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Economic Perspectives / January 2007 eJOURNAL USA

Economic Perspectives: Volume 12, Number 1

January 2007
ECONOMIC PERSPECTIVES

U.S. DEPARTMENT OF STATE / JANUARY 2007 / VOLUME 12 / NUMBER 1

http://usinfo.state.gov/pub/ejournalusa.html

Introduction

JOHN VERONEAU, DEPUTY U.S. TRADE REPRESENTATIVE

Why Liberalize Trade?

CHRISTINA SEVILLA, DEPUTY ASSISTANT U.S. TRADE

REPRESENTATIVE

Opening trade fuels growth and raises millions of people 

out of poverty.

Protectionism and Politics

BRUCE STOKES, INTERNATIONAL ECONOMICS COLUMNIST, 

NATIONAL JOURNAL

Responding to political pressure, governments have 

protected their producers from imports. As the problem of 

protectionism is political, so must the solution be.

Developing Countries Need to Open 

Markets to Each Other

DAVID DOLLAR, COUNTRY DIRECTOR FOR CHINA AND

MONGOLIA, WORLD BANK

Fully half of the benefits to developing countries from 

stalled multilateral trade negotiations would come from 

getting better access to each other’s markets.

Calming Workers’ Fears About Trade

DAVID H. FELDMAN, PROFESSOR OF ECONOMICS, COLLEGE

OF WILLIAM AND MARY

Most changes in the workplace leading to job displacement 

can be attributed to advances in technology, but it is 

increasing imports that attract more blame.

Learning the Correct Lesson About 

Protectionism

GARY HUFBAUER, SENIOR FELLOW, AND COSTANTINO

PISCHEDDA, RESEARCH ASSISTANT, PETERSON INSTITUTE

FOR INTERNATIONAL ECONOMICS

War-ravaged East Asian economies briefly used 

protectionist policies to revive their economies, but only 

when they opened their markets to imports did they 

realize enduring rapid expansion.

A Clear Model for Reform

JONATHAN KIMBALL, DIRECTOR FOR CENTRAL AND

SOUTHEASTERN EUROPE, U.S. DEPARTMENT OF

COMMERCE

The difference in economic development between the 

many former Soviet bloc countries that have opened their 

markets and the few that have not done so is sharp and 

revealing.

How the WTO Fights Protectionism

CARLA A. HILLS, CHAIRMAN AND CHIEF EXECUTIVE

OFFICER, HILLS & COMPANY

The WTO is the world’s greatest bulwark against 

protection.

Additional Resources

Bibliography

Internet Resources

Economic Perspectives / January 2007

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Benefits of Trade

Costs of Protectionism

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Economic Perspectives / January 2007 2 eJOURNAL USA 

Introduction

History and experience provide 

us with important insights as 

we look to the future of the 

international trading system. Particularly 

since the end of World War II, trade has 

been an integral engine of the world’s 

economic progress. Successive rounds 

of multilateral trade liberalization under 

the General Agreement on Tariffs and 

Trade (GATT) and its successor, the 

World Trade Organization (WTO), have 

helped rebuild war-devastated economies 

in Europe, provided a proven path to 

development for independent and modernizing nations in 

Asia, Latin America, Africa, and the Middle East, and lifted 

hundreds of millions of people out of poverty.

For the past seven decades, American presidents from 

Franklin D. Roosevelt to George W. Bush have steadfastly 

supported lowering trade barriers between the United States 

and our partners around the world. They have shared a belief 

in trade’s central role in promoting rising standards of living, 

greater prosperity, and a broader range of choices for our 

citizens and those of other nations. As a result, the United 

States is the most open major economy in the world, and 

this openness is a clear source of strength. According to the 

Peterson Institute for International Economics, U.S. annual 

incomes are $1 trillion higher, or $9,000 per household, due 

to trade liberalization since 1945. 

We are now witnessing a period of rapid transformation 

in the global marketplace. Just in the years since the Cold 

War ended, roughly 2 billion more workers and consumers 

have joined the international economy as political and 

technological barriers to market participation have fallen 

away. In order to empower more individuals to pursue their 

dreams and provide for their families, we must unleash trade’s 

potential to promote further global economic growth and 

fuel better jobs.

