Protectionism

• 1. The Politics Of The Border

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  Protectionism is the economic policy of restricting imports from other countries. The tools are familiar in name but quiet in effect: a tariff levied on imported goods, an import quota that caps how much of something may legally cross a border, and a thicket of other government regulations. Frédéric Bastiat, who lived from 1801 to 1850, left behind a slogan that compresses the stakes into eight words. When goods cannot cross borders, armies will. Yet most economists today line up against the policy he warned about. There is a consensus that protectionism drags on economic growth and welfare, while free trade and the reduction of trade barriers push growth upward. So how did a policy economists distrust become one of the most enduring habits of governments? Why do tariffs keep returning after every crisis, from the grain invasions of the 1870s to the trade wars of the 2010s? And how did a single American tariff act come to be blamed for deepening the worst depression of the twentieth century? The answers run through palace economics, colonial shipping rules, AIDS drugs in Africa, and the voting maps of the United States Congress.

• 2. The Toolbox

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  Tariffs and import quotas are the most common protectionist policies. A tariff is an excise tax on imported goods, first imposed to raise revenue but now used mainly to shield domestic producers and wage rates from cheaper importers. An import quota caps the volume of a good that may enter, usually through an import licensing regime. The rest of the toolbox is wider than most people imagine. Governments protect technologies, patents, and scientific knowledge. They restrict foreign direct investment, including the acquisition of domestic firms by foreign buyers. Administrative barriers hide in plain sight. Rules on food safety, environmental standards, and electrical safety can quietly function as obstacles to imports. Anti-dumping legislation targets the practice of selling abroad at lower prices than at home, though in practice such laws are usually used to slap tariffs on foreign exporters. Direct subsidies, in the form of lump-sum payments or cheap loans, prop up local firms that cannot compete; export subsidies do the reverse, paying exporters a share of the value they ship out. A government can also manipulate its currency. By selling its own money in the foreign exchange market, it lowers the currency's value, raising the cost of imports and cheapening exports to improve its trade balance. The catch is that this works only in the short run, because it eventually feeds inflation that raises the real cost of exports again. Even patents draw suspicion here. Peter Drahos argues that states realized patent systems could be used to cloak protectionist strategies, attending the revisions of the Paris and Berne conventions and joining the cosmopolitan moral dialogue about protecting inventive genius, knowing all the while that the domestic intellectual property system was a handy protectionist weapon. Some campaigns are almost folkloric, like the Buy American push in the United States, an extra-legal promotion of domestic consumption. The Buy American Act went further still, federal legislation calling on the United States government to prefer US-made products in its purchases.

• 3. The Economists' Verdict

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  Stephen P. Magee, an economist, claims the benefits of free trade outweigh the losses by as much as 100 to 1. That lopsided figure captures the mainstream view, which leans on the principle of comparative advantage: free trade creates more jobs than it destroys because countries specialize in what they make best. Protectionism, by contrast, produces deadweight loss, a hit to overall welfare that benefits no one. A 2016 study found that trade typically favors the poor, who spend a greater share of their earnings on goods and so gain most when free trade cuts prices. Other research found that China's entry to the WTO benefited US consumers as Chinese goods grew substantially cheaper. The empirical work piles up in one direction. Furceri and colleagues concluded in 2019 that tariff increases significantly hurt domestic output and productivity. A prominent 1999 study by Jeffrey A. Frankel and David H. Romer found that free trade has a large, statistically significant positive effect on growth and incomes. The disagreements are about magnitude, not direction. Findlay and O'Rourke note a consensus that interwar protectionism hurt the world economy overall, while debating whether the harm was large or small. Dartmouth economist Douglas Irwin warns against confusing correlation with causation in the high-tariff late nineteenth century, writing that few observers have argued outright that high tariffs caused such growth. Brian Varian found no correlation between tariffs and growth among the Australian colonies, which each set their own tariffs. Even the case for protecting infant industries carries a sting in the tail. Economists concede tariffs can help young industries in the short term, but only if governments pick winners and then actually lower the tariffs later, two things they routinely fail to do.

