Protectionism is still evil

In a recent comment on Chinese exchange rate policies Paul Krugman comes close to call for US protectionist policies against China.

Until now we have luckily avoided trade war during the Great Recession. However, during the Great Depression the global crisis was made significantly worse by an escalation of protectionist policies around the world.

Barry Eichengreen and Douglas Irwin in their 2009 paper “The slide to protectionism in the great depression: who succumbed and why?” explains how there was a strong correlation between countries with failed monetary policies and countries which implemented protectionist polices.

Here is the abstract:

“The Great Depression was marked by protectionist trade policies and the breakdown of the multilateral trading system. But contrary to the presumption that all countries scrambled to raise trade barriers, there was substantial cross-country variation in the movement to protectionism. Specifically, countries that remained on the gold standard resorted to tariffs, import quotas, and exchange controls to a greater extent than countries that went off gold. Just as the gold standard constraint on monetary policy is critical to understanding macroeconomic developments in this period, national policies toward the exchange rate help explain changes in trade policy. This suggests that trade protection in the 1930s was less an instance of special interest politics run amok than second-best macroeconomic policy management when monetary and fiscal policies were constrained.”

Scott Sumner also has a comment on Paul Krugman’s China piece.

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