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These days, virtually no international economic or trade summit can proceed without warnings about the dangers of protectionism and the end of the post-Cold War era of globalization.
Policymakers and officials at recent IMF spring meetings have rightly expressed concern about the potential for distortion in the new enthusiasm for industrial policy – with governments intervening to target specific companies or sectors. The amounts of public money that Joe Biden’s administration has injected into the green economy through the Inflation Reduction Act have been the envy of many governments around the world. But there are concerns about trade and technology restrictions imposed by the United States.
Some of the alarm is overblown. On the one hand, industrial policy is not necessarily ineffective or distorting. The United States’ turn away from globalization is atypical, especially among advanced economies. And cross-border movements of goods, services, investments, people and data have survived multiple shocks over the past 30 years.
Intervention is certainly on the rise. Studies by the IMF and research service Global Trade Alert report more than 2,500 industrial policy interventions last year, more than two-thirds of which had trade-distorting effects. But their overall impact is unclear. Hundreds of small expenditures or regulatory measures will not have much effect. Reports from the Greater Toronto Area also showed that distortive interventions increased rapidly after the 2008 global financial crisis, as global trade recovered.
It is not surprising or necessarily destructive for governments to intervene in rapidly evolving sectors like electric vehicles, both to gain a competitive first-mover advantage and to reduce carbon emissions. IRA spending isn’t perfect, but America is at least making a long-overdue contribution to the fight against climate change.
Attempts in other countries to align with the American approach have been relatively modest. France’s suggestion of a large new pan-European green sovereignty fund failed due to German skepticism. Japan has embarked on a spending spree to rebuild its semiconductor industry, but high debt levels across the world mean the capacity for new fiscal spending is limited.
At the same time, the United States’ total trade protectionism also has relatively weak echoes elsewhere. It is true that the EU has equipped itself with a whole range of weapons to fight against what it considers to be unfair competition. Using its latest instrument, regulations on foreign subsidies, Brussels this week carried out a raid on a Chinese company in Europe.
But if applied fairly, such equality of opportunity does not constitute protectionism. So far, the EU’s effective use of trade instruments has been limited. Brussels is considering anti-subsidy duties on electric vehicle imports from China, but the duties are likely to be modest, intended only to give European automakers breathing space to catch up.
Nor is America’s neurotic aversion to signing new trade deals shared elsewhere. Governments across the Asia-Pacific region are lining up to join the CPTPP that the United States abandoned. China’s apparent return to export-led growth raises concerns about potentially distortive interventions and trade imbalances, but it can hardly be called protectionist.
As always, the best defense of global trade would be binding global rules, but, as always, the World Trade Organization is far from putting them in place. Their rules are insufficient to constrain China’s state capitalist model, and the United States is more inclined to overthrow the institution by crippling its dispute resolution system than to truly reform it.
Without this strong legal framework, the conditions for a surge in government interventionism with protectionist elements remain in place. But there have been so many false alarms over the decades that it falls to those most concerned to show that these times are different and that globalization is in serious trouble. So far, there doesn’t seem to be any really convincing evidence that this is the case.
