January 9, 2020

Macro Series – Global Letter – Quantifying trade protectionism

BY John Llewellyn

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Macro Series - Global Letter - Quantifying trade protectionism 1

US protectionism stands to reduce US GDP by a percentage point. Or more.

Concern about recent trade protectionism stems essentially from its reversing the previously-won gains from the progressive liberalisation of international trade since the Second World War.1 These include the essentially static ‘comparative advantage‘ benefits made famous by Ricardo2 – Jamaica exporting bananas, Australia coal, Japan and Germany cars – and the dynamic rewards that flow from strong international competitive pressure on firms to economise, innovate, and invest.

While it is fairly straightforward to detail the nature of these gains qualitatively, quantifying them

– or their reversal – is not straightforward. But recent research is suggesting orders of magnitude.


A particularly thorough, top-down, study of the effects of border tariffs has recently been undertaken by the IMF, drawing on data for 148 countries over the period 1964 to 2014.3 Amongst its wide range of results, the Fund finds statistically-significant evidence that typically each 1 percentage point rise in a country’s import tariffs:

  • Reduces GDP by around 0.1%,4 and by around twice that in advanced economies,5,6 and
  • Reduces aggregate (labour) productivity by 0.2%. Again, in advanced economies, the effect is higher.7

It is instructive to apply such estimates to the tariffs enacted in recent years by President Trump. The value of the imports affected by the Trump tariffs is estimated and continually updated by the American Action Forum. Its end-2019 estimate is $364 bn, and it puts the estimated consequent increase in the cost of US consumer and producer goods at $69.8 bn.8 This represents an average tariff rate on the affected goods of 19%,9 and with US imports in total running at an annual rate of

$3,148 bn, that implies an overall average tariff rate of 2.2%.

Putting the findings of these two studies together suggests that the Trump tariffs will:

  • Reduce US GDP by the end of the fifth year, relative to what it would otherwise be, by around

0.5 percentage points,10 and

  • Reduce China’s GDP by a similar amount.11

Non-tariff barriers

Tariffs are however only part of the story: non-tariff barriers (NTBs) are another. The number of interventions in the international trading system, as recorded by Global Trade Alert (GTA),12 have been growing: and between November 2008 and the time of writing13 there have been 6,238 recorded ‘harmful interventions’ in the international trading system, far outstripping (particularly since 2012) the 2,189 liberalising measures.14

Counting the number of interventions is one thing however: quantifying their ad valorem equivalent (AVE) is another. Estimation typically is undertaken inferentially, the common practice being to construct one or more proxy variable for NTBs, and establish whether they have any statistical significance when inserted into a typical import demand equation.15

One study, by BNP Paribas, ingeniously proxies the intensity of NTB interventions by the number of Bloomberg stories mentioning words related to protectionism.16 Another uses dummy variables for each of the main types of protectionist measure identified in the GTA database.17 Both find the effects of NTBs are statistically significant; and that, given the number of NTBs now in force, they are now quantitatively as important as tariffs18 in their trade-restricting importance.19

Bottom line

The historical evidence cited above, when combined, implies that the current protectionist measures stand to reduce GDP in both the US and China by around 1 percentage point.20

That said, this could well be an underestimate. Unprecedentedly low global interest rates indicate weak investment relative to savings: something fundamental is hurting confidence. Mr. Trump’s systematic attack on the post-WWII international order, which is more than ‘ordinary’ protectionism, may be having greater effects than history-based calculations would suggest.◼



1 Average tariff rates for the United States declined progressively from their mid-1930 peak of 47.1% to 18.4% in 1934 and 1.3% in 2007. For a detailed history, see United States International Trade Commission, US trade policy since 1934. Chapter 3. Available at https://www.usitc.gov/publications/332/us_trade_policy_since1934_ir6_pub4094.pdf [Accessed 29 December 2019.]

2 David Ricardo’s On the Principles of Political Economy and Taxation was published in 1817.

3Furceri, D., Hannan, S. A., Ostry, J. D., and Rose, A. K., 2019. Macroeconomic Consequences of Tariffs. IMF Working Paper, January. Available at https://www.imf.org/en/Publications/WP/Issues/2019/01/15/Macroeconomic-Consequences-of-Tariffs-46469 [Accessed 27 December 2019].

