Protectionism, a negative-sum game

Protectionism, a negative-sum game

January 25, 2019

Cristina Rossi

The assessment of the potential magnitude of a global shock on trade barriers must start with a review of the current situation in terms of both tariff and non-tariff measures. The current level of protection in the United States, China, and the European Union - the main markets involved in the recent commercial tensions - is in fact quite differentiated. Moreover, the elasticities of import demand at price increases in these markets also tend to differ

 

Concerns surrounding protectionism have mounted only in recent months, but the analysis of barriers in global trade shows a slowdown in the liberalization process for some years now (for details you can see the report "Evoluzione del commercio con l’estero per aree e settori", ICE-Prometeia, November 2018 ).

The average tariff-level on manufactured goods, weighted for market dimension, showed only a slight reduction between 2001 and 2017 (from 4.4% to 3.7%): this is a result of the increasing relevance of emerging countries, typically characterized by higher levels of protection, on world trade in the aforementioned period (+15 pp). Moreover, in recent years, non-tariff measures have increased significantly: at a world level, since 2010, over 3000 actions to limit imports of goods have been carried out (of which almost 500 led by the United States). These measures have surged since 2013, showing a peak in 2018, fueled by actions taken by the US towards China.

 
Fig.1 Non-tariff measures on imports of goods: number of new barriers per year
Protectionism, a negative-sum game
Prometeia calculations on Global Trade Alert data
 

Under the hypothesis of a global trade war, the United States, China, and members of the European Union would be the most affected countries. At present, trade restrictions in these Big-3 markets are slightly different. The average duty rate (Most Favored Nation, MFN tariff) is higher for China (5.7%), followed by the European Union (3.7%, an overestimated figure bearing in mind that almost 70% of imports are intra-area and hence duty-free); on the other hand, the level of trade protection is lower on the US market (2.4%). Additionally, in these markets, the impact of non-tariff barriers is widely differentiated: the cost of these measures is higher in the EU, followed by China; conversely, the United States is the most open market from this point of view.

However, the current situation in terms of trade protection (tariff and non-tariff) is just one of the useful elements to picture what could be the sectoral effects of an escalation of trade tensions. To this aim, it is also important to consider the import elasticity to a price increase. An analysis based on a large set (4625 products and 117 countries) of elasticity coefficients of import demand to price, shows that – for manufactured goods on average – the import elasticity is higher for the United States (- 2.3), while China (-1.9) and the EU (-1.8) show a relative greater rigidity in import demand, albeit partly for different reasons. A higher variance can be found at a sectoral level. Moreover, the analysis of the main suppliers of the United States shows that in 14 out of 17 manufacturing sectors, China is one of the first three suppliers (8 times in the first place and 4 in the second), underlining the great potential impact of an increase in US tariff barriers towards Beijing.

 
Fig.2 The cost of protectionism for Italy: impacts on trade flows and GDP (% deviations from the "no trade war" scenario)
Protectionism, a negative-sum game
Prometeia estimates
 

To complete the assessment on this topic, it is interesting to evaluate to what extent a global trade war could affect growth in Italy, whose economy is strongly reliant on exports.

Under the hypothesis that the US introduces a 10% tariff on imports from all partners, which in turn respond with the same tariff increase on their imports from the US (but not on those from other countries), we estimate a negative outcome on the Italian GDP growth of about -0.10% in the first year and -0.26% the year after. That is to say a loss of about 1.5 and 5.7 billion euros respectively (at constant prices).

 
 
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