The Threat of Protectionism

More than twenty-five years of progressive liberalization of trade, from 1947 to 1974, saw unprecedented growth in world prosperity. Then the economic climate changed for the worse. Currency crises, oil crises, debt crises, world recession, and high unemployment produced an atmosphere in which demands for protection increased dramatically. The success of Japanese exports, and then of exports from the newly industrializing countries (NICs), produced pressure for changes in the older industrial nations. Such changes are painful when unemployment is high. Attempts to avoid the pain are the main cause of today's protectionism in the industrial countries. Trade in textiles was the first victim, followed closely by trade in footwear, leather goods, steel, shipbuilding, cars, and consumer electronics. Instead of tariffs, which are now very low, the main instrument of recent protection has been the nontariff barrier (NTB). It contravenes widely accepted principles of nondiscrimination and transparency in measures to restrict tradeprinciples which remain sound. NTBs usually discriminate against the lowest-cost sources of imports, so they raise prices to consumers and keep inefficient industries in business. The costs to the country imposing the NTB, and to the world as a whole, are higher than under an equivalent tariff. Moreover, NTBs are unfair, because they do not treat exporters equally. Often it is the exporters with the least bargaining power whose exports are most reduced. Although demands for protection have proliferated and the quantity of trade covered by nontariff barriers has increased, the effects on trade are not easy to quantify. Many trade barriers have proved porous: businessmen in the Republic of Korea and Hong Kong, for example, have to some extent overcome the restrictive effects of NTBs, and their exports of manufactures have continued to grow. But the latest Multifibre Arrangement (MFA) has broader coverage and tighter restrictions than its predecessors. New exporters will find its barriers harder to penetrate. If protection in the industrial nations increases still further, it will be hard for the developing countries to expand their exports. Although the developing countries have been able to avoid some of the effects of industrial countries' protection, the industrial countries themselves have not. Clearly the main costs of protection fall on the importing country. NTBs cause higher prices for consumers, lost tariff revenue for governments, inefficient resource allocation, and diminished competition. The pattern of trade cannot remain static. Since the early 1%Os developing countries have been increasing their exports not only to industrial countries but also to other developing countries. Today their exports account for nearly one-third of world exports to developing countries. They have also expanded trade with the centrally planned economies (CPEs), although these exports have stagnated in the past few years. But it remains unlikely that exports to these other countries will expand enough to lessen the importance of industrial country markets or the significance of the threat of industrial country protectionism (see Boxes 8.1 and 8.2). The international trading system since World War II has, at least in principle, been guided by the rules and procedures agreed to by the signatories to the General Agreement on Tariffs and Trade