A no-protectionism miracle

Actual protectionist actions by the US against China have been negligible compared with the severity and scope of those taken against Japan in the 1980s

Good news about the world economy is scarce. Even on trade, Pascal Lamy, director-general of the World Trade Organisation, recently rang some alarm bells, noting that more than 100 trade-restrictive measures were implemented by G20 economies over the previous seven months. But these warnings should not obscure the near-miracle that is the bigger picture: the absence of serious protectionism in industrial countries over the last decade despite experiencing the biggest structural trade shock from emerging markets, especially China. Consider this non-phenomenon and its explanations in turn.

Recent discussions of trade policy have focused either on the new trade initiatives involving the United States and Asia (the Trans-Pacific Partnership), the US and Europe (the Transatlantic Trade and Investment Partnership), or on the slow progress in the Doha round. More recently, Tyler Cowen and Paul Krugman have drawn attention to the "protectionist non-surge" in the aftermath of the recent financial crises, especially compared with the protectionist explosion during the Great Depression.

But all these have overlooked what has been the biggest trade policy story - both a puzzle and a miracle - exemplified most dramatically by the US. Imports to the US from China surged from half a percentage point of US domestic demand in 1990 to 5.2 per cent by 2010. Yet, apart from a few anti-dumping and countervailing actions, such an unprecedented surge, especially from a much poorer country, did not elicit a major protectionist response from the US.

Two comparisons from US history help understand the significance of this puzzle. The lack of domestic uproar against China contrasts with the heated and acrimonious debate in the US in the early 1990s against the trade agreement (the North American Free Trade Agreement, or Nafta) with Mexico. And actual protectionist actions against China have been negligible compared with the severity and scope of those taken against Japan in the 1980s.

In other words, in the US the protectionist dog merely whimpered (against China) when it barked loudly (against Mexico) and bit hard (at Japan). Adding further to the puzzle is the fact that the China trade shock was greater by several orders of magnitude than the threat posed either by Mexico or by Japan. What should have been a Rottweiler has instead been a cuddly Labrador retriever.

There are several possible explanations for this puzzle, which we explore in greater detail in new research . One possibility is that by the time the China trade shock arrived, the US had very few unskilled labour-based industries left that were in direct competition with imports from China. For example, the number of workers employed in the US clothing sector declined from 900,000 in 1990 to 150,000 in 2013. Thus, cheap Mexican goods then posed a greater problem than Chinese goods now.

Another possibility relates to the nature of trade and the power of the trading partner. From a US perspective, trade with Japan was very different from trade with China. The former represented head-to-head competition in some specific industries (steel, cars and semiconductors). Trade with China was based on differences in skills, with China exporting relatively low-skilled goods to the US. When their profits were threatened by Japanese competition, US companies with enormous influence in the political process fought back by way of protectionist demands, and successfully. In contrast, China defanged or co-opted US firms by encouraging foreign direct investment by them in China. As a result, trade actions against China were opposed by US firms with a stake in the large and growing Chinese market.

Dani Rodrik has argued that sustaining trade requires social insurance mechanisms to cushion the adjustment costs from liberalisation. Research shows that rising exposure to Chinese imports and the attendant labour market impacts of reduced wages and employment led to almost $15 billion of transfer payments (unemployment, disability, retirement, and health care benefits). This may have helped mute any protectionist response.  

It is possible that murky forms of protectionism are resurfacing, as Pascal Lamy has warned. But, for now, the big picture offers some reassurance. If US domestic politics could survive a trade shock as great as that from China, and if the Chinese experience is unlikely to be repeated, perhaps there is cause to be optimistic about the future of trade. The best piece of good news for the world economy in recent years may well have been the absence of bad protectionist news. Arvind Subramanian is a senior fellow and Martin Kessler is a research analyst at the Peterson Institute for International Economics. They are the authors of The Hyperglobalisation of Trade and its Future. An earlier version of this piece was published in the Financial Times