WTO data shows protectionism rising

Here’s a link to the WTO data showing G-20 protectionism is on the rise

It shows that between mid-October 2015 and mid-May 2016, G20 economies applied 145 new trade-restrictive measures, equating to an average of almost 21 new measures per month. Why the rising trend? We know protectionism is costly so what’s the best way to counter this?

I think the rising trend in protectionism we are seeing globally, let alone the protectionist rhetoric coming out of America ahead of their Presidential campaign, is a result of the Global Financial Crisis. There has always been an underlying protectionist streak in most countries based on the faulty  ‘exports good, imports bad’ mentality (partly fueled by the negotiation process itself, whether multilateral or bilateral). But this underlying protectionist sentiment got a kick along with the GFC.  The reasons are an obvious one and a subtle one.

The obvious one is the collapse in jobs in most major economies. Leaders correctly saw the protection danger and, citing the earlier experience of the Great Depression where trade collapsed in response to higher protection,  most communique’s from the various global meetings such as the G-20, implored governments to resist resorting to trade protection as a solution to the problem. By-and-large, this worked and overt rising protection  was avoided in the immediate aftermath of the GFC. But the collapse in domestic demand from the GFC ushered in a subtle, slowly creeping  protectionist force.

With a collapse in domestic demand and hence economic activity and jobs, that has proved to be unresponsive to low-interest rates, the obvious answer is to turn to external demand, that is net exports. The way to boost net exports is to devalue the currency – one of the ways easier monetary policy stimulates the economy. Devaluation is a legitimate and effective strategy when one country (or two) uses it. But it doesn’t work when everyone tries it in what economists call the ‘fallacy of composition’. Because the GFC was global, the ‘boost export strategy’ cannot work: everyone can’t increase their exports without someone increasing imports – hence, the headlines about ‘currency wars‘ as  experienced during the Great Depression. So the protectionism towards imports we are seeing now (often in the guise of trade remedy measures or local content rules) is a subtle consequence of the parlous macroeconomic situation most countries now find themselves in. The transmission mechanism of low-interest rates to higher domestic investment and spending is not working (a separate subject in itself) and because everyone can’t devalue against everyone else, the devaluation channel of easier monetary policy is ineffective too.  Taking a narrow self-interest view, it has proved too tempting for countries to try and keep out imports, whether by anti-dumping measures, local content plans or whatever.

Paradoxically, part of  the solution to lackluster growth is if countries get together, take a world view (which if everyone acts together is in their own narrow self-interest) and remove barriers to trade and investment. That will boost competition, improve productivity and boost growth and employment. That is, countries need to do the opposite of what they are doing now.