When the Presidential Decree No. 7567 of September 15th, 2011 imposed discriminating tariffs on imported cars, except for cars manufactured in Mexico and countries of the Southern Common Market (Mercosur), the old debate on protectionism versus free trade resurfaced in Brazil. The target of the decree at the time was mainly the cars produced in Asian countries, in a context of rising nationalist industrial policies. Thereafter, the mounting fiscal deterioration and political instability in Brazil made the controversy over trade protection lose prominence. However, the debate is recurrent in Brazil and the arguments used are often based on fragile empirical evidence, if not upon dogmatic assertions. In order to clarify the issues at stake, it is once again worth asking: what are the benefits and costs of a protectionist trade policy?
The mainstream theoretical models point out to the negative effects of protection for the country as a whole, as tariffs make consumers face higher prices. On the other hand, besides saving some domestic firms and jobs, government revenues increase according to the same models. In the end, the losses are greater than the gains. There is evidence of such losses in the literature: Douglas Irwin (2005) estimated the losses caused by the trade embargo levied by the United States against British products between 1807 and 1809.[1] Another study undertaken by Bernhofen and Brown (2005) stated that the rapid and unilateral trade opening in Imperial Japan after the arrival of the U.S. navy generated a gain of 5.4% to 9.1% in the Gross Domestic Product (GDP).[2] The economic historian Jeffrey Williamson (2011) agrees with the general rule that there are static gains from trade in the short run.[3] The idea that comparative advantages in international trade generate more gains than losses, as traditional models conclude à la David Ricardo or Heckscher-Ohlin, is not in check for the author. The point of the dispute is elsewhere.
Williamson (2011) then underlines that it is a long-run problem: what are the effects of free trade or protection on growth? The issue of growth is distinct from the traditional welfare analysis, which compares a state of affairs before and after trade liberalization. Bearing that question in mind, Williamson presents the responses found in the most recent literature. The author raises three possible effects of free trade and productive specialization that could be detrimental to countries seeking the path of long-run growth: (a) the “Dutch disease”, (b) commodity price volatility, and (c) the curse of natural resources. Perhaps these three effects could justify a protectionist policy that changes relative prices in order to bring about changes in the productive structure. But even if the importance of these three effects were recognized, protection would only make sense if “government failures” were smaller than “market failures”, such as spillovers or capital market imperfections. The possibility of “government failures” is probably the main reason underlying the research agenda on the political economy of protection.
Besides the theoretical question, there is an empirical problem: it is not clear in which conditions protection could work. In economics, there are still a number of empirical difficulties in some specific areas, which makes room for disputes. Some claim that the infant industry protection is an important tool for industrialization: the tradition is long, dating back to the Founding Father, Alexander Hamilton, and the creator of the Zollverein, Friedrich List. These authors inspired the Economic Commission for Latin America (ECLA) in the mid-20th century as well as contemporary authors, such as Ha-Joon Chang. Others, including Douglas Irwin (2001)[4] and John Nye (2007)[5], tried to show how certain countries, among which are the United States and England, have grown despite protectionist policies in the 19th century. Regarding the 20th century, the comparison between Latin America and East Asia is well- -known, since the two regions adopted active trade policies. The first group of countries seemingly performed below expectations, although some countries, such as Brazil and Mexico, were able to reach an advanced level of industrialization. On the other hand, East Asian countries were more successful in their interventions.[6] One should not forget that, despite having features in common, the East Asian strategy of export promotion, combined with high-level educational policies, was distinct from the Latin American strategy.
Part of the answer to the ambivalent evidence might be found in politics, not in economics. As mentioned earlier, if government failures are greater than market failures, either by clumsiness, misinformation or capture, at least some of the disappointing results can be explained. This makes room for the research program in political economy. A review written by Renato Colistete and Jarbas Menezes (2004) categorizes this literature into two lines of research: “historical” political economy and “positive” political economy.[7] The first school is represented by the successors of Alexander Gerschenkron, a well-known Harvard economic historian in the mid-20th century. This line of research highlights the fact that the political fragility of governments increases its incentives to protect certain groups, while economic crises may give rise to increased demand for protection.[8] On the other hand, the “positive” school develops formal models whose origins date back to the electoral competition model of Downs (1957). In this line of research, the work of Grossman and Helpman (1994) on the political economy of protection is perhaps the most influential. The authors present a model in which lobbies make contributions on account of trade policies, a kind of “protection for sale”.
