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May 4,1 984
The N ew Protectionism
In 1 979, the last major multilaterial
agreement lowering barriers to international
trade was signed in Tokyo, culminating a
thirty-year effort under the aegis of the
General Agreement on Tariffs and Trade
(GATT) to promote freer trade among the
world's nations. Now, scarcely five years
later, multiplying protectionist pressures and
actions pose perhaps the greatest post-war
threat to the continued growth of international trade. Indeed, in the last eighteen
months, the U.S. government, normally a
leading advocate of free trade, has restricted
imports of motorcycles and specialty steel,
while extending previously existing barriers
to textile and auto imports. Europe has
moved to restrict its imports of autos and
electronic equipment from Japan, and
threatens to retaliate against our barriers to
specialty steel by restricting its own imports
of chemicals from the U.s. The situation
could get worse as, for example, "domestic
content" legislation that could effectively
curtail most U.S. auto imports is widely
favored in the U.S. Congress.
The new protectionism is also distinguished
by its heavy and increasing reliance on such
non-traditional barriers as "voluntary export
restraints" (VER) and "orderly marketing
arrangements." These generally amount to
quotas on imports of agiveri'product from
one or more particular countries. For
example, the U.s. VER on autos applies to
Japan only. The discriminatory application
of these measures, and their implementation
outside the multilateral framework of GATT,
represent a significant departure from such
traditional barriers to trade as tariffs.
New also is the geographic source from
which the new protectionism is emanating.
Many of the new barriers have been imposed by the U.S. and European nations to
combat imports from Japan and the newly
industrialized countries (NICs) of Asia and
Latin America. These moves have come as
Japan and the NI Cs have gradually reduced
their own barriers to imports-often at the
urging of the U.s. and Europe, traditional
defenders of free-trade principles.
These developments have been dubbed the
"new protectionism," although in its
imposition of trade barriers to alleviate
domestic problems it can hardly be called
unprecedented. This Letterexamines what is
really novel about the new protectionism
and the problems it may pose for the U.s.
and the world economy.
The cost of this increased protectionism has
probably been very substantial. For
example, a study recently prepared by
Wharton Econometrics suggests that our
quotas on Japanese auto imports have raised
the average price of a car sold ,in the U.S. by
nearly one thousand dollars. With roughly
seven million cars sold in the U.s. last year,
that added up to a total cost to U.S. consumers of nearly $7 billion from this measure
alone. Thus, whatever protection trade
barriers afford, it does not come cheaply.
Scope
Certainly, the new protectionism represents,
a significant increase in barriers to trade. The
International Monetary Fund's staff has
estimated that protectionist measures
adopted by the world's nations in the last
four years encompass products representing
nearly 20 percent of world trade in manufactured goods and 33 percent of agricultural
trade. Nearly 50 percent of all world trade is
now estimated to be affected to some degree
by trade barriers otherthan tariffs, compared
to 40-45 percent a decade ago.
Reasons?
Protectionist measures have been engaged
for a variety of reasons. Directed at Japan,
they are often justified as a necessary response to that country's allegedly greater
protectionism compared to other major
industrial nations. Whilethis may have been
true some years ago, studies have shown
1
Opinions cxpres;;,ed in rhi-, newsletter do not
necessarilv reflect the view;;, of tilt' rnanagernenl
of the Federal Reserve Bank of San Francisco,
or cllthe Board of CoV('rnors of ttw Federal
Reserve Sv;;,tem.
a competitive disadvantage in steel, autos,
and other traditional industries against
lower wage countries such as Japan and the
NICs. Such shifts in comparative advantage
are, of course, neither new nor confined to
the West. Indeed, japan finds itself increas'ingly challenged in steel and shipbuilding
by Kore'il, Taiwan and other NICs.
that Japan is now no more restrictive overall
toward imports than other major industrial
nations, includingthe U.s. Indeed, Japan's
average level of tariffs (5,9 percent) is currently lower than that of Europe and only
slightly above that of the U.s, Admittedly,
Japan is relatively restrictive of certain products, such as agricultural goods. However,
the United States itself severely restricts
imports of certain agricultural products,
such as sugar and dairy products, while
European barriers to agricultural imports
(not to mention their subsidies of agricultural exports) generally are more stringent
than those of either the U.S. orjapan.