The World Bank estimates that the full elimination of 

trade barriers can lift tens of millions more out of poverty; 

hence, the moral imperative to find a way forward on trade 

is clear. Moreover, while debt relief and foreign aid can make 

an important contribution to development in poor countries, 

trade and trade liberalization are likely to be even more 

powerful tools for alleviating poverty and providing societies 

with the economic resources to address their most pressing 

needs. Again according to the World Bank, the annual 

income gain to developing countries from 

the elimination of trade barriers to goods 

alone is $142 billion, conservatively 

measured. This amount exceeds the $80 

billion in foreign economic assistance 

by the major industrialized countries in 

2005 and the proposed $42.5 billion for 

developing country debt relief combined.

The potential gains from freeing 

trade in manufactured goods, services, 

and agriculture are truly substantial. 

The suspension of the Doha Round 

of WTO negotiations in 2006 was 

disappointing for all who believe in the power of trade to 

promote economic development, to expand opportunities, 

and to facilitate peaceful cooperation among nations. That is 

why President Bush has directed the Office of the U.S. Trade 

Representative to continue in the quest for an ambitious and 

balanced agreement that meets the development objectives of 

Doha. 

The rapid pace of change in the international economy 

and its effects—both positive and negative—on regions, 

localities, and individuals breed understandable anxieties. 

Each society must find a way to address the needs of those 

who may be dislocated by change and cushion the transition. 

But backsliding and erecting walls and barriers to trade is not 

the answer: Trade barriers protect a few at the expense of the 

many, and countries that fail to resist protectionist actions 

risk slower growth, inefficient and noncompetitive sectors, 

greater unemployment, and increased inflation in the longer 

term.

Increased trade also has broad social benefits: Countries 

that are wealthier are more likely to devote resources to 

preserving their environment, and workers in export-related 

industries tend to earn higher wages than their domestic 

counterparts in non-exporting sectors. The gains from trade 

are real to the hundreds of millions of individuals today 

whose livelihoods and households depend upon it. 

We hope that readers will take the time to review each 

of the articles in this volume and gain from them a greater 

understanding of the benefits of trade liberalization for 

improving the quality of life for all people throughout the 

world.

 Ambassador John K. Veroneau

 Deputy U.S. Trade Representative 

Ambassador John K. Veroneau
3 eJOURNAL USA

The evidence is clear. Opening trade creates wealth 

for societies to address their needs and promotes economic 

development; erecting barriers to trade leaves people and 

countries worse off overall. The United States learned this 

lesson after imposing the damaging Smoot-Hawley tariffs in 

the 1930s. Since then, the United States has led the world in 

opening international markets, which has fuelled countries’ 

growth and development and helped raise millions of people 

out of poverty. But much more remains to be done to realize 

the benefits of freer trade in agriculture, manufactured goods, 

services, and other areas. Developing countries especially 

stand to gain if the impasse is broken in multilateral trade 

negotiations. World Bank studies have found that tens of 

millions more can be lifted out of poverty through increased 

trade.

Christina R. Sevilla is deputy assistant U.S. trade 

representative for intergovernmental affairs and public 

liaison.

“We will fight to lift the burden of poverty from 

places of suffering—not just for the moment, but 

permanently. And the surest path to greater wealth 

is greater trade.”

 President George W. Bush

 September 14, 2005

The world of the 21st century faces enormous 

challenges. More than 1 billion of its people live 

in poverty, a condition that devastates families, 

communities, and nations. Developed and developing 

countries alike share the goals of alleviating poverty 

around the globe, achieving greater economic growth 

and higher standards of living, and generating new 

employment and opportunities for their citizens.

As governments seek to break the impasse in the 

current World Trade Organization (WTO) Doha Round 

of negotiations, it is worth recalling that economic theory 

and practical experience demonstrate that open markets 

and trade liberalization—dismantling tariff and nontariff 

barriers to trade—provide a proven path to wealth 

creation and development. Countries that are open to 

trade tend to have more wealth, healthier populations, 

Why Liberalize Trade?

