Friday 26 March 2010

Temporary Protectionism?

Given the delicate situation that some economies face of persistent current account deficits, some may argue that protectionism could be a temporary solution to the problem, as Pedro Lains has warned below. But one has to keep in mind a stubborn fact about temporary protectionism - which has been invoked in the past to support infant industries, to force favourable terms of trade or to alleviate acute macroeconomic imbalances. And the fact is: there is no such thing as temporary protectionism. For the simple reason that protectionism leads not only to disruptions of trade but also to reallocation of resources which, in turn, creates strong constituencies who will do whatever it takes to stop any reversal of policy.
Many years ago, the French economic historian François Crouzet stated, with some exaggeration to be sure, that the resistance to free trade in his own time - the 1960's - was a consequence of the profound reallocation of resources caused by the Continental Blockade during the Napoleonic Wars. Be that as it may, protectionism is never undone without serious political struggle or an external shock of biblical proportions.

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