Economists sound the alarm on negative long-term consequences of protectionism
WU Professors Harald Badinger, Jesus Crespo Cuaresma, and Harald Oberhofer are deeply concerned about recent developments like the USA’s withdrawal from the Trans-Pacific Partnership, Theresa May’s plans for a “hard Brexit,” and the Austrian popular petition against the TTIP, CETA, and TISA trade agreements. They stress that free trade is one of the fundamental freedoms and has brought more advantages than disadvantages, especially for the Austrian economy.
Over the past few decades, Austria has benefited massively from its membership in the European single market and the European Free Trade Association, the fall of the Iron Curtain, and its accession to the EU. Trade has increased, exports have outgrown imports, new jobs have been created, and Austria’s per capita income has gone up. In 1995, Austria’s exports accounted for 33.6% of the country’s total national value added. By 2015, this figure had risen to 53.4%, while Austria’s imports as a share of GDP only increased from 34.8% to 48.9% over the same period. Model calculations also suggest that EU membership has boosted Austria’s economic growth rates by 0.5 to 1% per year. This additional income is available for spending on domestic consumption and also imports, which play an important role for the Austrian economy due to the country’s small size. With its limited resources, Austria has to import a wide variety of products from abroad, for instance cell phones, cars, and many other goods. Professors Harald Badinger, Jesus Crespo Cuaresma, and Harald Oberhofer of WU’s Department of Economics all agree that free trade offers many economic advantages, and they warn against excessive protectionist measures intended to shield off non-competitive industries.
Consumers benefit the most
Particularly consumers profit from free trade in many ways: It increases the range of products available in stores and stimulates competition, which leads to lower prices. “It’s essential to make sure that consumers have a free choice: We need comprehensive labeling requirements to ensure that people only buy the products they really want to buy and that meet their expectations. Even without any regulation at all, standards will only drop if there is a demand for lower standards,” the WU professors point out.
Competitiveness as a crucial factor
If companies are unable to withstand the pressures of free trade, usually this means that they are not competitive enough. Crespo Cuaresma, Badinger, and Oberhofer argue that these problems are not generally caused by market liberalization per se but rather by a lack of competitiveness. “Of course, political measures can be implemented to protect non-competitive industries and keep them alive for some time – as is currently being attempted in the USA, for instance. In the long term, however, such moves to isolate markets will stifle innovation and discourage increases in efficiency, which will lead to higher prices for consumers. These measures are also unable to save jobs in these industries in the long run,” the economists point out.
A drop in global poverty
The WU researchers disagree with the argument that free trade leads to the exploitation of poorer economies and that these countries necessarily find themselves on the losing end of free trade. The direct link between international trade and per capita income shows that the increase in global trade volumes has contributed to a drop in global (absolute) poverty over the past few decades. Recent calculations indicate that expanding the trade volume by one percent relative to the total value added leads to an average reduction in absolute poverty by 0.17%. Lowering customs duties by one percent on average results in a 0.4% drop in the amount of people living below the absolute poverty line.
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