“I think it would be quite disastrous, actually. Well I don’t think I should say disastrous because that is an excessive word and I should refrain from excessive words. But it would certainly have a negative impact on global growth…” –Christine Lagarde1
The “it” she’s referring to is protectionism, a theme which is clearly once again at the forefront of the political and policy discourse now, and which has support from the anti-establishment wings of both the left and the right. This time though, the protectionist sentiment has momentum, which is unusual in the post-WWII era.
In my opinion, Christine Lagarde, in all likelihood, is quite “certain” of the eventual impact of anti-globalization on growth, because there appears to be near-universal agreement on this point among economic practitioners. Frequently, on a politically-charged economic issue, respectable economic analysis and historical evidence exists to support both sides of the debate. Not so with respect to free trade versus protectionist policies; the economics community broadly agrees that free trade is pro-growth, and protectionist policies are growth-stifling. This conclusion persists despite decades of work trying to disprove it. Free-trade has been a bedrock economic principle since David Riccardo first formulated the theory of comparative advantage over 200 years ago. A widely-cited 2012 survey of economic experts by the University of Chicago Business School showed 96% of respondents agreed that “freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.”2
Every so often a wave of discontent surfaces in the political discourse which gives structural protectionist themes some airtime, but rarely does it last long in the face of stark, if intellectually snobby, evidence to the contrary. So why then does this particular groundswell of anti-globalization protectionist rhetoric appear to be so durable?
With every application of protectionist policies or reversal of them, over the short term within an economy there are households who benefit and those who suffer setbacks. The (virtually) undisputed free-trade economic theory would say that economic growth overall will be higher in each country with freer trade, but importantly the theory does not contemplate how that growth will be distributed within the economies. In several recent posts I have discussed the fact that the benefits of positive economic growth in the US and other developed economies are accruing now only to a minority of the respective populations, with a majority of the populations experiencing declining living standards despite the positive growth. Additionally, with freer trade between developed markets (DM) and emerging markets (EM), it is clear that a meaningful portion of this unequal prosperity in DM is due to lack of labor competitiveness for the DM middle-income workforce when compared to their EM counterparts.3 Labor and firms who are uncompetitive in an international context are those who fare poorly when trade policies are liberalized.4 The problem is, for a while now this group has represented a growing portion of DM populations. Because the economic growth in DM has been uneven, the theoretical benefits of free trade can still be present in aggregate, but might only felt by a fraction of the population which may be insufficiently large to win an election. This, I think, is new.
Voters on the left and on the right have been directly (negatively) impacted by free trade and have now had enough. Unfortunately, it’s not at all clear that enacting protectionist policies will simply run the process in reverse, benefiting the middle-income majorities at the expense of the top few percentiles. Theoretically, deadweight losses from tariffs, quotas, and subsidies would impact economies the way they have historically – socializing the costs fairly democratically (and quietly) across the consumption spectrum to the detriment of headline growth. However, the breadth of the popular discontent directly tied to free-trade legitimately raises the question: are there limits to the classical free-trade theory? The voters, at least in Britain, are prepared to find out.
4 In a particularly dense but noteworthy study, David Autor, David Dorn and Gordon Hanson were able to quantify the (negative) impact of increased US imports from China on workers in several US industries: http://economics.mit.edu/files/6613