Christina R. Sevilla

Courtesy of ACDI/VOCA

About half of the global benefits from freer trade in goods would go to people in developing 

countries, such as this Angolan fruit trader.

Economic Perspectives / January 2007
Economic Perspectives / January 2007 4 eJOURNAL USA 

higher rates of education and literacy, stronger labor 

rights and environmental standards, and greater 

investment opportunities. Trade barriers, in contrast, 

may shield narrow special interests from competition, 

but ultimately they leave a nation as a whole worse off 

in terms of wealth foregone, slower growth, and, hence, 

fewer resources to address pressing societal needs.

THEORY AND EVIDENCE

Why do countries trade? The intellectual 

underpinnings of free trade are well known to 

economists. Simply put, nations benefit by specializing 

in the production of goods and services that they can 

produce most efficiently, and exchanging these for the 

goods and services that other countries produce at higher 

quality and lower cost. In this arrangement, countries 

benefit from more efficient production, increased 

consumer choice, and better goods and services at lower 

prices. Dismantling government barriers to trade allows 

individuals access to the world’s supermarket for food, 

clothing, and other manufactured goods, and for services 

that form the infrastructure of the modern economy, 

ranging from finance to telecommunications and 

transportation to education.

Competition also motivates businesses to innovate, to 

find new production processes and technologies to better 

serve customers, and to advance knowledge. For example, 

the development of advanced computer technologies and 

life-saving medicines in recent years has flourished under 

conditions of open markets and export opportunities for 

industry growth, coupled with enforcement of strong 

copyright and patent laws.

Barriers to competition produce the opposite effect—

less efficient domestic industries; higher costs, poorer 

quality, and fewer choices of goods and services; less 

innovation; and slower economic growth.

The economic history of the 20th century provides 

a potent demonstration of the vast benefits of trade 

liberalization for hundreds of millions around the world 

and a dramatically painful lesson on the global costs 

of trade barriers. In 1930, the United States imposed 

unprecedented trade barriers in the mistaken belief that 

U.S. producers could not successfully compete against 

foreign producers due to lower foreign wages and 

production costs. At that time, the U.S. Congress passed 

the Smoot-Hawley Tariff Act, which erected high tariff 

walls to shield the U.S. market from foreign competition. 

The consequences were disastrous. Trading partners 

retaliated by protecting their own markets from foreign 

imports. World trade fell by 70 percent in the early 

1930s, throwing tens of millions out of work, deepening 

the Great Depression, and fuelling the political tensions 

that helped give rise to World War II.

Since then, successive American presidents and 

Congresses have laid the foundations and forged 

consensus for peaceful economic cooperation and shared 

prosperity through the General Agreement on Tariffs 

and Trade (GATT) and its successor institution, the 

World Trade Organization. From its original 23 founding 

members under the GATT in 1947, today’s WTO 

has 150 members at every level of development and 

representing every region of the globe, with more than 

two dozen countries seeking to join. The goal remains 

the same: to lower barriers to trade and spur new trade 

flows among nations, thereby unlocking the benefits 

of economic growth and development on the broadest 

basis. Trade rules also provide certainty, transparency, and 

predictability in international commerce, help foster the 

rule of law, and allow for countries to settle their trade 

disputes peacefully.

TRADE CREATES WEALTH

Empirically, expanded trade has been essential to 

economic growth and wealth for both developed and 

developing countries.

The openness of the U.S. market to the world 

has been a cornerstone of this nation’s strength and 

prosperity. The United States is the world’s largest 

economy and largest importer and exporter. Since 

the 1990s, freer trade has helped raise U.S. national 

economic output by nearly 47 percent, and, over the 

same period, the U.S. economy added nearly 19 million 

jobs. Manufactured exports support more than one in 

six U.S. manufacturing jobs, an estimated 5.2 million 

jobs, and agricultural exports support an additional one 

million jobs. Jobs supported by exports pay about 13 to 

18 percent more than the national average.

