The effects of protectionism

Public Relations Office        July 26, 2017

Masakazu Sakaguchi

Professor, School of Policy Studies (International economics, development economics, finance)

Masakazu Sakaguchi, Professor, School of Policy Studies (International economics, development economics, finance)

Various events are causing concern about the “rise of protectionism,” including the separation of the UK from the EU, the birth of the Trump administration and the advances made by far right parties in the major countries of Europe.

Each country of the world has enjoyed the merits of free trade as it has grown and developed. If we look back on period of the just over 70 years since the end of World War Ⅱ the results show that it is the countries that have adopted open external policies towards others including free trade and investment that have had the highest growth performance. This is true for both the developed countries and the developing countries. The models of growth and development achieved through free trade are too numerous to count. This includes various of East Asia countries that have achieved the high growth labeled as “The miracle of East Asia”, such as China, which has realized a surprising rate of growth through the shift to “reform and opening up” economic policies by Deng Xiaoping and India, which overcame an economic crisis where it was on the verge of state bankruptcy by switching to liberalization policies and has since continued to achieve steady growth. Free trade has raised the standard of living for people around the world and rescued hundreds of millions of people from poverty.
So why are we now seeing a rise in the number of people speaking out against it? This is because there has been an increase in the suffering of people who receive damage as a result of free trade and the slowing of the growth of the global economy is making it harder to ease that suffering.

Free trade is a policy that aims to promote the growth of economies by enlivening economic activity through the free trading of goods, services and money between each country. However, economic growth is also a process that leads to the destruction of industries that have lost competitiveness and of other existing systems. The result of this is that various “strains” are created. Unemployed people will come out of companies that have lost in the competition with other countries. This is not a problem if new industries arise to employ those people, but this does not always happen.

The EU model has aimed for growth and development by creating a “single market” that enables the free movement of not only goods, services and money, but also of people. However, this EU model is now also facing problems. The referendum in the UK that decided the exit from the EU was an expression of the opposition of UK residents to the threats to employment, lifestyles and safety that have resulted from the acceptance of an unlimited number of immigrants.

What should we do? To shift policy towards trade protectionism would be the most foolish thing we could do. We must learn from the experiences during the worldwide depression in the 1930s. At that time, each country strengthened their trade restrictions, and the result was that the depression worsened.

The only way that we can maintain free trade is to carefully deal with the “strains.” The key point will be how effectively we can employ measures against the various problems. In America, this means inequality, and in the EU it is inequality and problems relating to immigrants and refugees, as well as the problems with public finances and the banking sector that have been exposed by issues with the Euro. For Japan as well, the basic issues are the correction of disparity and the growth necessary to achieve that. If solutions are not possible, then the continuation of the system of free trade will not be possible. Our wisdom is being tried.

Yukio Miyata

Professor, School of International Studies (Industrial Organization and American Economic Policy)

Yukio Miyata, Professor, School of International Studies (Industrial Organization and American Economic Policy)

The Trump administration that came to power in America in January 2017 has honored its election promises to depart from the TPP (Trans-Pacific Partnership) and strengthen trade protectionism. The Trump administration is unconventional and unorthodox in many points, and it is also a long way away from the economic policy of the Republican Party up until now. The party adopting protectionist policies has previously been the Democratic Party, which has the labor unions as its support base. The Republican Party has so far supported free trade. The attempts to revive manufacturing industry through protectionism, and the requests and threats made to companies to keep their operations within the country, are part of industrial measures aiming to promote specific industries. This also differs from the traditional approach of Various events are causing concern about the “rise of protectionism,” including the separation of the UK from the EU, the birth of the Trump administration and the advances made by far right parties in the major countries of Europe. Each country of the world has enjoyed the merits of free trade as it has grown and developed. If we look back on period of the just over 70 years since the end of World War Ⅱ the results show that it is the countries that have adopted open external policies towards others including free trade and investment that have had the highest growth performance. This is true for both the developed countries and the developing countries. The models of growth and development achieved through free trade are too numerous to count. This includes various of East Asia countries that have achieved the high the Republican Party that the market will decide the rise and fall of industries and the government should not intervene.

On the other hand, just because their policies may be similar, it is not thought that the Democratic Party in the House will support President Trump. There are many uncertainties regarding how much support the policies of the Trump administration will receive in Congress.

However, we should pay attention to the fact that the protectionism of the Trump administration was an election strategy. America is clearly divided into the states supporting the Republican Party (called the Red States after the party color) and the states supporting the Democratic Party (the Blue States). Victory in elections is decided by the few “Swing States” (the states where support changes like a swinging pendulum). In the presidential election last year, the Trump staff cleverly stressed protectionism in order to capture states such as Michigan and Ohio, where there are many factory workers. Leaving the TPP is a bad thing for agriculture. However, the states of Nebraska and Kansas, where there is a lot of agriculture, have traditionally been Red States. The Republican candidate always wins there, so there was no need to pay them lip service. However, it is not possible to ignore the profits of agriculture, so the exports of agricultural products to Japan will no doubt become a problem in the individual trade negotiations to be held from now on. In theory, free trade can clearly be profitable for both of the countries involved. Putting “America first” and having free trade are not contradictions.

However, whereas the benefits are distributed thinly but widely among many consumers, the damage is concentrated on a small number of producers. These producers are willing to spend money to petition politicians, so they will work hard calling for protectionism. Politicians listen to people making a lot of noise, so policies get distorted. It will be no good to simply advocate market fundamentalism because it is correct in theory. Unless the policies can maintain the efficiency of free trade whilst caring for the parts that are damaged by it, then the end result will be the discontinuation of fair trade.