Domestic Transparency Can Slow Resurgent Trade Protectionism

[The following article is a synopsis of a Hinrich Foundation Report published today, March 7, 2023.]

For six decades following World War II, governments reduced tariffs progressively and agreed to rules that would enable trade and investment to flourish. If ever there was a golden age of globalization, it was roughly the 15 years between 1993 and 2007. Protectionism was considered retrogressive and the convergence of multilateralism, technological progress, political liberalization, the reemergence of China, and the end of the Cold War begat larger markets, economies of scale, cross-border production sharing, and unprecedented increases in trade, investment, and economic growth.

Amid growing worries about the risks of supply chain interdependence and the strategic consequences of falling back from the technological fore, protectionism is shedding its stigma. It is being rebranded as a tool to make domestic economies more secure and more resilient by encouraging a repatriation of production, incubation and nurturing of domestic technology champions, and realization of broader industrial policy goals.

Resurgent protectionism – often imposed at the whim of U.S. presidents – suggests globalization’s golden age has given way to what are perceived as the necessities of great power rivalry. Considerations of economic optima and fealty to the rules of international agreements have taken back seats to national security, technological primacy, and other geopolitical objectives.

It’s not difficult to understand why the U.S. government might prioritize strategic aims. After all, the United States’ commitment to the multilateral trading system was borne of – and reinforced by – pressing strategic considerations, such as thwarting communism and Soviet expansionism. Moreover, it is the responsibility of any government to protect its people and preserve and pad its advantages for posterity.

Regardless of whether one sees merit in using trade policy to achieve security-oriented objectives, broader acceptance of government interventions for those purposes risks opening the door to all manner of petty protectionism. The public is prone to seeing trade through a nationalistic, “us-versus-them” prism. Incessant media oversimplification of the meaning of trade balances, trade agreements, and trade disputes drives home this idea that trade is a competition between Team USA and the foreign team. Protectionist measures are easily portrayed as sticking up for America and, accordingly, are often the path of least resistance for policymakers.

In reality, there is no monolithic U.S. interest in the outcome of a trade dispute or trade agreement. Out of self-interest, producers seek to minimize foreign competition, while the self-interest of consumers is to maximize competition and choice. Steel producers want high tariffs on imported steel, but that drives up production costs for steel-consuming manufacturers. Labor unions seek to limit foreign competition for government procurement, while the Buy American rules they wield ensure taxpayers get shoddy infrastructure at astronomical costs.

Protectionism is a domestic policy choice that imposes domestic costs on the domestic economy. Yet protectionism is often the default choice because policymakers hear disproportionately from interests seeking those outcomes. This asymmetry of information derives from an asymmetry of motivation to mobilize the resources necessary to influence the outcome. Protection seekers are usually smaller, better organized, more cohesive, and more capable of estimating the costs of pursuing protection and the value of its payouts than are the disparate groups upon whom those costs are thrust. Abetting this injustice is a paucity of domestic institutions committed to shining light on the benefits of trade and the costs of protectionist measures undertaken or under consideration.

Even among the internationalist architects of the General Agreement on Tariffs and Trade (GATT), the rules-based trading system was seen as a necessary but insufficient condition for restraining protectionism. The importance of trade and the benefits of openness would need to be reinforced at home, through trusted domestic institutions, or else the international rules would come to be seen as the dictates of a faceless, foreign bureaucracy that erode national sovereignty by pushing an unwanted, “globalist” agenda.

The absence of domestic reinforcement of the virtues of trade – it was presumed and recent history seems to confirm – would spawn and nourish constituencies for protectionism. The international rules alone cannot ensure trade openness and nondiscrimination, especially since democratic governments are first and foremost accountable at home, where protectionism can be popular and politically attractive.

Despite pledges from representatives of G-20 economies during the financial crisis and “Great Recession” in 2008 to refrain from protectionism, the number of “harmful interventions” (as reported in the Global Trade Alert database) by those governments in their economies averaged almost 2,300 per year between 2009 and 2021. These interventions include the introduction or amplification of domestic subsidy programs, export promotion subsidies, export restrictions, general tariff increases, trade remedies (such as antidumping measures), restrictions on foreign bidding for government procurement, restrictions on foreign investment, and several other categories. And how did things turn out?

During the golden age of globalization (1993-2007), the real value of trade increased 6.8% per year, as compared to an annual increase of 2.6% in the 15 years since. Real foreign direct investment flows grew by 21.3% per year during the golden age but decreased by 1.3% annually during the 15 years since. Real global GDP increased 3.4% per year during the golden age, but by only 2.5% per year ever since. And trade as a share of GDP grew by 3.2% annually during the golden age but has registered 0.0% annual growth during the 15 years since.

These comparisons indicate there is a compelling case for skepticism about protectionism, which should put domestic transparency protocols on any responsible government’s agenda. Transparency requirements can help governments wrestling with consequential trade and industrial policy decisions by ascertaining the likely benefits and costs of prospective policies and identifying and prioritizing the public interest.

That is not to say the concerns of those seeking reprieve from the consequences of intensifying import competition or desiring more time to adjust are illegitimate. Indeed, change can be disruptive, even tumultuous. Governments should be able to do for their people what they think is necessary to mitigate the social costs of rapid change, but those decisions should be made in a transparent environment, where the estimated costs and estimated benefits of proposed policy changes are understood before actions are taken.

Domestic transparency regimes have been implemented with good results in places such as Australia and incorporated piecemeal in some national trade remedy law protocols. However, they have failed so far to catch on broadly. Real commitments by governments to domestic transparency arrangements may represent the world’s best chance to beat back a gathering storm of protectionism and restore a healthy, sustainable level of global economic integration and growth.