American households also benefit from the freedom 

to choose imports from around the world. It is estimated 

that the two major trade agreements of the 1990s—the 

WTO Uruguay Round and the North American Free 

Trade Agreement between the United States, Canada, and 

Mexico—generate increased purchasing power of $1,300 

to $2,000 per year for the average American family of 

four.

For developing countries, the benefits of trade 

openness coupled with pro-market domestic reforms are 

also proven by experience, and the potential for greater 
5 eJOURNAL USA

growth and poverty reduction through trade liberalization 

is substantial. The World Bank has reported that per 

capita real income grew nearly three times faster for the 

developing countries that lowered trade barriers 

(5 percent per year) than for other developing countries 

(1.4 percent per year) in the 1990s.

With respect to poverty, Columbia University 

economics professor Xavier Sala-i-Martin finds that global 

poverty rates have declined significantly over the last 

three decades, estimating between 250 million and 500 

million fewer poor 

in 2000 than in 

1970, coupled with 

reductions in global 

income inequality 

during the 1980s 

and 1990s. China, 

for example, has 

aggressively opened 

its market and 

expanded its trade, 

lifting more than 

250 million people 

out of poverty. 

Chile, which has 

also actively opened 

its market to trade 

and commerce, has 

more than halved its 

poverty rate, which 

declined from 46 percent in 1987 to around 18 percent 

in 2004. On the other hand, in sub-Saharan Africa, a 

region that has been much less open to trade, countries 

are only now beginning to open markets and expand 

trade in a way that will alleviate increased poverty.

Studies by the World Bank and the Peterson Institute 

for International Economics estimate that global free 

trade could lift tens of millions more out of poverty 

and inject $200 billion annually into the economies of 

developing countries. However, for developing countries 

to fully realize the benefits of liberalization, trade should 

be accompanied by other domestic reforms, assistance, 

and capacity building.

With regard to trade capacity building, the United 

States has made it a priority to provide developing 

countries with the tools to benefit from the global trading 

system. The United States is the largest single-country 

provider of trade-related assistance, which includes traderelated physical infrastructure. U.S. cumulative spending

on such aid in 2001-2006 totaled more than $5.6 billion 

in grants. 

TRADE LIBERALIZATION AND DEVELOPMENT

Developing countries are potentially large beneficiaries 

of further multilateral trade liberalization in agriculture, 

manufactured goods, and services through the WTO 

Doha Round.

Agriculture: More than 70 percent of the poor 

in developing 

countries live 

in rural areas. 

World Bank and 

Organization 

for Economic 

Cooperation and 

Development 

(OECD) studies 

concur that the 

most important 

thing developed 

countries can do to 

benefit developing 

countries is to 

make deep cuts 

in agricultural 

tariffs. Eliminating 

agricultural 

distortions by 

developed and developing countries alike would deliver 

nearly two-thirds (63 percent) of the potential benefit to 

developing countries. World Bank studies indicate that 

93 percent of the welfare gains from removing distortions 

to agricultural trade globally would come from reducing 

import tariffs, while only 2 percent of gains would come 

from reducing export subsidies and 5 percent from 

reducing domestic support. Virtually all of the welfare 

gains to developing countries from removing distortions 

to agricultural trade globally come from the removal of 

import tariffs.

Goods: According to the World Bank, roughly half 

of global economic benefits from free trade in goods 

would be enjoyed by developing countries. The estimated 

increase in developing countries’ annual income by 

2015 is $142 billion, or 49 percent of global gains. 

Taking dynamic changes to economies into account, that 

estimated increase rises to as much as $259 billion, or 

56 percent of global gains. Trade barriers in developing 

countries are higher than in developed countries: The 

Countries such as India that have begun opening markets to imports give their consumers 

many more choices in groceries and other goods.

© AP Images/Amit Bhargava

Economic Perspectives / January 2007
Economic Perspectives / January 2007 6 eJOURNAL USA 

International Monetary Fund finds that trade restrictions 

in developing countries are four times higher than in 

high-income countries. Because roughly 70 percent of the 

tariffs on goods traded by developing countries are paid 

to other developing countries, low- and middle-income 

nations could benefit from eliminating their own barriers 

and stimulate further South-South trade flows.

