Protectionism Will Exacerbate Corona-Contraction

September 18, 2020

Matthew Rees & Phil Harvey recently wrote an article for RealClear Markets titled: Protectionism Will Exacerbate Corona-Contraction. You can read the full article here, and it’s also below:

Protectionism Will Exacerbate Corona-Contraction

Colombia and Albania would seem to have little in common. But they have been united since the Covid-19 outbreak in banning the export of a product that rarely finds its way into trade policy: toilet paper.

Thankfully, they’re the only two countries to have taken such action. But hundreds of other products have been ensnared by the protectionist impulse this year – many, but not all, tied to Covid-19. For developing nations in particular, the dangers are great: A sweeping retreat into restricting exports and imposing high import tariffs could exacerbate the current global economic slowdown and stifle the economic growth that reduces poverty. The early signs are not encouraging.

Developing countries have been subjected to hundreds of protectionist measures this year. The U.S. Commerce Department, for example, announced in April that it’s slapping anti-dumping duties on a few companies in India and Turkey that export quartz surface products used for home furnishings. A few days earlier, Commerce announced an investigation of mattress producers from Cambodia, Indonesia, Malaysia, Serbia, Thailand, Turkey, and Vietnam for allegedly selling their products “at less than fair value.”

But much of the protectionist activity has been undertaken by developing countries themselves. In July, for example, India announced restrictions on the imports of televisions, power tillers, and cut flowers. Argentina has announced import duties on gluten free infant formulas and urinary catheters. Turkey has raised import duties on outdoor plants and corks, while Egypt has banned the import of white raw sugar. Sri Lanka has imposed a 15-fold increase in the tariffs on select onions. And the list goes on.

More than 70 percent of the new protectionist measures have been subsidies and export measures (such as restrictions on what can be shipped out of a country), according to Global Trade Alert. Other tactics include tariff hikes and quotas. The sectors most targeted for protectionism this year have been pharmaceuticals, textiles, and medical/surgical equipment. But the next most common targets – cereals, apparel, plastic products, and vegetables – have a less direct connection to Covid-19. And therein lies the risk – that countries habitually resort to protectionism during emergencies in a short-sighted bid for economic security. There have already been health consequences associated with the restricted flow of goods. More than 70 countries restricted the export of medical materials, which meant that many African nations had limited access to diagnostic tests, according to John Nkengasong, head of the Africa Center for Disease Control and Prevention.

All of these actions come against the backdrop of the World Bank estimating that global growth will decline by 5-8 percent this year, pushing an additional 71-100 million people into extreme poverty. The latter figure would represent the first global increase in extreme poverty since 1998.

An expansion of protectionist policies, which are often adopted during economic downturns, would cause those numbers to rise. The trade war that broke out in the 1930s intensified that decade’s economic turmoil. And in just the past decade, the share of world trade impacted by policy-driven distortions such as export incentives, subsidies, and import tariffs, has risen from 40 percent to about 75 percent, according to United Nations data. In other words, the world economy is being splintered by the kind of mercantilist policies that depress economic efficiency and opportunity.
Add up all the protectionist measures throughout the world and the result will harm workers in exporting countries and depress economic growth nearly everywhere. We already know that global trade is projected to decline 18 percent this year, according to the World Trade Organization. And the United Nations projects that foreign direct investment flows will fall 30-40 percent. Those numbers could rise if the protectionist trend continues.

Why does this matter? Because the experience of the past four decades – from China, India, and elsewhere – demonstrates that expanding trade and foreign investment is essential to economic growth in developing nations. And economic growth is the most powerful and sustainable antidote to extreme poverty, helping more than one billion

people to escape it over the past four decade – the biggest and fastest rise in living standards in human history.

There is nonetheless going to be a temptation for policymakers to ramp up protectionist measures designed to “help” the poor. The risk is that these measures will take precedence over the trade liberalization that is going to help the poor the most. The poverty reduction over the past four decades is a monumental achievement. But there’s no guarantee the progress will continue. As the World Bank wrote recently, “the pandemic could alter the very structures upon which the growth of recent decades was built.”

The Covid-19 shock to the global economy is a test of whether policymakers have mastered the lessons from the past. Those lessons are crystal clear: Protectionism is a recipe for higher poverty, while market-based policies will help deliver the economic growth that fosters opportunity and prosperity.

Mr. Rees served in the Office of the U.S. Trade Representative. Mr. Harvey is the founder of DKT International.