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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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