Can Protectionism Protect Us?

Political discourse is rife with protectionist rhetoric today, although actual economic policy applications remain limited. So far, refusing to sign regional trade agreements (Trans-Pacific Partnership) or freezing related negotiations (Transatlantic Trade and Investment Partnership) is nothing like the customs actions taken in the 1930s during the Great Depression.

However, there is a risk that the North American Free Trade Agreement (NAFTA) could be terminated by the American administration while a trade war between the US and China is possible. This would be a change from the current situation of latent protectionism that arose after the 2008 crisis, where a myriad micro-measures with limited overall effect are kept in check by WTO safeguards.

The underlying argument, embraced by certain French presidential candidates in their policy programmes, is to protect those who lose out from globalisation.

However, protection through customs tariffs no longer protects. Value chains have become global and closing the borders to international products means closing the door on the numerous national components (previously exported) they contain. Moreover, customs measures are regressive in terms of income redistribution: they penalise households that tend to consume more and which consume more goods than services – in other words, low-income families with children.

But a very different form of protectionism, one that has much more sway in a world where business is mobile, could take over: tax competition. If implemented, the American corporate tax reform proposal will likely upset the balance of the world economy considerably. It will protect American jobs at the cost of international competitors, with European countries at the top of those affected.

Can multilateral trade rules hold out against a large-scale push for protectionism? Will nationalism spread? What impact will protectionist measures have on global production chains? What new forms will protectionism take?