• 4. Patents And The Sick

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  The Agreement on Trade-Related Aspects of Intellectual Property Rights, known as TRIPS, binds every member nation of the World Trade Organization to minimum standards for regulating intellectual property. It was negotiated at the close of the Uruguay Round of the General Agreement on Tariffs and Trade between 1989 and 1990 and is administered by the WTO. The World Bank has indicated that TRIPS has not produced a demonstrable acceleration of investment to low-income countries, though it may have done so for middle-income ones. Critics say the agreement limits governments from opening the door to generic producers. One of the most visible conflicts over TRIPS has been AIDS drugs in Africa, where patents helped keep drug costs high for public health programs. The fight did not rewrite TRIPS. Instead, the Doha Declaration was issued in November 2001, stating that the agreement should not stop states from confronting public health crises and allowing for compulsory licenses. After Doha, PhRMA, the United States, and to a lesser extent other developed nations worked to minimize the declaration's effect. In 2020 the same fault lines reopened around COVID-19 vaccines, diagnostics, and treatments. South Africa and India proposed a temporary WTO waiver to let more countries produce the vaccines, arguing that suppressing the virus fast benefits the entire world. Over 100 developing nations backed the waiver, but the G7 members blocked it. The blocking was condemned by 400 organizations, including Doctors Without Borders, and by 115 members of the European Parliament. In June 2022, after heavy European Union involvement, the WTO adopted a watered-down agreement that covers only vaccine patents, excludes high-income countries and China, and adds little beyond the flexibilities that already existed.

• 5. Borders And Bullets

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  Protectionism has been blamed as a major cause of war. The argument points to the constant warfare of the 17th and 18th centuries among European governments that were predominantly mercantilist and protectionist, and to the American Revolution, which arose ostensibly over British tariffs and taxes. The counterargument turns the logic inside out. Archaeologist Lawrence H. Keeley argues in his book War Before Civilization that disputes between trading partners escalate to war more often than disputes between nations that barely trade. The Opium Wars bear this out, fought between the UK and China over the right of British merchants to trade opium freely. For many users, recreation became a punishing addiction; those who stopped suffered chills, nausea, and cramps, and some died from withdrawal. Then there is the peace that trade was supposed to guarantee and did not. Barbara Tuchman says European intellectuals and leaders overestimated the power of free trade on the eve of World War I, believing the economic consequences of a continent-wide war would be too great to risk. Helmuth von Moltke the Younger proved them wrong. Warned of those consequences, he refused to even weigh them, insisting he was a soldier, not an economist.

• 6. Europe's Long Pivot

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  Adam Smith warned in the 18th century against the interested sophistry of industry, seeking advantage at the expense of consumers. Friedrich List read Smith as disingenuous, suspecting he championed free trade so British industry could lock out underdeveloped foreign rivals. The continent that produced both men spent the next century changing its mind. In the immediate aftermath of the Napoleonic Wars, Findlay and O'Rourke write, European trade policies were almost universally protectionist, with smaller countries like the Netherlands and Denmark as exceptions. Liberalization came in a wave. The repeal of the Corn Laws in 1846 marked the decisive shift toward free trade in Britain, a change driven partly by economists like David Ricardo and partly by the growing power of urban interests. A 1990 study by Harvard economic historian Jeffrey Williamson showed those laws had sharply raised the cost of living for British workers. The 1860 Cobden Chevalier treaty between France and the United Kingdom opened the floodgates. France and Belgium signed in 1861, a Franco-Prussian treaty followed in 1862, Italy joined in 1863, Switzerland in 1864, and a cluster of nations in 1865. By 1877 Germany had virtually become a free trade country, with average duties on manufactured goods on the Continent down to 9-12 percent, far below the 50 percent British tariffs of the post-Waterloo era. Not everyone followed. The Russian Empire and the Austro-Hungarian Empire stayed highly protectionist, and the Ottoman Empire grew more so after holding liberal free trade policies from the 18th to the early 19th centuries. Long after World War II reopened Western European economies, the old instincts lingered. John Tsang, then Hong Kong's Secretary for Commerce, Industry and Technology, observed in 2005 that the EU spent around 70 billion euros a year on trade-distorting support.

