The Vicious Cycle of Protectionism

By VERONIQUE DE RUGY.

"This Wall Street Journal article is a must-read for those who have been calling for a return to industrial policy, subsidies, protectionism, and overall retrenchment on the grounds that it would be better than the current system for the country and its workers. I would add to the list of those who should read this piece all the supporters of the Inflation Reduction Act and the Chip Act.

It’s not as if they weren’t warned that protectionism and cronyism at home would result in protectionism and cronyism abroad. That means that everyone retrenches from international trade and increases their production costs, and everyone gets hurt and is less resilient during crises. Here is the Journal:

If U.S. policy makers use this opportunity to promote domestic industries at the expense of foreign competitors, other governments are likely to respond with their own protectionist policies, leading to a costly breakup of global trade, government officials and trade specialists say.

Foreign governments have already started to respond to America’s industrial policy/protectionism:

The European Union, Japan and South Korea all have demanded the U.S. revise its electric-vehicle tax-incentive program, saying the local-assembly and local-content requirements to qualify for tax credits of up to $7,500 per vehicle discriminate against their companies and might violate World Trade Organization rules.

European Commission President Ursula von der Leyen said in a Dec. 4 speech that the U.S.’s EV program could “redirect” investment flows of manufacturers to the U.S. from Europe at a time when the European economy is reeling from an energy crisis caused by the war in Ukraine.

In a joint paper issued Dec. 19, Bruno Le Maire, France’s finance and economy minister, and German Economy Minister Robert Habeck, proposed urgently experimenting with ideas for subsidies and tax credits for key industrial sectors. “We will mobilize all relevant national and European tools and instruments,” they wrote.

The Chips act as well must compete with EU, Japanese and South Korean plans to promote domestic semiconductor industries. Economists and industry executives warn that expanded production fueled by uncoordinated subsidy programs would result in global overcapacity.

Moves by rich nations to retrench from global trade have alarmed international organizations tasked to oversee global economic growth. Officials at such agencies have warned that such steps would only increase inflationary pressure and declines in economic growth and living standards over time. People in developing nations, in particular, are seen as getting hurt.

“If we want to deal with climate change in a collaborative fashion, if we want to deal with preparing for the next pandemic and so on, let us dial down the talk on decoupling and fragmentation,” Ngozi Okonjo-Iweala, director-general of the World Trade Organization, said on a December panel at the International Monetary Fund. “It will be very costly to the global economy,” she said.

The WTO recently lowered to 1% its projection for growth in total exports and imports for 2023, down from 3.4%.

This is just a sample and the beginning of how countries have reacted so far. To be continued."