New concepts
In the end, the most novel but problematic
aspect of the new protectionism may prove
to be the approaches to trade policy it has
advanced. In particular, the notions of
"bilateral reciprocity" and "industrial
policy" are increasingly advocated as bases
for trade negotiations even though they
represent significant departures from the
principles that underlie trade policy for most
of the post-war era.
Likewise, protectionist measures by the U.S.
have sometimes been advocated as a way to
reduce our large and growing trade deficit,
itself sometimes blamed on protectionism
abroad. But while barriers to imports reduce
the volume of goods we buy from abroad,
they may not improve our trade balance
significantly. Import prices could well rise
(as happened with our restrictions on Japanese autos) and leave the value of imports
little changed. Furthermore, foreigners may
reduce their purchases of our exports in
response to our restrictions on imports of
their goods. In any case, numerous studies
indicate that it is the high value of the dollar,
not barriers to our exports, that is largely
responsible for our trade deficit.
Bilateralreciprocity.Bilateral reciprocity
entails restricting imports from a given
country to the same degree that that country
restricts one's exports to it. Thus, if japan
were more protectionist than Germany, we
would place higher barriers on our imports
from Japan than on our imports from
Germany. By contrast, post-war trade agreements generally have been based upon the
non-discriminatory "most-favored-nation"
(MFN) principle. This means that a country's
imports of a given commodity receive the
, same treatment regardless of where they
come from. In applying the M F N principle in
traqe negotiations, nations have sought to
balance their own trade concessions with
those obtained from their partners as a
group; they have, in effect, sought
reciprocity on a multilateral basis.
A more basic source of protectionist pressure lies in the high unemployment in the
United States and Emope in such historically
key industries as autos and steel. Protectionist measures have aimed in large part at
stemming the decline of these industries by
giving them some relief from foreign competition. In part, these industries' woes reflect
the worldwide recession of 1 980- 1982.
However, many of these sectors probably
are facing secular declines that reflect in part
a general shift in the output of developed
countries from heavy industry toward services and higher technology manufactures.
More important are the relatively high wage
rates in the U.S. and Europe that put them at
In contrast, the rationale underlying bilateral
reciprocity is that the benefits from trade
liberalization should be reciprocal on a
bilateralbasis. Realistically, however, the
gains from trade liberalization cannot be
expected to balance bilaterally any more
than one nation's trade balance with another
can be expected to balance. Because of
differences in industrial structure, country A
2
Still, the very comprehensiveness of traderelated industrial policies is a major practical obstacle to their inclusion in actual
negotiations. Government tax and regu latory policies are generally shaped by
domestic considerations, such as equ ity and
efficiency, that are apt to vary among
nations. Governments are probably less
willing to modify such policies-much less
tailor them to conform to policies of others
-to enjoy the gains from free trade alone. At
the least, arriving at rules governing policies
with only indirect impacts on trade is
extremely difficult to achieve given the wide
variety of policies involved. Anyone, after
all, can play the industrial policy game:
foreigners, for example, could ask if low
U.S. gasoline taxes (compared to those of
other nations) constitute an industrial policy
aimed at discouraging imports of small
European and Japanesecars.
may stand to gain mainly from increased
accessto B's market, while B gains primarily
frorl1 increased exports to C, and C from
greater access to A. Only through a multilateral agreement, where A grants concessions mainly usefulto B while benefitting
mainly from C's concessions, are the potential gains likely to be great enough to induce
all countries to incur the political and social
costs of significant trade liberalization.
