Support for protectionist trade policies flares up periodically, usually during sustained periods of slow economic and income growth. Now is one of those periods and Australia has much to lose.
The use of tariffs and other protectionist measures has lifted in G20 countries since the global financial crisis and there are clear signs that the trend could accelerate. US President Donald Trump in his inaugural address stated that “protection will lead to great prosperity and strength” and his campaign promised to turn the tide on globalisation. In parts of Europe proponents of protectionism have been empowered. And, for the first time, leaders of G20 nations have backed away from a commitment to reject protectionism.
So far, it is unclear how far countries’ trade policies will change. But developments to date suggest that maintenance of the status quo is unlikely. Some think change will be at the margin, such as a more forceful pursuit of alleged rule violations within the established international trade system. Others fear transformational changes that risk unwinding the significant reductions in trade barriers achieved over the past 50 years.
It is these developments and a desire to understand what they may mean for the broader economy that motivated the Productivity Commission in 2017 to assess the potential impacts of shifts in trade policy towards a more protectionist stance. The analysis draws on stylised scenarios that the commission has modelled to illustrate the possible effects on Australia and elsewhere of significant international increases in protection and of different policy responses.
Impacts of increased protectionism
In a scenario where substantial import tariffs are imposed on two of the United States’ largest trading partners—Mexico and China—and they reciprocate in kind, economic growth in all three countries would be lower. Mexico would be particularly hard hit since about 80 per cent of its exports are to the United States. Both Mexico and China would redirect some of their exports to other markets at lower prices, benefiting other countries. Overall, world output would only decline by a very small amount.
From the analysis, we could comfort ourselves in the belief that the ultimate effects on economic activity and living standards in Australia would be small if the rise in protectionism stopped at the United States imposing tariffs on China and Mexico.
However, in the interim, tariff increases would cause substantial disruption to, and reorganisation of, global trade in ways not captured by trade models. The United States is inextricably connected to global supply chains, and ironically this may be what deters the pursuit of protectionist trade policy. Meanwhile the uncertainty has a cost.
More seriously, if a scenario akin to the experience of the 1930s were to be repeated—with trade barriers significantly higher around the world—the economic dislocation unleashed would have the capacity to cause a global recession and put the rules-based global trading system under huge strain.
Australia would not escape unscathed. Over 1 per cent of GDP every year and close to 100,000 jobs would be lost, and up to 5 per cent of our capital stock could be mothballed. Living standards would fall across the income distribution. A household with the median weekly income would be worse off by nearly $1,500 a year.
Rising protectionist sentiment and actions in some countries may lead some to suggest that a rethink of Australia’s commitment to free trade is needed. They would be wrong. Protectionist policies would harm the Australian economy and risk reversing the community wide gains that the lowering of barriers to trade have helped to deliver, and would not deal with the concerns regarding insecurity about jobs and incomes that globalisation has come to encapsulate.
Strategy towards open markets
Yet it would also be a mistake to dismiss the signs of discontent that are testing the social compact that underpins open market policies. Trade policy alone cannot ensure that the potential benefits of liberalisation are fully realised or widely distributed. The Productivity Commission’s report outlines a three-pronged strategy that would help achieve better outcomes for all and foster public confidence in open markets.
First, Australia should continue to work towards freer markets and to make the rules-based trade system function better. Prospective areas for improvement include prioritising regional agreements that allow, or work directly towards, most favoured nation treatment; the greater use of plurilateral sector-specific agreements negotiated in the context of the World Trade Organization; broadening participation in negotiations to parties capable of offering critical assessment, not just parties seeking an advantage or protecting a constituency; and adopting better consultation processes in negotiating trade and investment agreements.
Second, governments should pursue broader policies that strengthen the economy’s resilience and the workforce’s adaptability to changes taking place in the global economy, many of which are driven by new technologies. These companion policies can serve to lessen the disruptive impacts of change and create an environment that spreads the benefits of globalisation more widely. They include education and training policies that aim to build solid foundation skills and enable participation in further training and reskilling for displaced workers; workforce policies that influence how readily firms can adjust the size and composition of their workforce; and macroeconomic stability.
Third, governments should better engage with the community around the case for free trade, and about policies aimed at managing the costs of adjustment and ensuring the benefits of liberalisation are shared more widely. This would help to build community confidence in trade and foreign investment policies.
Resisting protectionism and continuing to work towards freer markets, while making trade work for all by minimising adjustment costs and ensuring the benefits are widely shared, is the best path forward. Higher living standards depend on it.
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