Protectionism: Historical perspectives

Nikolaus Wolf 11 June 2018

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Oxford Academic

Protectionism is back on the political agenda and with it the question, how do trade and other forces of global markets affect our well-being? Trade theory suggests that specialisation along comparative advantages is welfare increasing under a very broad set of assumptions. However, it also suggests that the gains from trade can be very unequally distributed, with a few big winners and a large number of losers. For the most important questions, theory alone provides insufficient guidance due to the underlying contingencies – it all depends on institutions, on trade partners, sectors involved, expectations about the future and the like. Therefore, times of crisis direct us back to empirical evidence and notably back to historical episodes that were characterised by large shocks. Already during the late 19th century, the world experienced a period of rapid globalisation followed by painful deglobalisation. Was the ‘first globalisation’ accompanied by efforts to provide social protection for potential losers? What evidence do we have for the effects of tariffs on growth? How did the liberal era of free trade end and why was it so difficult to return to it?

In a ‘virtual issue’ of the European Review of Economic History, we reproduce several papers that have been published in the Review over the last years, all of which address the historical experience of the first globalisation, its end and attempts to reintegrate markets after 1945. Michael Huberman and Wayne Lewchuk (2003) discuss in their paper “European economic integration and the labour compact, 1850–1913” how indeed national governments faced with the pressures from globalisation before 1914 responded with labour market regulations and social insurance. They show that workers supported free trade as long as they were protected against external risks. But growing pressure from global markets challenged the free trade regime. 

In his paper “Why Chamberlain failed and Bismarck succeeded: The political economy of tariffs in British and German elections”, Adam Klug (2001)compares the outcomes of three critical elections in European history, the 1877 and 1878 elections in the German Empire and the 1906 election in Britain. While free trade prevailed in Britain, the 1878 election resulted in a protectionist majority that not only shifted the political climate in the German Empire but also triggered protectionist responses abroad. Based on a specific factors model and new data, which allows comparing the two countries, Klug argues that not only economic interests, but also the political system and religious affiliations mattered for election outcomes. Similarly, Sibylle Lehmann and Oliver Volckart (2010) analyse the case of Sweden, roughly a decade later. In their paper “The political economy of agricultural protection: Sweden 1887” they ask to what extent the shift to protectionism in two elections in summer and autumn 1887 can be explained by changing economic interests. Using state-of-the-art techniques, they conclude that the outcome of the election can only partially be rationalised and that non-economic factors and indeed “quirks of fate” (Lewin 1988) can sometimes be decisive.

James Foreman-Peck and Andrew Hughes Hallett and Yue Ma (2007) broaden the perspective and consider the experience of the Great Depression after 1929 in their paper “Trade wars and the Slump”. They analyse why international coordination failed and highlight the interplay between domestic and international politics, where domestic issues dominated. They argue that the largest players at the time, the USA and the UK, would have gained little from international cooperation in contrast to France and Germany. Hence, the return to free trade after 1914 was impeded by the unequal gains from international cooperation and large internal conflicts. The massive influence of the USA after 1945 brought free trade policies back on the agenda. This can be read as a warning for today that a slide to protectionism might be hard to reverse.

William Hynes, David S. Jacks and Kevin H. O’Rourke (2012) describe the deglobalisation after 1914 in their paper “Commodity market disintegration in the interwar period”. First, they show that the First World War led to a fragmentation of markets, not at least to increased transportation costs. Second, they highlight that after a short period of reintegration in the early 1920s, the Great Depression triggered a further and deeper fragmentation, this time largely due to protectionist policies including the break-up of the international monetary system. It took until the 1970s to reach again the 1913 level of commodity market integration.

Several papers contributed to the debate on tariffs and growth, by addressing the question whether protectionism can have beneficial effects on growth or not. In his paper “New results on the tariff-growth paradox”, David S. Jacks (2006) reconsiders the evidence from Bairoch (1972) and O’Rourke (2000) on a positive correlation between economic growth and tariff levels during the late 19th century. First, Jacks finds that indeed tariffs seem to be positively related to growth, even after controlling for several confounding factors, but also that openness is positively related to growth. To solve this seeming contradiction, he points out that tariffs affect exports and imports differently and suggests that in a non-reciprocal trade environment, tariffs might indeed have growth promoting effects. This is related to a large recent literature on institutional factors and the political economy of protectionism. Wolfgang Krause and Douglas J. Puffert (2000) provide an insightful case study on the German Empire before 1914 entitled “Chemicals, strategy, and tariffs: Tariff policy and the soda industry in Imperial Germany”. A key question here is whether protectionist tariffs in the chemical industries can explain the rise of the German chemical industry before 1914. They conclude that increased tariffs in the 1880s played some role for the success of this particular industry, but that other factors, notably independent technological change, were decisive.

A final set of papers analyses the political economy of agricultural policies, an area that was largely exempt from the market liberalisation in the Western economies after 1945. Mark Spoerer (2015)analyses the common agricultural policies of the European Economic Community and asks to what extent they can be interpreted as part of the general expansion of the welfare state. In “Agricultural protection and support in the European Economic Community, 1962–92: Rent-seeking or welfare policy?”, he concludes that “the combined benefits from subsidies, import protection and political prices gave much more benefits to European agriculture than any welfare policy could have done”. Eva Fernandez (2016) puts this into a wider perspective using a global panel of countries for 1920–1970 in her paper “Politics, coalitions, and support of farmers, 1920–1975”. She highlights the role of the political system and shows how in continental Europe after 1945 proportional election systems and coalition governments helped to strengthen the political influence of farmers.

This small selection of papers published over the last years in the European Review of Economic History stresses how trade and welfare policies have always been related. It also shows that while the wider economic benefits from protectionism are uncertain at best, domestic policy considerations often trumped international cooperation already 100 years ago.

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Topics:  Economic history International trade

Tags:  Europe, protectionism, history, globalisation, Political Economy, Sweden, Germany, Great Depression, tariffs, 21st century, economic growth

Chair of Economics and Economic History, Humboldt University Berlin; Research Affiliate, CEPR

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