Economic efficiency considerations also
argue for anon-discriminatory (MFN) principle in trade policy. For the world as a
whole, the gains from freer trade come in
large part from the shift of production of
each commodity toward the most efficient,
lowest cost, producer-nation. Bilateral reciprocity could have a perverse effect by shifting production awayfrom lower cost producers,)f these producers were deemed more
protectionist than higher cost producers.
Protection?
Reflection on some "old" history may
supply the best perspective to the new protectionism. In the early 1930s, the United
Statesand other industrial nations sharply
raised trade barriers to alleviate unemployment-but made the world depression
much worse. The post-war GATT effort to
lower trade barriers fostered the rapid
growth of world trade, promoted the development of many poorer nations, and
brought about a more efficient allocation of
world resources. Policymakers must ponder
whether, in view of these history lessons, the
protection seemingly offered certain industries by the new trade barriers is worth the
threat they pose to these longer-term gains.
IndustrialPolicy.Industrial policies are
government measures that affect a nation's
trade indirectly by promoting domestic
producers at the expense offoreign competitors. For example, it has been argued
that the Japanese government's promotion
of research into computer technology is an
industrial policy that can discourage imports
and promote exports even though it does not
constitute any direct or explicit barrier to
trade. Consequently, there hiwe been
several proposals to include industrial
policies in trade negotiations (others have
advocated that the
government adopt
its own industrial policy).
u.s.
Admittedly, a government could, in principle, discourage imports (or encourage
exports) of a given commodity simply by
structuring domestic tax or other policies to
foster domestic production of competing
goods, or to discourage consumption of
those goods. On this basis, virtually the
entire array of government measures-tax
structure, anti-trust laws, and science and
regulatory policies-could be considered
industrial policies.
Charles Pigott
3
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BANKING DATA-TWELFTH FEDERAL
RESERVE
DISTRICT
(Dollar amounts in millions)
SelectedAssetsand Liabilities
large Commercial Banks
Loans, Leases and Investments 1 2
Loans and Leases1 6
Commercial and Industrial
Real estate
Loans to Individuals
Leases
U.S. Treasury and Agency Securities2
Other Securities 2
Total Deposits
Demand Deposits
Demand Deposits Adjusted 3
Other Transaction Balances4
Total Non-Transaction Balances6
Money Market Deposit
Accounts-Total
Time Deposits in Amou'nts of
$100,000 or more
Other Liabilities for Borrowed MoneyS
Weekly Averages
of Daily Figures
ReservePosition,All Reporting Banks
Excess Reserves (+ )/Deficiency (-)
Borrowings
Net free reserves (+ l/Net borrowed( -)
Amount
Outstanding
4/18/84
Change
from
4/11/84
178,816
158,892
47,202
59,682
27,803
4,994
12,228
7,696
188,075
45,579
29,997
12,958
129,538
1,413
1,460
254
131
201
13
36
11
-1,698
966
-1,152
26
- 757
40,094
-
544
37,802
19,015
-
240
1,041
Weekended
4/09/84
273
53
220
Change from 12/28/83
Percent
Dollar
Annualized
-
-
-
2,791
3,537
1,239
783
1,152
69
279
467
2,922
3,658
1,334
183
553
5.1
7.3
8.7
4.3
14.0
- 4.4
7.2
- 18.5
- 4.9
- 24.1
- 13.8
4.6
1.3
497
4.0
363
3,992
-
3.0
- 56.3
Weekended
4/26/84
188
44
144
1 Includes loss reserves, unearned income, excludes interbank loans
2 Excludes trading account securities
Excludes U.S. government and depository institution deposits and cash items
ATS, N OW, Super N OW and savings accounts with telephone transfers
S Includes borrowing via FRB, TT&L notes, Fed Funds, RPsand other sources
6 Includes items not shown separately
3
4
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Bankof San Francisco,P.O. B?x 7702, SanFrancisco94120. Phone(415) 974-2246.
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