• 7. The Workshop And The Colony

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  The Navigation Acts of the late 17th century required all trade in England and its colonies to move on English-flagged ships crewed at least 75 percent by English subjects. The same laws barred British colonies from exporting certain products anywhere but Britain and forced their imports to be sourced through Britain, keeping them as dependent agricultural economies that fed raw materials to the metropole. The strategy worked spectacularly for the center. From 1815 to 1870 the United Kingdom enjoyed being the world's first modern industrialized nation, the workshop of the world, undercutting locally made goods in almost any market. By the 1840s Britain had turned toward free trade, and the Corn Laws, in force between 1815 and 1846, became the symbol of the old order. Sir Robert Peel, a Conservative prime minister, achieved their repeal in 1846 with Whig support, defying most of his own party. Free trade did not insulate Britain from others' tariffs. One study found Britain's exports in 1902 would have been 57 percent higher had all its trade partners embraced free trade, a shortfall that fed the late-Victorian climacteric, a deceleration in the economy's growth rate. Then Britain reversed course again. During the interwar era it abandoned free trade through a patchwork of laws, then passed the Import Duties Act of 1932, imposing a general tariff of 10 percent on most imports and creating the Import Duties Advisory Committee, which could recommend even higher duties. Lloyd and Solomou found this early-1930s protectionism to have been productivity-enhancing. The empire's accounting tells a starker story. British India, run by the East India Company, paid its own administrative costs and the cost of the large British Indian Army, yet returned only a small trading profit. The real flow ran the other way. In 1801 unrequited transfers, paid from Indian-collected revenue, amounted to about 30 percent of British domestic savings available for capital formation in the United Kingdom.

• 8. America's Three Eras

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  According to Douglas Irwin, US tariffs have served three purposes across history: raising revenue, restricting imports to protect producers, and securing reciprocity through trade agreements. Each goal dominated its own era, and the eras were split by two shocks, the Civil War and the Great Depression. From 1790 to 1860, revenue ruled, with import duties supplying roughly 90 percent of federal receipts. Tariffs were simply easier than the alternatives. Sales taxes provoked resistance like the Whiskey Rebellion, an income tax was a tracking nightmare, and imports funneled through a few ports such as Boston, New York City, Philadelphia, Baltimore, and Charleston, making collection simple and nearly invisible to the public. Thomas Jefferson ran the period's boldest experiment, a near-total embargo on maritime commerce from December 1807 to March 1809; Irwin estimates the static welfare loss at about 5 percent of GDP. The fault line was geographic. The export-oriented South backed a tariff for revenue only, pushing the average tariff under 20 percent by 1860, while the Northeast's textile and iron industries faced import competition and wanted protection. The Civil War flipped the balance toward the North and the Republican Party, opening the restriction period from 1866 to 1928, with rates climbing to 40-50 percent and staying there for decades. Irwin punctures the myth that high tariffs built America into an industrial power; as its share of global manufacturing rose from 23 percent in 1870 to 36 percent in 1913, the tariffs cost around 0.5 percent of GDP in the mid-1870s, and much of the real growth came from natural resources, immigration, foreign capital, and services like railroads. The era ended in catastrophe. The Tariff Act of 1930, the Smoot-Hawley Tariff, raised the average tariff on dutiable imports from about 40 percent to 47 percent, and deflation pushed the effective rate near 60 percent by 1932. Real GDP fell about 25 percent and unemployment topped 20 percent. Irwin argues the tariff was not the primary cause of the Great Depression but worsened it by provoking retaliation and shrinking global trade, with its most lasting damage being the resentment that pushed other countries into discriminatory trading blocs. The Democratic victory of 1932 launched the reciprocity period from 1934 to 2016, tariffs fell, and even Republicans came to back trade liberalization during the Cold War. That consensus cracked after the 1993 NAFTA vote, when the parties effectively swapped positions as the South turned Republican and the Northeast turned Democratic. In January 2017 President Donald Trump announced the US was abandoning the Trans-Pacific Partnership, vowing to stop the ridiculous trade deals that had taken companies out of the country, and President Joe Biden largely continued those protectionist policies, negotiating no new free trade agreements during his presidency.