The resurgence of protectionism: An examination by Fund staff of the protectionist trade measures taken in recent years by the major industrial countries

From a study by the Fund’s Trade and Payments Division, under the direction of Bahram Nowzad, of the protectionist trade actions taken in recent years by major industrial countries.


From a study by the Fund’s Trade and Payments Division, under the direction of Bahram Nowzad, of the protectionist trade actions taken in recent years by major industrial countries.

The postwar trend in international trade has been toward an increasingly more liberal system. However, many countries have, in recent years (and particularly since 1974), been demonstrating a shift in the opposite direction. Although it is difficult to quantify the net effect on world trade of the trade actions adopted recently, the evidence indicates that it has been relatively limited. Nevertheless, the recent shift away from liberalization is a cause for serious concern.

The general argument against protectionist trade measures is that they provide no real solution to the underlying problems of the protected industry—indeed, they may compound the difficulty of finding long-lasting solutions—and that they ignore the more fundamental reasons why domestic industries may be losing ground to foreign competition. The immediate impact of a protective measure—whether in the form of increased customs tariffs or other import charges, import quotas, or tariff quotas—is an increase in the price of the imported goods in the market of the importing country. This increase gives the domestic producers of the import-competing product a relative price edge that may be sufficient to stimulate domestic sales or, at the very least, to protect their share of the market. In turn, this may benefit labor employed in the protected industry by preventing layoffs, or increase the return on shareholders’ equity in the protected firms.

Protection also brings increased costs, however, which are ultimately borne by the economy as a whole. First, the prices of goods rise on the domestic market; this cost is paid by consumers. Second, protection means that relatively inefficient industries are able to hold or attract resources, while the economy forgoes the higher level of income and employment that would have gone to more efficient industries in the absence of protection. Protectionist measures, moreover, once adopted, tend to become entrenched as the sectors that benefit develop a vested interest in preventing their removal. For a major intermediate goods industry, such as steel, the higher costs are likely to be transmitted throughout the economy in the form of higher prices for the products, such as automobiles and construction materials. Furthermore, the inflationary impact of import restrictions on products such as steel is likely to have an immediate adverse effect on steel-using products, resulting in demands for additional protection against foreign competitors in the affected industries and/or affecting exports adversely.

Trade restrictions also have direct adverse effects on the exporting country, whether it is developed or developing. They reduce access to foreign markets, impinge on the exporter’s ability to share fully in the benefits of increased international trade, and thus also affect the exporting country’s willingness to assure foreign suppliers access to its own market. The effects of protectionist measures are likely to be especially serious on developing countries, which depend on a relatively small volume of trade in a still relatively narrow range of products. Thus, measures with a seemingly minor impact from the developed country’s point of view can have serious consequences for the developing country’s exports. Furthermore, most developing countries faced by reduced access to certain foreign markets may encounter difficulties in finding substitute outlets for their exports, especially in the short run. Such substitution possibilities are often limited by the nature of the export product (which may be specifically designed for certain markets), and by the historical and cultural ties that often determine the direction of their trade. Even if such substitution possibilities exist, the process is often slow and costly, and exporters may fear that redirection of sales may itself provide restrictions in the new markets.

The historical setting

In contrast to the extensive pattern of trade barriers erected in the 1930s, the years following World War II have generally shown a progressive movement toward a liberal world trading system. This process, which began with a series of conferences convened in 1944–48 at the initiative of the United States, culminated in the coming into force of the General Agreement on Tariffs and Trade (GATT). The GATT was based on the premise that international cooperation, an agreed code of conduct, and a stable framework were essential to prevent the pursuit of narrow national interests that could lead to the escalation of trade restrictions and eventually to a fall in the level of trade. The GATT thus represented a major step toward replacing the chaotic trade relations characteristic of the interwar era with a system founded on reciprocity and nondiscrimination, a set of ground rules for the conduct of international trade, and a mechanism for further trade liberalization.

Since then, barriers to trade have been successively reduced in six rounds of multilateral trade negotiations ending with the Kennedy Round (1963–67). By the end of the Kennedy Round, the weighted average tariff for the major trading nations had been reduced to 7.7 per cent on all industrial products, 9.8 per cent on finished manufactured products, 8 per cent on semifinished products, and 2 per cent on raw materials. In spite of the remaining restrictions—such as those applied to much of the agricultural sector (which had generally escaped the liberalizing trend), the remaining tariffs on industrial goods and raw materials, and a variety of nontariff barriers—trade in industrial products after the completion of the Kennedy Round was substantially free of restrictions. Internationally negotiated and “bound” tariffs applied to the bulk of world trade, and a considerable degree of certainty and stability existed regarding the general conditions for international trade. The postwar movement toward liberalism in trade, complemented by a stable monetary framework, fostered an unprecedented rise in international trade, which increased more than sixfold between 1948 and 1973.