Services: Services are now the major source of 

employment in developing economies, accounting for 

more than 50 percent of jobs in Latin America, the 

Caribbean, and East Asia. Services are the future of 

developing countries because they are the fastest-growing 

component of their total economic output and the 

largest component of foreign direct investment (FDI). 

Services account for more than 60 percent of global 

FDI, increasing from $870 billion to $5.9 trillion from 

1990 to 2004. Because the barriers to trade in services 

are extensive, the payoff for reducing them is great. 

For example, a recent World Bank report indicates 

that countries with open financial services sectors have 

grown on average one percentage point faster than other 

countries. A University of Michigan study estimates 

that liberalization of services would produce more than 

two-thirds of the global economic welfare gain from the 

elimination of trade barriers.

TRADE AND THE ENVIRONMENT

Trade liberalization can and should support sustainable 

development. Generally speaking, countries that are 

wealthier tend to devote 

greater societal resources 

to domestic environmental 

preservation. In the WTO, 

the Doha Round holds 

great promise for win-win 

situations with regard to 

trade and environment, 

whereby liberalization yields 

positive environmental 

outcomes. For example, many 

prominent environmental 

nongovernmental 

organizations, such as Oceana 

and World Wildlife Fund, 

have supported the efforts of 

trade ministers to eliminate 

harmful fish subsidies, which 

lead to overfishing of the 

world’s oceans and depletion 

of fish stocks, as part of the Doha negotiations. Further, 

liberalizing trade in environmental goods and services 

can support sustainable development goals by providing 

greater access at lower cost to key environmental 

technologies in areas such as wastewater management, 

solid and hazardous waste management, remediation 

of soil and water, and protection of ambient air and 

renewable energy production.

THE WISER PATH

Developing and developed countries alike face an 

important choice in the direction of their trade policy. 

In a rapidly shifting global economy, policy makers 

may be tempted to shield their domestic markets from 

competition and erect new barriers that advantage a 

relatively small group at the expense of the vast majority 

of producers, workers, and consumers. Theory and 

empirical evidence counsel a wiser path. Openness to 

trade has been the foundation for economic growth, 

prosperity, rising standards of living, and a better life for 

countless millions in countries around the world.

The United States stands ready to dismantle remaining 

trade barriers as others do the same and create real, new 

trade flows that will benefit businesses both large and 

small, workers, farmers, and families. The gains from 

trade yet to be realized for the hundreds of millions more 

who seek greater freedom, opportunity, and a path out of 

poverty mean that it is imperative to expand new markets 

abroad. 

A Taiwan-made wrench for sale in Mexico City demonstrates the benefits of open trade for both of 

these advanced developing economies.

© Lynsey Addario/Corbis
7 eJOURNAL USA

Protectionism has a long history. Responding to political 

pressure, governments in developed and developing 

countries have protected their textile, auto, agriculture, 

and other producers from imports. In some places, farmers 

receive protection despite their small numbers because they 

hold disproportionate voting power. As the problem of 

protectionism is political, so must the solution be.

Bruce Stokes is international economics columnist for 

the National Journal.

Protectionism—government efforts to shield 

domestic producers from international 

competition—is deeply rooted in the politics of 

nations throughout the world. It is both the product of 

special interests and a reflection of general public anxiety 

about change. And it comes at great economic cost.

Resistance to trade liberalization and its political roots 

are hardly new. In the first half of the 19th century, Britain 

imposed import tariffs designed to “protect” British farmers 

and landowners from competition posed by cheap foreign 

grain imports. But these import taxes raised food prices in 

English cities, forcing reluctant industrialists to pay higher 

wages so that their workers could afford to eat. In 1846, 

after a protracted struggle in Parliament, these Corn Laws 

were repealed, marking the political ascendance of the new 

English middle class.