4 The annual amount builds, to reach this figure by the fifth year – see Furceri et. al., op cit., Table 6, p. 34.

5 This result is derived from a sample of 34 advanced economies. See Furceri et. al., op cit., pp. 18-19. For the list of countries, see Furceri et. al., op cit., Table 5, p. 33

6 The IMF cites a figure of at 0.28%. It also finds that the effects are greater when tariffs are raised than when they are reduced, and in periods of economic expansion, compared with contraction. Not surprisingly, the Fund finds in addition that tariff increases raise unemployment; and, interestingly, inequality. At the same time, tariffs are found to have only small effects on the trade balances, in part because they induce offsetting exchange rate changes.

7 The Fund write-up does not specify by how much.

8 Varas, J., 2019. The total cost of Trump’s Tariffs. American Action Forum, 16 December. Available at https://www.americanactionforum.org/research/the-total-cost-of-trumps-new-tariffs/ [Accessed 27 December 2019]

9 A similar figure – 21.0% – has been computed by Chad Brown of the Peterson Institute: see Brown, C. P., 2019. US-China Trade War Tariffs: An Up-to-Date Chart, 2019. Available at https://www.piie.com/research/piie-charts/us-china-trade-war-tariffs-date-chart [Accessed 29 December 2019]

10 The calculation for output is (2.8% * 0.22) ≈ 0.6%

11 China’s retaliatory tariffs to date have been estimated to be of the order of $165.7 bn. A calculation similar to that performed for the US, and applying the developing-economy coefficient of 0.1, produces a similar estimated effect for the reduction in China’s GDP viz. (6.2% * 0.1) ≈ 0.6%.

12 For homepage, see https://www.globaltradealert.org/about

13 28 December 2019.

14 Harmful measures include principally: subsidies (excluding export subsidies); contingent trade-protective measures; export-related measures (including export subsidies); tariff measures; and trade-related investment measures. See Global Trade Alert, 2019. Global Dynamics: Total number of implemented interventions since November 2008. Available at https://www.globaltradealert.org/global_dynamics/day-to_1228/flow_al [Accessed 28 December 2019].

15 Typical explanatory variables in import demand equations include various measures of: income; international competitiveness (including tariffs), whether measured by relative export prices or relative unit labour costs; and economic size and distance from foreign markets.

16 The method is explained thus: “… we adopt an (admittedly crude) measure of news velocity, tracking the 12-month rolling average of the incidence of Bloomberg articles mentioning keywords such as “China,” “CFIUS,” “sanctions”, “port delay, etc.” See BNP Paribas, 2019. US-China trade: Tariffs and NTBs. 05 August. Available at https://bnpp-singletrack.s3.eu-west- 2.amazonaws.com/396404_120819214631.pdf?X-Amz-Algorithm=AWS4-HMAC-SHA256&X-Amz- Credential=AKIAI7DGE6BGIQATBLRQ%2F20191229%2Feu-west-2%2Fs3%2Faws4_request&X-Amz-Date=20191229T000000Z&X-Amz- Expires=86400&X-Amz-Signature=a3382a26884ef1ae4f1fb7c393bac94064eccba43bae9449eb12c747379be6fb&X-Amz- SignedHeaders=host, p. 3. [Accessed 29 December 2019]

17 Kinzius, L., Sandkamp, A., and Yalcin, E., 2019. Global trade protection and the role of non-tariff barriers. VOX CEPR Policy Portal, 16 September. Available at https://voxeu.org/article/global-trade-protection-and-role-non-tariff-barriers [Accessed 27 September 2019]

18 The term tariff is taken to cover a range of traditional so-called ‘trade defence interventions’ (TDIs), which include importantly anti- dumping duties, countervailing duties, and so-called ‘safeguards’.

19 A word of caution here: it may not be appropriate in all cases simply to add the estimated effect of tariffs to those for (pre-existing) NTBs – in some cases, and to some extent, the former may substitute for the latter. But it would be difficult, probably impossible, to obtain quantitative evidence on that.

20 Again, by the end of the fifth year, relative to what it would otherwise be.

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