Against this background, there has been a retreat from the liberal trading system in recent years. It may seem somewhat paradoxical that this development has coincided with new international efforts to liberalize trade and to improve the rules for world trade in the context of the Tokyo Round of Multilateral Trade Negotiations, formally launched in September 1973 and pursued intensively since early 1975. But, in fact, the agreement of major trading nations to enter into a new round of negotiations was motivated in part by fears of a major lapse into protectionism. Following the breakdown of the 1971 Smithsonian agreement on exchange rates, there was considerable concern that in the absence of effective rules on exchange arrangements during a period of widespread balance of payments problems, countries might resort to trade restrictions. These fears were sharpened in the wake of the external adjustment problems related to the oil crisis in 1973 and the onset of the worldwide recession in 1974. (See Table 1 for the effects of the recession on world output and trade.)

Table 1

Growth of real output in the industrial countries and the volume of world trade, 1962–77

(In per cent)

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Sources: National reports and Fund staff estimates.

Compound annual rates of change.

Trade actions taken

While various types of restrictive trade action have been taken by a large number of countries in recent years, this article focuses on the causes and implications of the more important measures adopted by the principal industrial nations that are also major world traders—on the grounds that the trade actions of these countries have the greatest impact on international trade. The review on which this article is based covered the restrictive trade actions taken by Canada, the European Economic Community (EEC), Japan, and the United States, which collectively represent about 60 per cent of total world imports. Although the bulk of world trade is effected between these countries, many smaller countries—especially developing countries—are highly dependent on their exports to these markets.

While a selective approach was adopted toward country coverage, it is important to recognize that the problems of restrictive trade actions and their impact are much broader than the findings might imply. First, there is considerable evidence of restrictive trade actions taken during the period under review by industrial countries other than those covered in the survey. Second, trade restrictions have also been adopted by many developing countries, including some that are relatively more developed and whose actions have an important impact on the trade of other developing countries.

The study of the trade measures taken by major industrial countries showed that so far such actions have tended to be concentrated in certain industrial sectors, such as textiles, clothing, footwear, steel, shipbuilding, and a variety of other manufactured products, especially electrical consumer goods. A number of other products, in particular beef, have also been affected by recent measures. Although these actions—particularly the measures on steel—have had an effect on trade among the industrial countries of North America and Western Europe, their main impact has fallen on exports originating in Japan and a number of developing countries. More generally, the trade actions adopted have affected sectors in which many developing and primary producing countries have an actual or potential comparative advantage, and where the proliferation of restrictions can seriously jeopardize their scope for export expansion and economic growth.

Various types of trade action have been used recently by the countries surveyed. There has been increasing resort to “escape clause” actions (to protect domestic industries against injury from imports), although the GATT escape clause provisions themselves have been invoked relatively infrequently. Antidumping and countervailing duties have been used with increasing frequency. In this connection, particularly significant is the adoption in December 1977 by the United States and the EEC of minimum prices for steel imports, and the announced intention of the latter to negotiate bilateral agreements with suppliers. Increasing use of nontariff measures (such as health and quality standards) that may have the effect of impeding imports is also evident in some industrial countries. Another important development is the increased reliance on various types of bilateral arrangements that quantitatively limit trade and often remain outside existing international rules, thus escaping multilateral surveillance.

Antidumping and countervailing duty actions are considered a legitimate form of protective reaction against actions taken by other countries (see box). In times of depressed demand, as competition for a smaller volume of available orders heightens, it is possible that in some instances exports may be subsidized or sold below domestic prices or cost. There is, however, considerable controversy as to what is protection and what constitutes dumping or subsidization and how the degree of dumping and subsidization should be determined. An important question, therefore, is whether antidumping and countervailing duties are being used to counteract dumped or subsidized exports, or whether they have the effect of disguised protectionism.

Employment crucial factor

Many factors, both structural and cyclical, seem to underlie the resurgence of protectionist sentiments and the increasing willingness of governments to adopt trade-restrictive actions even while reiterating their basic commitment to an open and liberal trading system. The Fund staff study led to the conclusion that the issue is complex, that a multiplicity of factors—economic and social—are at work, and that explanation must be sought in terms of their interaction.

