­tion­al in their pro­duc­tion oper­a­tions and sup­ply chains that they have a vest­ed inter­est in resist­ing pro­tec­tion­ism. Many indus­tries that faced import com­pe­ti­tion in the past — such as tele­vi­sions, auto­mo­biles and semi­con­duc­tors — have found that inter­na­tion­al diver­si­fi­ca­tion or joint ven­tures with for­eign part­ners are a more prof­itable way of cop­ing with glob­al com­pe­ti­tion than sim­ply stop­ping goods at the bor­der. More­over, many domes­tic indus­tries no longer have much of an incen­tive to ask for import restric­tions because for­eign rivals now pro­duce in the domes­tic mar­ket, elim­i­nat­ing the ben­e­fits of trade bar­ri­ers for domes­tic firms. For exam­ple, unlike in the ear­ly 1980s, US automak­ers are not ask­ing for trade pro­tec­tion because it would not solve any of their prob­lems. They are diver­si­fied into oth­er mar­kets with equi­ty stakes in for­eign pro­duc­ers, and oth­er for­eign firms oper­ate large pro­duc­tion facil­i­ties in the US.

Unlike the ear­ly 1930s, the US accepts its inter­na­tion­al respon­si­bil­i­ties and is pre­pared to exer­cise its lead­er­ship to pre­vent an out­break of pro­tec­tion­ism. The strong eco­nom­ic team of pres­i­dent-elect Barack Oba­ma is like­ly to pre­vent the admin­is­tra­tion from impos­ing new trade bar­ri­ers. These key fac­tors dis­tin­guish the present era from the past. They have sus­tained polit­i­cal sup­port for an open trad­ing sys­tem and have pre­vent­ed the out­break of a glob­al­i­sa­tion back­lash.

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