February 16, 2016

The Return of Trade Protectionism

In this Mint article, Vivek Dehejia, Resident Fellow at IDFC Institute, writes about the return of trade protectionism, particularly in the run-up to the forthcoming US Presidential elections.


He observes that typically candidates facing elections lean towards trade protectionism during tough economic times and in fact "..one could argue that calls for protection often coincide with macroeconomic downturns or even macroeconomic and financial crises.


Excepts from his article are below


"The protectionist urge waned during the economic boom of the late 1990s that continued, with minor hiccups, until the global financial crisis of 2007 and thereafter. During the immediate aftermath of the crisis, attention focused on its macroeconomic and financial dimensions, with trade issues on the back burner.

But now that the US, in particular, appears to be on the path of economic recovery, albeit a slow and shaky recovery, attention has once again shifted back to trade issues, especially as they affect American workers (and voters).

The “new protectionism” preached today by Trump, Sanders, and even to some extent by incumbent president, Democrat Barack Obama, and Democratic front-runner Hillary Clinton, harks back very directly to the debate in the early 1990s..."


Vivek argues against the rising trade protectionism, he writes, "......even though a nation as a whole is likely to benefit from freer trade, in any sensible trade model, there will be distributional impacts, such that some groups gain while others lose. It is true that, if there are distributional impacts in the presence of aggregate gain, it is possible for the losers to be compensated and the winners to remain better off than before (in economics jargon, a “Pareto improvement”).

However, in the absence of a mechanism that accomplishes this—either through voluntary agreement or through redistributive taxes and transfers—the losers will, in fact, remain worse off, perhaps permanently or for a very long time.

The message, therefore, is that advocates for freer trade in advanced economies such as the US ought not to gloss over its potentially harmful distributive effects. Rather, if they are honest, they must concede that trade is likely to create losers just as it creates winners, even if the economy as a whole gains.

But, crucially, they must then pitch for sensible policy responses, such as adjustment assistance schemes and the like, which help mitigate, if not reverse, the losses, while also ensuring that such interventions do not cause the gains to dissipate."


The entire article can be accessed here

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