Similar fights over tariffs dominated much of 19th 

century American politics. In the run-up to the American 

Civil War (1861-1865), the northern, industrial 

states wanted high tariffs to protect their emerging 

manufacturing interests from European competition. 

The southern states wanted low tariffs because they 

imported much of what they consumed, from linens to 

farm machinery. One indication of just how important 

this issue was: When Jefferson Davis, the president of 

Protectionism and Politics 

Bruce Stokes

Protectionism has long been contentious. This cartoon makes fun of the protectionist platform of 1896 U.S. presidential candidate William McKinley.

Joseph Keppler and Frederick Opper, Puck Magazine, June 3, 1896

Economic Perspectives / January 2007
Economic Perspectives / January 2007 8 eJOURNAL USA 

the secessionist Confederate 

States of America, gave his 

inaugural address in 1861, 

he spent much of the speech 

talking about the need for 

low tariffs, not about slavery.

Three-quarters of a 

century later, politically 

inspired protectionism was 

a worldwide response to the 

Great Depression. During 

the 1928 U.S. presidential 

election campaign, 

Republican candidate 

Herbert Hoover pledged to 

raise tariffs on farm imports 

to aid American farmers, 

who had experienced years of 

declining commodity prices. 

Once Hoover’s promised 

legislation began moving 

through the Congress, 

industrial-sector special interest groups added their own 

tariff protections.

The resulting Smoot-Hawley Tariff Act of June 1930 

ended up raising all U.S. tariffs to historically high levels. 

Foreign retaliatory duties sent global commerce spiraling 

downward. By 1934, world trade was only one-third what 

it had been in 1929.

TEXTILES AND APPAREL

In the modern era, thanks to a half century of tariffreducing global trade negotiations, protection is far 

less extreme. But it is no less political. Agricultural, 

industrial, and service industry interests still resist 

market liberalization because they have domestic market 

dominance to preserve and they fear the lower prices and 

technological innovations posed by foreign competition.

The protection afforded the textile and apparel industry 

in all parts of the world until recently is a classic case 

of such vested interests defending themselves against 

imports. Restraints on trade in cloth and garments first 

emerged in the 1950s as developing countries began to 

compete with producers in Europe and the United States. 

The multilateral 1974 Multifibre Arrangement imposed 

product-specific import quotas and tariffs on all such 

trade. This protection cost U.S. consumers more than 

$20 billion a year in higher prices for shirts, trousers, and 

underwear. And the World Bank estimated that every 

American or European job preserved by such import 

restraints denied jobs to 35 workers in poorer countries.

Nevertheless, thanks to the political influence of 

American and European textile and apparel makers and 

the unions that represented their workers, limitations on 

trade remained in place until 1993, when rich countries 

finally agreed to lift them. But even then, it took a decade 

to phase them out. So it was not until 2005, more than 

half a century after protection began, that trade in textiles 

and apparel was finally liberalized. And even now, such 

commerce faces some extremely high tariffs.

PROTECTING AUTOMAKERS

Protection can also affect higher-value products such 

as automobiles, an industry that at various times has been 

protected by powerful political interests in Japan, Korea, 

China, and the United States.

In the 1970s and 1980s, the U.S. auto industry faced 

its first major challenge from foreign competition as 

Japanese automakers aggressively entered the American 

market. As Japan’s share of the U.S. market grew, the Big 

Three U.S. automakers—Ford, Chrysler, and General 

Motors—convinced the federal government to impose 

a cap on the number of cars Japan could ship to the 

United States. In 1981, the Reagan administration agreed 

to impose such restraints, despite President Reagan’s 

free market philosophy, because the auto and auto parts 

Farmers protest in France, where the political system gives them a disproportionate influence in elections. 

© AP Images/Claude Paris
9 eJOURNAL USA

industries were major employers in the United States. 

Moreover, such employment was largely concentrated in 

a number of politically pivotal states—Michigan, Ohio, 

and Illinois—that exerted a great deal of influence in 

Congress and in presidential elections.

The annual import limit had the perverse effect 

of encouraging Japanese car companies to change the 

product mix of vehicles they shipped to the United 

States, sending more upscale models, where the profits 

were greatest, and fewer smaller, cheaper cars. It is 

estimated that, at its peak in the early 1980s, the quota 

was transferring $5 billion a year in additional profits to 

Japanese automakers, who could sell their quota-limited 

cars at a premium. Despite this protection, the U.S. 

auto industry continued to lose market share to Japanese 

producers because Toyota, Nissan, and Honda simply 

jumped over the trade barrier and began manufacturing 

cars in the United States.

America is not alone when it comes to the imposition 

of protectionist policies as the result of political influence. 

In South Korea, for example, foreign car makers from 

Japan, Europe, and the United States sold only 30,000 

cars in 2005, just 3.3 percent of the Korean market. That 

same year, Korean automakers sold more than 1.5 million 

vehicles abroad. The combination of an 8 percent tariff 

and taxes on engine size add about $9,000 to the price 

tag of a $30,000 imported car. Moreover, until recently, 

the Korean government audited the tax returns of anyone 

who bought an imported car, a sure way to discourage 

buying a foreign brand.

DISPROPORTIONATE VOTING

The ability of special interests to influence trade policy, 

and whether they can continue to exercise such influence, 

can best be explained by the constitutional structures in 

which such trade policies are formulated, the changing 

political-economic balance within modern societies, and 

the evolution of public opinion about trade issues around 

the world. Special interests can often manipulate political 

systems because they reflect economic and political 

realities that no longer exist.

In the United States, members of the U.S. House of 

Representatives represent people. There is one member 

for approximately every 650,000 citizens. Members of the 

U.S. Senate represent land. There are two senators from 

every state, no matter its population. This arrangement 

reflects a deal made in the 18th century at the time the 

U.S. Constitution was written to balance the interests 

of large and small states. In the 21st century, the effect 

has been to give agricultural interests disproportionate 

influence in the U.S. Senate, reinforcing support for 

American agricultural subsidies that can distort trade.

But America is not alone in its constitutional bias 

toward protectionism. Although active farmers make 

up less than 4 percent of the French electorate, their 

high turnout rate enables them to deliver 8 percent of 

the vote in national elections. And the French electoral 

system affords farmers a disproportionate chance to 

become elected officials. More than one-third of the 

country’s mayors are active or retired farmers. And since 

members of the French Senate are indirectly elected 

by municipal councils, it is not surprising that farmers 

are overrepresented in that upper house. The disparity 

between the percentage of farmers in the Senate and the 

proportion of farmers in the overall population has nearly 

doubled in the past 40 years.

And the nature of the French presidential election 

system makes it hard for a presidential candidate to 

ignore farm interests. A runoff system, in which the 

top two vote-getters proceed to a second round, gives 

farmers—who overwhelmingly belong to parties of 

the political right—great influence in choosing the 

conservative candidate. In 1988, for example, farmers 

accounted for nearly one of every four votes given to 

Jacques Chirac, the conservative winner in the first 

round. It is little wonder that Chirac has often been 

considered a creature of organized agriculture.

These peculiarities of the French political system allow 

other strong, regionally based industries, such as textiles 

and electronics, to exert similar pressure. This contributes 

to the weakness of the Patronat—the leading French 

trade association for French industry—and effectively 

silences its opposition to the farm lobby and the forces of 

protectionism.

Similarly, in the South Korean National Assembly, 

rural voters are “overrepresented” by a margin of three 

to one. This disproportionate influence of farm voters 

has led to high tariffs on food imports, forcing Korean 

consumers to pay some of the world’s highest prices for 

beef, fruits, and vegetables.

Experience in Japan, however, suggests that changes 

in constitutional arrangements can transform the 

politics that drive protectionism. Up until the 1980s, 

apportionment of electoral districts for the Japanese Diet 

reflected the distribution of the population in the years 

following World War II, when only one-third of the 

people lived in urban areas and two-thirds lived in rural 

areas. But by the 1980s, three-quarters of the Japanese 

population lived in cities. As a result, it took five times as 

Economic Perspectives / January 2007
Economic Perspectives / January 2007 10 eJOURNAL USA 

many urban votes as rural votes to elect a Diet member. 

By-products of this rural influence were a 700 percent 

tariff on rice and one of the world’s most protected 

agricultural sectors.

But in 1994, electoral reform in Japan dramatically 

narrowed rural-urban differences in legislative 

representation. This change in the balance of voting 

strength led the Liberal Democratic Party, which had 

dominated Japanese politics after World War II, to 

transform itself from a rural-based party to an urban 

and suburban party, with new policy priorities. Japanese 

government subsidies have been redirected from farmers 

to urban residents, and while Japan is far from being an 

open economy, it now imports far more than it ever did 

before.

PUBLIC AMBIVALENCE

The politics of trade are also driven by the public’s 

profound ambivalence toward international commerce. 

In principle, people worldwide think globalization 

is good for their families and for their countries. In 25 

of the 44 nations surveyed by the Pew Global Attitudes 

Project in 2002, majorities of at least 60 percent thought 

that globalization was a good thing. Africans, who live 

on the poorest continent, were the most upbeat. Seven 

in 10 respondents in Uganda said greater international 

commerce was good for their 

nation. Roughly two-thirds of 

Nigerians agreed. Meanwhile, 

more than half the Vietnamese, 

whose economy is the secondfastest growing in Asia, thought 

that internationalization had been 

good.

A more recent survey by the 

German Marshall Fund found 

ambivalence about trade in 

Europe and the United States. 

Seven in 10 Americans favored 

international trade in 2006, up 

from two-thirds in 2005. And 

even more Europeans, three out 

of four, supported trade, up from 

two in three. But more than half 

the French and nearly one-third 

of Americans do not favor freer 

trade. And half the Germans and 

three-fifths of the Americans and 

the French think freer trade costs 

more jobs than it creates.

Overall, it would seem that Americans and Europeans 

are free traders in principle and protectionists in practice. 

The same people endorse free trade as a philosophical 

concept and also support tariffs on steel imports, for 

example, if those tariffs will protect local jobs.

The tragedy of protectionism is the economic cost 

it imposes on national economies, especially poor ones. 

Recent studies by the World Bank conclude that removal 

of protectionist barriers in developing countries has 

increased growth between 1.2 and 2.6 percent. Moreover, 

trade liberalization has been followed by acceleration in 

investment and exports of goods and services.

These economic benefits notwithstanding, the political 

roots of protectionism and its long history suggest that 

barriers to trade will remain an impediment to economic 

well-being for some time to come and that protectionism 

will have to be addressed politically if it is to be 

overcome. 

The opinions expressed in this article do not necessarily reflect the views or 

policies of the U.S. government.

Japanese farmers resist trade agreements opening the country’s agricultural markets to any more 

foreign competition.

© AP Images/Itsuo Inouye
11 eJOURNAL USA

Fully half of the benefits to developing countries from 

stalled multilateral trade negotiations would come from 

getting better access to each other’s markets. They would 

gain more by lowering their own barriers to agricultural 

trade than they would by wealthy countries lowering their 

barriers, although the latter also must happen.

With two-thirds of the industrial goods tariffs paid 

by developing countries going to other developing 

countries, further trade liberalization could attract 

foreign investment and advance developing country 

growth. Completing the Doha Round trade negotiations 

will require real leadership on the part of the developing 

world, especially the big developing countries that have 

benefited so much from globalization.

David Dollar is World Bank country director for 

China and Mongolia.

The Doha Round of multilateral trade negotiations 

is stalled and may very well fall apart. This 

round of trade liberalization was supposed to be 

the World Trade Organization’s “development round” 

that would provide benefits in particular to developing 

countries, which are home to 1 billion people living on 

less than $1 per day and 2.6 billion living on less than 

$2. How would a new round of trade liberalization help 

poor countries?

OPENING AGRICULTURAL MARKETS

The most obvious issue—and the one that has 

received the most attention—is the ongoing agricultural 

protection of rich countries. Japan protects rice and 

other markets. The United States and Europe subsidize 

and protect farmers. