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momentum needs to be rekindled and reaffirmed.
Although advanced economies historically have
tended to lead the way, it is important that large
emerging market countries now play a greater role.
This is appropriate given their growing prominence
in the global economy.
There are many approaches to dealing with the costs
of globalization, but protectionism is a dead end.
Trade restrictions address the symptoms and not
the underlying problems, and they introduce other
costs and distortions. While such measures might
generate temporary boosts to growth from greater
domestic production and consumption, these would
likely be offset by a range of other costs. Over time,
such measures would retard productivity growth and
thereby shrink the economic pie. As an illustration,
import substitution models that were pursued by
many emerging market economies following the
Second World War eventually led to lower long-
term growth outcomes. This was the experience in
India, which helped trigger the reforms of the early
1990s.
In assessing the benefits and costs of trade, it
is important to understand that a nation’s trade
balance reflects much more than its trade policy. Just
as important are the country’s saving and investment
spending proclivities, which are affected by many
factors, including tax and fiscal policies. For example,
in the United States, we have a chronic trade deficit
because domestic investment spending exceeds
our domestic saving. Foreign capital inflows make
up the gap. In this process, the foreign exchange
value of the dollar plays an important equilibrating
mechanism. If the domestic saving/investment
imbalance is unchanged, then any reduction in the
trade balance from higher trade barriers will be
offset by lower exports. The domestic currency will
appreciate to cause the trade deficit to widen to
accommodate the desired capital inflows. Thus,
trade restrictions affect the composition of trade
but not the gap between exports and imports, which
is determined by the difference between domestic
savings and investment. At the end of the day, the
protectionist country would produce more goods in
sectors protected by higher trade barriers but also
fewer goods for export.
The expectation that higher trade barriers would
save jobs ignores these critical second-round effects.
Moreover, the story may not end there. What
happens if another country that now faces higher
trade barriers responds by raising its own barriers?
That would push production even further out of
high-value-added exports that are now deterred
by the higher foreign trade barriers and into those
exports that face lower trade barriers, or into the
goods protected by the higher domestic trade
barriers. Raising trade barriers would risk setting off
a trade war, which could damage economic growth
prospects around the world.
Measures that raise trade barriers typically would
protect lower-wage, import-competing jobs, but
would also weigh on the prospects for jobs in the
more efficient export sector, which tend to be higher-
paying. The outcome would be countries producing
more where they have a competitive disadvantage,
and less where they have a competitive advantage—
the exact opposite of what we should be aiming for.
For example, in the United States, one of our largest
manufacturing exports is aerospace parts (which
requires skilled labor) and one of our largest imports
is apparel (which requires less skilled labor).
These second-round effects would also likely hurt
productivity growth. Scarce resources would be
used less efficiently and trade protection would
likely lessen the level of competitive pressure that
helps drive innovation. Moreover, lower productivity
growth would likely lead to a slower improvement in
a nation’s living standards over time.
This negative consequence of higher trade barriers
can be illustrated most starkly by the estimates of the
costs per job saved through protectionist measures.
Researchers that have studied this closely estimate
that the costs per job saved from protectionist
measures in the United States typically run into
the hundreds of thousands of dollars per year. To
illustrate, consider the case of import restrictions on
Chinese tires. The cost of a job saved was estimated
at $900,000 per year while the measures were in
place, or more than 20 times the average
worker’s compensation.
5
5 Hufbauer and Lowry, “US Tire Tariffs: Saving Few Jobs at High Cost”,
Peterson Institute for International Economics, April 2012