The lead story on the front page of the Washington Post today warns that trade barriers are making a comeback:
Moving to shield battered domestic manufacturers from foreign imports, Indonesia is slapping restrictions on at least 500 products this month, demanding special licenses and new fees on imports. Russia is hiking tariffs on imported cars, poultry and pork. France is launching a state fund to protect French companies from foreign takeovers. Officials in Argentina and Brazil are seeking to raise tariffs on products from imported wine and textiles to leather goods and peaches, according to the World Trade Organization.
The list of countries making access to their markets harder potentially includes the United States, where critics are calling the White House’s $17.4 billion bailout of the U.S. auto industry an unfair government subsidy that would put foreign competitors at a disadvantage.
Articles about the supposed comeback of protectionism have been a dime a dozen for the past six or seven years. I know because I wrote one in 2003. And yet, again and again, protectionism has failed to come back to any sort of world-changing extent (in part because it never really went away). I’m willing to grant that things might be different now—although, seriously, is there really anything new or surprising in the fact that “France is launching a state fund to protect French companies from foreign takeovers”? But the whole oh-no-it’s-the-Smoot-Hawley-Act-all-over-again-and-it’s-gonna-cause-another-Great-Depression line of reasoning just doesn’t convince me. At least not yet.
In search of a better description of what’s going on, I went to trade troublemaker Dani Rodrik’s blog. And sure enough, I found a much more interesting way of looking at the issue. Rodrik was discussing the Keynesian multiplier, the added economic oomph you get per dollar of deficit spending in recessionary times:
It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do–but should we really care if the alternative is significantly lower growth and higher unemployment? More to the point, will Obama and his advisers care? …
If American consumers decide to spend 40 cents of a dollar of additional income on cheap imports from China and other foreign countries, the multiplier will be a mere 1.3. How long will it take before politicians of all stripes cry foul over the leakage through the trade account and the “gift to foreigners” that this represents? And they will have Keynesian logic on their side.
The way out of this dilemma is to get the rest of the world to engage in fiscal expansion at the same time–so that the gift is returned. The good news here is that China is playing along and hopefully the Europeans will too (if they can convince Germans to get over their weird obsession with fiscal conservatism).
But most developing nations are constrained by weak fiscal fundamentals. They cannot play the fiscal stimulus game because their borrowing capacity is limited: external finance is drying up and domestic financial markets cannot absorb the increase in public debt without a sharp rise in interest rates.
Rodrik’s solution is to come up with some kind of big-time credit help for developing countries. I get the logic, but the politics of that may be extremely hard to manage (can you imagine Tim Geithner asking Congress for a few hundred billion dollars so Indonesians and Brazilians can afford to buy more stuff?). So yeah, maybe now I am starting to worry about the comeback of protectionism.