PROTECNTION x GROWTH

November 17, 2008
Trade protection and growth
Ugh, yet again! But the question of whether trade liberalization/protection promotes or retards economic growth is one of those venerable topic of discussion in economics that simply refuses to go away. See for example Ha-Joon Chang's recent op-ed in the FT. One reason is that much of the discussion is driven by pre-conceived ideas (on the efficacy of markets versus governments) instead of actual evidence.
Two recent papers represent a significant advance. One, by Lehmann and O'Rourke focuses on the late 19th century, while the other, by Estevadeordal and Taylor, looks at the last thirty years. The chief contribution of these two papers is that they actually differentiate between different types of tariffs. Lehmann and O'Rourke distinguish between tariffs that protected industry, tariffs that protected agriculture, and tariffs intended to simply raise revenue. Their conclusion:
Industrial tariffs were positively correlated with growth. Agricultural tariffs were negatively correlated with growth, although the relationship was often statistically insignificant at conventional levels. There was no relationship between revenue tariffs and growth.
The sample of countries is a group of mostly developed countries over the period of 1875-1913.
Estevadeordal and Taylor, meanwhile, distinguish among tariffs on capital, intermediate, and consumer goods (plus they use an imaginative identification strategy to alleviate reverse-causation concerns). They find that it is mainly tariffs on capital and intermediate goods that retard growth, while tariffs on consumer goods have a much weaker effect.
Now, the two sets of results are somewhat in tension with each other, and it is not clear whether the differences are due to differences in statistical methods, or to the fact that the late 19th and late 20th centuries were inherently different, with the former being a period in which protection of industrial goods was good for growth while the latter was one where, at best, it was not too damaging.
Regardless of reconciliation, the bottom line is this: what matters is the structure of protection (what is being protected). The answer to the age-old question is one that economists should be accustomed to giving: it depends.
And of course one thing that it depends on is the overall state of the global macro-economy. At a time when the world is digging deeper into recession, exporting your problems through trade protection is the last thing that any responsible country should be doing.
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