Some of the longer-term factors underlying recent protectionist actions have been present for some time. These include the growing structural problems of industrial countries in a number of sectors associated with shifts in the pattern of world consumption and production, the failure of relative wages to reflect wide divergences in the rates of growth of productivity and thus to encourage intersectoral labor shifts, large additions to productive capacity in certain sectors, and the increasing competitiveness of imports from Japan and a number of developing countries. The favorable economic conditions that prevailed throughout much of the postwar period, while affording an opportunity to address some of these problems, also tended to mitigate or veil their seriousness.

The exceptionally severe and tenacious worldwide recession of 1974–75, however, brought in its wake a surge of protectionist actions. In particular, recent experience suggests that perhaps the most crucial factor—and the one most likely to influence policy choices toward protection—is the extent and duration of unemployment, at the global or sectoral level, or the threat of increased unemployment (see Table 2). In a period of high unemployment (such as that following the onset of the recession in 1974), especially when it occurs in sectors open to competition from imports, the demand for the authorities to take action may become politically difficult to resist. The case for affirmative government action may appear all the more compelling if the affected industry is heavily concentrated in certain regions, thus making the economic well-being of those regions dependent on the maintenance of activity in that industry. These difficulties have been exacerbated where large additions to capacity from previous investment came on-stream at the very time that demand began to stagnate. With slackening demand, pressures may have multiplied to increase exports and import substitution to maintain profits and employment.

Table 2

Selected OECD countries: unemployment rates, 1970–77 1

(In per cent)

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Source: National statistical records.

The data are based on labor force sample surveys (Canada, Italy, Japan, and the United States), unemployment office statistics (Belgium, France, the Federal Republic of Germany, the Netherlands, and the United Kingdom), unemployment insurance statistics (Ireland), and trade union benefit statistics (Denmark).

Fund staff estimate.

One of the most frequently cited arguments for trade restrictions is related to import penetration—that is, imports as a proportion of domestic consumption (see Table 3). If this ratio rises suddenly, the suggestion is often made that imports have disrupted markets, injured domestic industry, and caused unemployment. There seems little doubt that in some product lines, a sudden surge of imports, at times caused by a concentrated marketing effort, has created difficulties. From an economic point of view, however, the ratio of imports to domestic consumption or production is not by itself meaningful. Such ratios may be high or low, depending on a number of factors including resource endowment, technological change, and the degree of specialization. Traditionally, import-penetration ratios in industrial countries have been high for some agricultural products and raw materials but, except for a few specific items, relatively low for manufactured goods. Moreover, in view of the constantly evolving patterns of comparative advantage, the freezing of such ratios, or the setting of upper limits that would result from the current preoccupation with import penetration, would effectively prevent the realization of the additional gains that would result from increased specialization in production and trade.

Table 3

Selected industrial countries: import penetration ratios1

(In per cent)

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Source: UNCTAD, Handbook of International Trade and Development Statistics, 1976.

The import figures used in the computation of the import penetration ratio for the European Economic Community (EEC) exclude intra-EEC trade. Similarly, for the three “total” columns, the import figures are defined to exclude trade between the EEC, the United Kingdom, the United States, and Japan. Percentages shown are in value terms.

Original six members only.

Including oil exporting countries.

The framework of world trade

The economic, legal, and institutional framework within which most international trade takes place is contained in the General Agreement on Tariffs and Trade (GATT). Its most fundamental component is a negotiated balance of mutual tariff concessions among contracting parties which commit themselves not to raise import tariffs above the negotiated rates “bound” in the schedules of concessions annexed to the General Agreement. (Countries applying the General Agreement are referred to as contracting parties to the GATT.) The bound tariff rates negotiated are generalized to all contracting parties through the most-favored-nation principle. While aiming at “developing the full use of the resources of the world and expanding the production and exchange of goods,” the General Agreement does not explicitly envision total liberalization of all tariff and nontariff trade barriers; instead, it emphasizes “reciprocal” and “mutually advantageous” arrangements among contracting parties. Thus, the present world trading order accepts protection of domestic industries through the use of tariffs; however, any increase in bound tariffs is subject to certain well-defined safeguards that ensure that the legitimate interests of other trading nations are not adversely affected.

The General Agreement also contains provisions prohibiting or limiting the use of nontariff barriers to trade. These provisions include some exceptions but only for reasons not directly related to the need to afford protection to local industry. Although quantitative import restrictions on industrial products have been substantially liberalized since the inception of the GATT, lowering of other nontariff barriers has proved more difficult. Even the identification of such barriers is sometimes a complex matter, and trading nations frequently have different views on whether a particular practice represents a legitimate domestic measure or a form of protection in its intent or application.

