The Economist

Stagnant economic growth and increased globalisation have led to criticism of free trade and greater support for protectionist policies, writes Stephen Walters.

The perils of protectionism

Unfortunately, sluggish rates of economic growth, social dislocation and growing resistance to global integration have led to a renewed push globally for protectionism. This is particularly so in the US and Europe, where political leaders are ventilating populist resistance to free trade and support for local industry, despite overwhelming evidence that protectionism simply does not work.

Putting up the shutters is seen by some as an easy solution but, as Prime Minister Malcolm Turnbull said at the recent G20 meeting in China, “protectionism is not the ladder to get us out of a low growth trap. It’s a shovel to dig that hole deeper and make the problem much more intractable.”

A recent study has indicated that dozens of restrictive measures on trade have been added globally each year since the global financial crisis of 2008–09. The crisis saw thousands of jobs destroyed and industries lost, but it also stoked pre-existing fears about the long-term effects of global integration. More recently, overcapacity in places like China has generated disinflation and made the global playing field far from even.

The dubious short-term benefits of imposing barriers and restrictions to protect local industry are superficially attractive, particularly to politicians who are regularly exposed to voters anxious about their jobs. Such policies can preserve local employment, but the benefits are almost always outweighed by the longer-term costs, which include higher prices for consumers, less choice, deteriorating fiscal positions and low productivity.

Recent attempts to wind back progress on trade liberalisation have contributed to a job-destroying constriction of global trade, which has grown by only 2 per cent in the past year. Academic studies show that economic growth is enhanced by more open competition and freer movement of capital across borders.

Policymakers have become so worried that they are speaking out. As the International Monetary Fund mourned the world economy’s inability to meet G20 leaders’ 2014 objective to lift growth by 2 per cent, the recent G20 gathering pushed back against the shallow objectives of protectionism. Officials are now worried that planned multilateral trade arrangements like the Trans-Pacific Partnership may be doomed.

Thankfully, Australian policymakers began knocking down the rickety walls of protectionism decades ago. For generations, governments had imposed tariffs on imported products and favoured import quotas and inflexible buy-local arrangements. These helped forestall adjustment, but ultimately failed to have any lasting impact. Indeed, manufacturing, a popular target for protection, used to represent 40 per cent of Australia’s GDP, but now accounts for about 8 per cent, despite all the efforts to protect it. Billions of dollars of so-called corporate welfare were also poured into struggling domestic industries, many of which were found to be uncompetitive. Thankfully, most of these misguided activities have ended. Politicians eventually realised that throwing good taxpayer funds after bad merely delayed the inevitable.

Australia has been at the forefront of the push for free trade, on the basis that it promotes growth and employment. Australia already has in place free trade agreements (FTAs) with China, the US, Japan and other major trading partners, and is now in negotiations to complete new agreements with both the UK and Europe, in the wake of the successful Brexit vote earlier this year.

Worryingly, there are signs that populist protectionism is making a comeback here too. For starters, there have been calls for a return to activist industry policies and misguided buy-local campaigns. And, since the federal election, there have been calls for taxpayer funds to be provided to struggling steelmakers and even for “free” milk to be given to school students to help ailing dairy farmers.

Modern protectionism takes other forms too. Billions of dollars have been directed towards local construction of submarines, when offshore construction is substantially cheaper. And, there is renewed resistance to foreigners buying assets in Australia, which ultimately starves local industry of expertise and capital. These measures are a false economy. The competition may ultimately contribute to the operation failing and jobs being lost, but this frees up underutilised capital for more efficient activities.