Economists from MIT and the University of Chicago on who needs protectionism and why

Despite the fact that protectionism as a foreign trade strategy – this is the consensus of economists – is unprofitable in the medium term on the scale of economies, it exists and flourishes in the world. Economists at MIT and the University of Chicago offered their explanation of what is happening at the “micro level.” The effectiveness of political support for protectionism lies not in the protection of large industries or regions, but in the fact that it is able to protect the status quo for narrow sectors of the economy in which profitability is high for previously established reasons.

The phenomenon of protectionism in foreign trade seems to be one of the “eternal” topics in political economy. In economic science, debates about the harms and benefits of protectionism ended in the middle of the 20th century, and there is no theory describing the benefits of high tariff and non-tariff trade barriers for economies as a whole. This does not prevent national governments from paying attention to the benefits of free trade for decades, although the losses from trade barriers are already quite quantifiable and are estimated in shares of GDP.

A group of economists from MIT and the University of Chicago (Rodrigo Adeyo, Arnaud Costino, Dave Donaldson and John Stuer) in an article for NBER published data on a new approach to studying the problem: if the survival of protectionism as an idea is not explained only by the inertia of political thinking, it is necessary to describe it within the framework of political economy , what exactly makes the behavior of politicians who support protectionist policies under the slogan of “protection” rational.

The standard view of protectionism in the United States, the largest market for industry lobbyists in the world, particularly as outlined in the work of Dani Rodrik and John McLaren, and quite applicable to other major economies, assumes a banal but understandable link between politicians and protectionism. In its framework, politicians introducing protective measures in relation to a particular product “protect” industries, usually geographically concentrated in certain regions, in exchange for votes: votes are exchanged, primarily in states, which in the US political system can provide , for example, the success of a candidate in the presidential election, reduces the level of external competition for companies in the region – of course, at the cost of losses for all other consumers in the United States. Empirically, this theory is confirmed not only in the USA: the standard “waves of protectionism” and the rhetoric of “protection of national interests” are tied to industrial centers, the conditional “coal miners of Kuzbass” and “metallurgists of the Urals” are constant objects of “protectionism”, this is a global trend.

Meanwhile, as Adeyo and colleagues demonstrate in their work, based on an alternative approach to modeling the benefits and losses from protectionism in a specific economy (it was done on data on changes in the US trade tariff in 2017, on the eve of President Donald Trump’s “trade war with China” ), the logic “politicians buy votes from large industries, cities and states” is essentially not confirmed by these data. Assumptions that politically organized sectors of the economy (for example, with strong industry associations) or politically important regions with specific industrial concentrations benefit more from import tariff changes than others do.

But, Adeyo and his colleagues suggest, the analysis demonstrates that the most effective resources spent on lobbying for protectionism are specific narrow sectors and even companies (and their owners) that protect high incomes or profitability, including historically or by chance. The scale of the redistribution of wealth in the US economy during protectionism is enormous – as a result of the “act of economic protection”, this is the percentage of wealth of one person employed in the sector, $2.4 thousand per person per year on average and more than $5 thousand in the most suitable sectors of the economy (textiles, hardware and metallurgy) with average lobbying costs of $100 per employee per year. According to these calculations, they are higher than the scale of foreign economic losses: as Adeyo and colleagues write, “the pie may be smaller, but the larger piece is the one that goes to specific players.” In this light, we note that for the survival of protectionism, the invisibility of local, but expensive “protective” measures should be important against the background of seemingly global, but little meaningful measures to “protect” all industries – including those motivated by obscure geopolitical ideas: they earn, apparently, not on them.

Dmitry Butrin