Protectionism is back, above all, in the US. The driving forces behind it are xenophobia and nostalgia. Arguments can be made for a degree of self-sufficiency, for reasons of national security. But those arguments need meticulous assessment. This is not what has been happening, certainly not under Donald Trump. But though the tone is different under Joe Biden, the reality is not, alas. On the contrary, protection has become one of the few issues on which there is bipartisan consensus.
The communiqué issued by the leaders of the G7 stated that, "We have agreed ... to ... secure our future prosperity by championing freer, fairer trade within a reformed trading system". This papers over cracks between the US, increasingly doubtful about trade and, say, Germany, dependent upon trade for its prosperity, as is true of all the smaller high-income countries.
It is not surprising that a large country with a sophisticated economy and diverse resources, such as the US, tends to trade less intensively than smaller ones and so cares less about it. It gains many of the benefits of trade through internal specialisation. But, as Anne Krueger argues in her book, International Trade, trade has been the handmaid of economic growth, across the world, since the second world war.
Wicked practices
Moreover, even if trade is less vital for the US than for other members of the G7, this does not mean that the US is a hapless victim of the wicked practices of the rest of the world and especially of China. On the contrary, the resort to protection is like looking for keys under a street light, not because that is where they were lost, but because that is where it is brightest.
The US problem is that protection – a tax on the domestic economy, mainly consumers, for the benefit of producers – is a politically acceptable but ineffective substitute for a well-designed social safety net. Europeans have much to learn from the US, especially on innovation. But on how to combine open trade with personal economic security and so adjust to trade, they are far ahead.
In a splendid recent polemic, the economist Adam Posen takes the protectionist arguments head on. In particular, he notes, far from being exceptionally open to trade, the US is relatively closed. Far from having suffered an exceptional degree of opening over the past two decades, it has been retreating from openness. Far from having been exceptionally buffeted by imports from China, for each loss to Chinese competition, roughly 150 jobs were lost to "similar-feeling shocks in other industries". And far from being a unique victim of declining employment in manufacturing, the very same thing has been happening to all high-income countries.
No doubt, the US economy has suffered from high and rising inequality and a poor labour force performance, with the employment of prime-age adults increasingly lagging behind that in most G7 members. But these phenomena cannot be due to trade, since the US is less open than the others, even Japan. The true explanations include the emergence of new fortunes in innovative sectors, but also rent-extracting behaviour throughout the economy and, not least, absence of support for income and work (notably, on the latter, for mothers).
Industrial jobs
Why have the losses of industrial jobs been so politically salient? A part of the answer is that they were jobs of predominantly white and male workers. But it is also because, in the US, the absence of universal healthcare and next-to-no support for retraining and job-seeking makes the loss of a job mean also the loss of basic security. A modern economy becomes more flexible, not less, by separating security from a specific job.
In the absence of what Danes call “flexicurity”, protectionism may seem inevitable. But nothing is going to bring the old industrial jobs back. Robots are going to replace workers on production lines everywhere. Manufacturing will end up like agriculture - fantastically productive, while employing virtually no production workers. As Posen asserts, nostalgia is just not a sensible policy.
Apart from nostalgia and a search for security in the wrong place, there is xenophobia. But the days when China was the overwhelming force in supply of cheap manufactures have long gone. The debate now centres increasingly on national security.
There is a view, for example, that the pandemic proved the dangers of extended supply chains. The opposite is the case. After initial shortages, because demand was so unexpectedly strong, supply surged. Relying on one’s own production would not have solved this. There is a problem today with vaccine supply, but that is due to a global shortage of production capacity and the strength of demand from the rich.
Technological leadership
Yes, there is a case for maintaining technological leadership in vital sectors and for security of supply of essential products. But these concerns need to be defined and addressed with precision. Above all, in economic competition with China, democratic stability and investment in people, infrastructure and innovation will be the decisive factors.
Meanwhile, the continuation of trade across the world will not only cement mutual interdependence but underpin prosperity, especially for poorer countries, as the World Bank’s excellent World Development Report 2020, on supply chains and development, stresses. This is also compatible with tackling climate change, under the right globally agreed policies. The G7 is correct that the world trading system needs reform. But this must not mean destruction. We should not throw liberal trade away for the wrong reasons and in the wrong way. – Copyright The Financial Times Limited 2021
