The collapse of the Soviet Union and the rise of emerging markets 30 years ago were accompanied by a string of economic papers arguing nations that liberalized trade grew much faster than those that didn’t. Country after country followed that advice to fight recessions.
Three decades later, the phrase “trade liberalization” is often criticized as globalism. A new era of protectionism is being led by the world’s largest economy, the U.S., as it figures out how to extend an economic expansion.
Four International Monetary Fund economists—Davide Fuceri, Swarnali Hannan, Jonathan Ostry and Andrew Rose—decided to take a look again at the relationship between trade and prosperity, only this time by analyzing the impact of trade restrictions during a time of economic growth.
Specifically, they analyzed data from 151 nations between 1963 and 2014, looking for what occurred when tariffs rose by about 3.6 percentage points—small potatoes compared with the tariffs the U.S. is imposing on China, steel producers and others. The study didn’t take account of other trade restrictions, including nontariff barriers and retaliatory tariffs. Mr. Ostry, who decades ago worked on some of the trade-liberalization papers, said the IMF economists wanted to see what impact even a small increase would have.
The result: slower growth, more unemployment, higher inequality, exchange rate appreciation–and no improvement in the trade balance, which President Trump has said is his main measure of U.S. trade health.
Why the negative effects? Mainly because tariffs block competition, and reduce efficiency and productivity. Less productive economies prosper less, Mr. Ostry said.
Some of the IMF findings are counterintuitive. Advanced economies are affected more by tariffs than developing nations. Tariffs have a bigger impact when economies are expanding–choking off growth somewhat–than when economies are contracting.
Indeed, the economists find that trade restrictions boost growth somewhat during recessions. Mr. Ostry said that may be because firms that “couldn’t quite cut it at world prices, maybe could cut it under protectionist walls.” That was the theory Latin American nations operated under for decades before their economies slowed and they turned to liberalized trade.
Even so, Mr. Ostry said, he wouldn’t recommend protectionism as a strategy to cope with recessions.
“That mild stimulative effect comes at a cost,” he says. “It’s distortive and can reduce productivity, efficiency and welfare.”
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from Real Time Economics https://ift.tt/2qkrXGl
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