Chang’s “forward-looking protectionism”


Ha-Joon Chang is now not only urging developing countries to use trade barriers to promote development but also arguing that the US needs to adopt “forward-looking protectionism.”

Between the 1830s and the 1940s, against superior European competition, the US developed its industries behind literally the highest tariff wall in the world, with the average industrial tariff rate ranging between 35% and 55%… Moreover, the theory that justified such protectionism, namely, the ‘infant industry’ argument, had been first developed by none other than the first Treasury Secretary of the US – Alexander Hamilton.

I’ll leave criticism of Chang’s history of American and European development to Doug Irwin, who notes that:

[T]he United States started out as a very wealth country with a high literacy rate, widely distributed land ownership, stable government and competitive political institutions that largely guaranteed the security of private property, a large internal market with free trade in goods and free labor mobility across regions, etc. Given these overwhelmingly favorable conditions, even very inefficient trade policies could not have prevented economic advances from taking place… [C]orrelation is not causation. Chang produces no evidence that protectionism was responsible for the growth.

Chang then turns to why the US should be protectionist in the present day:

[W]ell-designed and time-bound protection of mature industries can facilitate, rather than hindered, trade adjustment and industrial upgrading… Mr Obama should use protectionism in a similarly forward-looking way. Industries that can be revived through re-tooling of its factories and re-training of its workers should be given protection, but only if they fulfill certain conditions regarding investment and training. Industries that have no future should be given strictly temporary protection to ease phasing-out through orderly liquidation and redundancy.

First, how does a government credibly commit to temporary protection while encouraging the industry to phase out its excess or obsolete capacities? The cases of steel and automobiles are far from encouraging in this respect.

Second, tariffs protect products and industries, not firms. How would the government make protection conditional on investment and training, which do not occur at the industry level?

Third, won’t protection of developed countries’ dying industries in many cases hurt developing countries? Chang’s measures would deter Indian steel and Chinese textile exports.

Fourth, if both growing industries and dying industries should receive protection, then what industry will not? It seems that openness would be the exception rather than the rule in Chang’s preferred trading regime.

A well-designed welfare state with good unemployment insurance and re-training programme can facilitate structural changes by reducing the resistance of the workers to more open trade that exposes them to greater risks… Stronger welfare state is why the demand for protectionism is much weaker in the European economies than in the US, despite the greater acceptance of active role of the government in the former.

Does anyone have quantitative measures to support this claim? We know that the CAP is much worse than US farm subsidies. In what areas is Europe less protectionist?

Ha-Joon Chang has a long way to go before he convinces me of the merits of forward-looking protectionism for the United States.