The dichotomous debate between protecting or liberalizing tends to leave the “gray” area aside: maybe the question is about how and how much to protect. Santiago Macario (1964)[9], an economist from ECLA, had already drawn attention to the excesses of indiscriminate protectionism in the region long before the “market critics” — such as Anne Krueger[10], Bela Balassa[11] and Jadgish Bhagwati[12] —, who criticized the trade policies carried out by the developing countries from the 70s onwards. According to Macario (1964), the average effective tariff for manufacturing sectors in Latin America was 165%, an obvious excess even for the standards of the time. Colistete (2010) highlights this point: it is possible that the indiscriminate protection has generated almost autarchic economies without incentives to achieve high productivity levels, with some exceptions in some sectors. However, the author acknowledges that the crises of the 70s hinder better assessments of the policies of that period. Anyway, in this “gray” area, explanations based on political economy issues may be even more important.[13]
The case of the Brazilian automotive industry is an excellent example of trade policy dilemmas. The industry is not competitive yet and has been supported by protectionist policies for more than half a century, but its importance in the production chain and labor absorption is far from negligible. The auto industry has not been considered “infant” for a long time, which compromises the defense of its protection in terms of long-run growth. On the other hand, the immediate social consequences of a sudden end of protection could be disastrous in terms of unemployment in the sector and its ramifications — the well-known Stolper-Samuelson theorem points out the risks of trade liberalization in terms of losses for certain segments of the economy, although liberalization continues generating net gains as a whole under the assumption of full employment. The question is how to “disarm the bomb without destroying the entire building”, particularly taking into account the significant political power of the manufacturers and the labor unions of that category and the need for thinking of compensatory policies. In this regard, there are pessimistic studies, such as that of Autor (2014), which estimate the effects of labor market adjustments triggered by the U.S. trade integration in recent decades.[14] It is hard to believe that there would be no similar problems in Brazil, and the solutions are not that simple.
Despite the advances in the research, more definitive solutions to the debate seem distant. Practical problems in testing the effects of trade policies are not the only obstacles. Measuring the effects of certain trade policies can help, but does not solve the disputes. Disagreements in the field do not comprise only utilitarian considerations, in which only economic costs and benefits are taken into account. Fundamental questions about the limits of the government or the private actors in the economy and in the society are at the heart of the discussion. This kind of debate transcends traditional cost-benefit assessments, sometimes reaching almost a dogmatic character. Therefore, the advances made in the research on protectionism can support debates, but hardly solve the disputes — actually grounded on political or moral perspectives — between the most ardent supporters and the detractors of each view. In fact, there is no way out of the moral discussion in Economics, but it can become a problem when the prevailing attitude is based on “fiat justitia, pereat mundus.”[15].
[1] IRWIN, D. The welfare costs of autarky: evidence from the Jeffersonian embargo, 1807-1809. Review of International Economics, v. 30, p. 345-358, 2005.
[2] BERNHOFEN, D.; BROWN, J. An empirical assessment of the comparative advantage gains from trade: evidence from Japan. American Economic Review, v. 95, p. 208-225, 2005.
[3] WILLIAMSON, J. Trade and poverty: when the third world fell behind. Cambridge, MA: MIT, 2011.
[4] IRWIN, D. Tariffs and growth in late nineteenth-century America. The World Economy, v. 24, n. 1, p. 15-30, 2001.
[5] NYE, J. War, wine, and taxes: the political economy of Anglo-French trade, 1689-1900. Princeton: Princeton University, 2007.
[6] FEENSTRA, R.; TAYLOR, A. International economics. 3 ed. New York: Worth, 2014.
[7] COLISTETE, R.; MENEZES, J. D. Modelos de proteção comercial — uma resenha. Revista de Economia Política, v. 24, n. 2, 2004.
[8] SIMONS, B. Who adjusts? Domestic sources of foreign economic policy during the interwar years. Princeton: Princeton University, 1994.
[9] MACARIO, S. Protectionism and industrialization in Latin America. Economic Bulletin for Latin America, v. 9, p. 75-83, 1964.
[10] KRUEGER, A. Liberalization attempts and consequences. Cambridge: Cambridge University Press, 1978.
[11] BALASSA, B. Development strategies in semi-industrial economies. Baltimore: Johns Hopkins University, 1982.
[12] BHAGWATI, J. Protectionism. Cambridge: Cambridge University Press, 1988.
[13] COLISTETE, R. Revisiting import-substitution industrialization in post-war Brazil. Munich: University Library of Munich, 2010. (MPRA Paper, n. 24665).
[14] AUTOR, D. et al. Trade adjustment: worker level evidence. Quarterly Journal of Economics, v. 129, n. 4, p. 1799-1860, 2014.
[15] Let justice be done, even if the world perishes (translation mine).