1. NS3040 Fall Term 2018 Protectionism Effects
Oxresearch, Protectionism Leads to Lower Output April 23, 2018

2. Overview
Protectionism has increased substantially over the last two years
One of the reasons policymakers often cite is a desire to boost macroeconomic performance
This idea is central to the “Made in America” campaign
In this context the Trump administration has
Withdrawn from the TPP
Stalled negotiations of the Transatlantic Trade and Investment Partnership (TTIP)
Started renegotiating NAFTA
Imposed tariffs against trading partners including Canada, South Korea and China and
Threatens more especially against China
Protectionism is building momentum

3. Empirical Findings I
Negative consequences of protectionism has been studied extensively but usually focused on long-run outcomes
Implicitly it is often presumed in the short run higher tariffs can increase domestic economic activity
Argument is by increasing price of imported goods consumers will purchase more of the domestic goods
Causes domestic output and employment to increase – the “expenditure switching” effect

4. Empirical Findings II
However empirical research indicates negative effects predominate
A temporary increase in anti-dumping initiatives raises inflation and reduces economic activity
Similar impact with tariffs
Increasing the tariff rate by an average of 1.2% causes economic activity to decline by a 0.3%.

5. Mechanisms
Contractionary effects of protectionism arise from a combination of different forces
These forces more than offset the expenditure switching effect
Higher tariffs increase the price of consumption goods, reducing aggregate demand for a given level of income.
Increasing tariffs increase the price of imported capital goods leading to lower investment and output
Higher tariffs mean lower-productivity firms charging higher prices can increase their market share, at the expense of lower- price higher productivity firms
Central banks are likely to react to higher inflation by increasing interest rates creating additional contractionary effects

6. Assessment
Research shows that protectionism is not an effective tool to provide macroeconomic stimulus
The beneficial effects on trade deficits are small but the cost of lower aggregate activity is high
If retaliatory actions escalate, the negative macroeconomic impact of protectionism could be much more severe.

7. Effects on Friendly Countries
Jason Douglas, Smaller Players Caught in Trade Fight” WSJ, July 23, 2018

8. Evidence of Trade War Damage
Neil Irwin, How to Tell if the Trade War is Starting to Damage U.S. Economy, New York Times, July 25, 2018
Many anecdotal accounts of troubles from trade wars –
Harley Davidson moving some production to Europe
Missouri nail company laying off workers because of higher price for steel
Hard to gauge effects on whole economy because
trade a relatively small share
Most data only registers after a long lag time
A number of other factors are simultaneously affecting profits and production levels

9. Leading Indicators I
However certain indicators likely to provide early signs of trouble
Confidence and spending – look to business surveys about plans for capital spending
Stock market – exporters and the rest. See what is happening to Boeing, Caterpillar and John Deer – bellwethers for a trade war because have direct exposure to global commerce
Prices and Inflation – what futures tell use. Commodity prices best indicator. Right now hot-rolled steel is $916 a short tun, but $759 in December 2019 market – suggests trade war will be short

10. Leading Indicators II Jobs – look to Surveys of business hiring plans
Increases in unemployment claims