In order to provide safeguards against injurious import competition, the General Agreement authorizes the importing country to suspend temporarily or to reverse its trade liberalization policy in certain narrowly circumscribed situations. If, as a result of unforeseen developments and the effect of the trade liberalization obligations incurred by an importing country under the GATT, increased imports of a product cause or threaten to cause serious injury to domestic industry, the country may introduce as an “escape clause action,” tariff or nontariff restrictions on such imports “for such time as may be necessary” to remedy the problem. In the past, GATT members have invoked the “escape clause” provisions relatively infrequently, although analogous “escape clause” actions, under national or regional legislations and without invoking the GATT provisions, have been utilized more often.

The General Agreement also contains provisions that authorize importing countries to take compensating action against trading partners found to be dumping goods in their markets or increasing sales through subsidization of their exports. On the occasion of dumping, the importing country may impose antidumping duties whenever and to the extent that the sale of imported goods takes place in the importing country’s market at less than its “normal value” and results in material injury to the domestic industry. In an analogous fashion, the General Agreement also authorizes an importing country to impose offsetting countervailing duties on goods benefiting from production or export subsidies in the exporting country, when these result in material injury to the domestic industry. In both cases, the fundamental objective is to provide legal grounds for affected countries to take offsetting measures when threatened by dumping or subsidization. However, the antidumping or countervailing duties that are considered as being consistent with the General Agreement should not result in net additional protection of the affected industry in the importing country, since these duties are not to be imposed at rates higher than would be necessary to offset the margins of dumping or subsidization.

In practice, the effectiveness of procedures for justification of restrictive measures under GATT rules often depends to a considerable extent on the policy stance of the restricting country and of the affected country. In the absence of voluntary recourse to GATT provisions by these countries, or protests by third countries whose interests may also be adversely affected (for example, by the diversion of exports from the traditional trading partners to third markets), trade restrictive actions may not come formally to the notice of the GATT. Although eventually some of these “extralegal” actions may be brought within the purview of the GATT in subsequent trade negotiations, at any given moment countries apply a variety of trade restrictions, some of which remain outside multilateral surveillance. Accordingly, over the years, the need to strengthen the GATT framework has come to be increasingly recognized.


Share of developing countries in world trade, 19741

Citation: Finance & Development 0015, 003; 10.5089/9781616353346.022.A006

Source: U N Trade Tapes1 Excluding centrally planned economies The United Nations data on developing countries exclude the Republic of China and Yugoslavia as well as other European countries but include Turkey.2 Not elsewhere specified.

A significant new development is the diversification of the export base of developing countries and the challenge that they present in a number of new sectors. This development has some notable features. First, industries that manufacture some of the newer products (in particular, steel, ships, and electronics) have been built up in some developing countries mainly for the export market, whereas in some of the more traditional export lines (such as textiles, clothing, footwear, and a number of other consumer products), such countries succeeded first in capturing their domestic markets before moving to compete in third markets and in the markets of the countries from which they had previously imported. Second, the coming on-stream of manufactured exports from many developing countries was a predictable consequence of earlier investments in the industrial sphere carried out at the urging—and frequently with the financial, technical, and managerial encouragement—of industrial countries. Indeed, it has been made progressively easier for many developing countries to overcome some of the traditional obstacles to industrialization, such as a lack of financial resources, a dearth of managerial talent, and the absence of a technologically oriented labor force. In certain sectors, such as electronics, the activities of transnational corporations and the establishment of subsidiaries have actively promoted the process of industrialization. Third, the growth of export capacity in the developing countries has also meant the growth of their import capacity, and, except for some oil producing developing countries, the latter has normally exceeded the former. Thus, while increased import competition from developing countries may have caused difficulties for certain sectors in the industrialized countries, it has also enabled other sectors to expand.

Pressures will continue

The pressure for structural adjustment in industrial countries arising from the competition of imports from developing countries—which, to date, are significant in a relatively narrow but expanding band of products—can be expected to increase in coming years. The extent of the necessary readjustment will be further increased by other factors, in particular, normal changes in technology and competition in domestic and external markets from sources within the industrialized countries themselves. As a result, it will become more difficult to maintain liberal trade and high levels of employment with unchanged wage levels and profitability in affected sectors; hence, significant improvements in the process of structural adjustment in industrial countries will be essential if protectionist pressures are to be reduced.

