How the U.S. economy will fare under protectionism

By Raz Koroh

Globalization faces considerable opposition and criticism.  As tariff barriers are removed, inefficient producers of commodities such as food grains in poor countries can no longer compete with the often highly subsidized and sophisticated agribusiness, which now have new markets for their corn, rice, and wheat.  For instance, under the NAFTA free trade deals between Canada, the United States and Mexico, price caps and subsidies for tortillas in Mexico must be removed, which means that subsistence farmers who used to be able to sell their small surplus are now required to participate in a monetized economy and to pay for cheap imported grain in order to eat.  Likewise for the United States, blue collar unemployment rate rises, union membership and power reduced, and many economic refugees are driven toward maquiladora sweatshops across the border.  The 2016 U.S. Presidential candidate Donald Trump from the Republican Party said he would reverse free trade deals that put U.S. jobs in jeopardy; in other words, he would bring back pre-Second World War economic protectionism to the United States.  Will this make America great again?

Here are several factors to consider.

Pre-War protectionism. In the years between the Civil War and Second World War there were 19 ‘boom and bust’ economic cycles.  During this period, U.S. economic expansions average only 28 months, and contractions average as long as 22 months.  In the most severe contraction during this period, the Great Depression, the U.S. economic output fell 27 per cent and unemployment rate was at times over 25 per cent.

Post-War globalization.  Since the Second World War there have been only 10 economic cycles, with expansion averaging as long as 57 months, but contractions averaging only 10 months.  In the most severe recession during this time, July 1981 to November 1982, the U.S. economic output fell only 2.9 per cent, and unemployment rate reached a maximum of only 11 per cent.

Clearly, economic expansions are now twice as long as they previously were, and contractions average at best one-half of their former duration before the war, so that the balance between the two periods has improved significantly.  During the 2008 subprime crisis, 5 trillion dollars were wiped out, 8 million people were unemployed, and 6 million made homeless, yet still this paled in comparison to the times when protectionism was the norm, and for the most part should be blamed on Wall Street rather than free trade.

Structural adjustments are inevitable since the late 1970s, when the World Bank, International Monetary Fund (IMF), and the World Trade Organization (WTO) made deregulation and privatized globalization as their basic goal.  Indeed, the United States has taken the lead in developing models in the tool kits of the UN financial lenders and managers, under the so-called Washington Consensus.  They provide a stable environment in which to invest, hastening the movement away from barter to a monetized economy, remove inefficiencies of publicly owned enterprises and surplus labor, and to assure that previous loans will be repaid.  Collectively, they form the bedrock of the global trading system today.

Comments welcomed.