Why protectionism spells trouble for global economic growth: For hundreds of years, competitive markets have been seen as most likely to maximize economic output.

• Author: Ostry, Jonathan D.
• Position: GLOBAL VIEW

It is sometimes alleged that for all the microeconomic distortions that protectionist policies inflict, there can be a silver lining in terms of macroeconomic gains: more jobs, more output and a stronger trade balance. Indeed, some economies today are seemingly using commercial policy to pursue macroeconomic objectives. Tariffs can dampen imports, boost net exports (the difference between exports and imports, or the trade balance), and so boost GDP, other things being equal.

Economists, however, have generally been sceptical. Since the time of Adam Smith (or maybe even before), open and competitive markets have been seen as most likely to maximize output by directing resources more productively. Tariffs, on the other hand, encourage both the deflection of trade to inefficient producers and smuggling in order to evade them; such distortions reduce any beneficial effects. Further, consumers lose more from tariffs than producers gain, so there is deadweight loss. And the redistributions associated with tariffs tend to create vested interests, so harm tends to persist. Broad-based protectionism can also provoke retaliation, which adds further costs in other markets.

Moreover, economists believe macroeconomic policies (fiscal and monetary policies such as interest rates or the budget deficit) to be the natural instruments for achieving macroeconomic goals, such as raising growth and jobs. Tariffs are more likely to lead to offsetting changes in exchange rates that frustrate the achievement of macroeconomic objectives; less imports and a stronger trade balance increase demand for the domestic currency, and so its value.

There is in addition a powerful lesson from history. Protectionist policies helped precipitate the collapse of international trade in the 1930s, and this trade shrinkage was a plausible seed of the Second World War. So while protectionism has not been much used in practice as a macroeconomic policy, most economists emphatically consider that this is as it should be.

But times change. Some economies today are using commercial policy seemingly for macroeconomic objectives. Can we say something about what the likely practical consequences of such actions are likely to be? In a recent study covering the vast majority of developed and developing countries in the world, and half a century's-worth of macroeconomic data, we examined the responses of six key macroeconomic variables to changes in the tariff rate: real GDP, productivity, the...