But the process of structural adjustment faces certain impediments, and the success of programs of adjustment—whether by firms or government sponsored—depends to a large extent on the severity of these obstacles. In particular, the reallocation of resources is a slow and often costly process and one that often meets with considerable resistance from both industry and trade unions, since the gains from alternative use of resources are not perceived as such by the affected groups and economic stimuli are not sufficient. Also, it is often difficult to readapt or relocate the work force in the affected industry, since the sectors most seriously affected often employ a higher share of older, or other relatively less mobile, workers than industry as a whole. This problem is compounded where there are concentrations of unskilled labor—frequently the group that is in jeopardy—in particular regions. It must also be noted that it is considerably easier to achieve structural adjustment in a buoyant economy than when sluggish economic conditions prevail: in a vigorous economy, labor mobility is greater than in one characterized by high unemployment and reduced opportunities for the use of resources.

There is thus a serious difficulty in reconciling an open and liberal commercial policy—a stance repeatedly avowed and supported by industrial countries—with the need to cope with the problems of uncom-petitive industries. The dilemma for governments in industrial countries is to choose policies from a limited range of options: to furnish import protection, which may provide short-term relief by further postponing the need to adjust at the cost of fostering inflation and inhibiting growth; to refrain from any actions in the commercial policy field, allowing possibly disruptive adjustments to take place, but at the social and political cost of a temporarily higher level of unemployment; or—perhaps the most difficult although preferred alternative from an international point of view—to encourage structural adjustments that would promote the transfer of resources to more efficient uses and to supplement the efforts of the affected industries to increase their productivity. Policymaking in this connection is influenced by the asymmetry of pressures for protection. While the diffused impact of protectionist actions and the difficulty of organizing the consuming public at large limit the possibilities for the potential losers to exert pressure on the authorities against protection, the potential beneficiaries are often well organized and more effective in bringing pressure.

Many of the factors that underlie the rise in protectionism are likely to persist in the years ahead. If, as may well be the case, unemployment in the industrial countries remains relatively high, the difficulties of effecting structural adjustments in these countries may remain serious. The problem of import competition in industrial products is expected to grow further. In the developing countries the diversification of the export base is likely to continue, thus enabling them to compete in new lines of manufacturing production, particularly where low labor costs are a major determinant of the pattern of comparative advantage. In some sectors (such as steel and shipbuilding), large excess capacities are expected to remain in existence for a number of years. Thus, even with a revival of aggregate demand, some sectors in the industrial countries will continue to experience difficulties. Nevertheless, if governments capitulate to these pressures for protection, the consequences for the international economy will become increasingly serious, especially for developing and other primary producing countries whose development and industrialization efforts are affected. Several developing countries currently facing renewed protectionist pressures in the industrial countries have incurred external indebtedness on the assumption that foreign markets will remain open. Unless this assumption is realized, the debt servicing burden of the developing countries that depend heavily on access to foreign markets may become difficult, resulting in the vicious circle of balance of payments crises, debt renegotiations, and the shrinkage of foreign capital flows.

Perhaps the most disquieting feature of recent developments is the apparent erosion of political commitment to a liberal trading system. A reflection of this erosion is the growing trend toward the organization and structuring of world trade involving quantitative regulation of trade flows. This trend originated in the textile sector in the early 1960s, where bilaterally negotiated restraint arrangements under multilateral rules were accepted because even more restrictive measures might have been imposed in their absence. There has been an increasing tendency to resort to bilateral trade restraints outside the framework of existing rules. These developments have culminated in recent proposals for the organization of international trade that appear to favor multilateralization of restraint arrangements and international surveillance of market shares. Experience with the operation of bilateral restraint arrangements—either under a multilateral framework, as in textiles, or on a purely ad hoc bilateral basis—suggests that such restraints may perhaps introduce an element of certainty in trade relations over the short term. Even so, the organization of markets does not appear to be conducive to the dynamic evolution of trade according to the principles of comparative advantage, efficiency, and nondiscrimination, especially if negotiated arrangements are unable to provide adequately for the emergence of new suppliers, technological change, and changes in relative costs of production. These developments pose two fundamental issues for international commercial policy—whether the principles of nondiscrimination and reciprocity, on which the world trading system is based, can withstand the growing pressures and stresses being placed on trade relations, and whether the existing forms and instruments of multilateral cooperation are adequate to cope with the conflict between the short-term interests of trading nations and the broader objectives of promoting growth of world trade, employment, and income.

In the light of the preceding discussion, determined and broadly conceived efforts at the national and international level will be required to arrest the drift toward protectionism, with the determining impulse for directing policies toward renewed liberalization coming from national governments.

A study, The Rise in Protectionism, on which this article is based, has been published by the Fund (English only) in its Pamphlet Series and is available upon request from The Secretary, International Monetary Fund, Washington, D.C. 20431, U.S.A.

Finance & Development, September 1978
Author: International Monetary Fund. External Relations Dept.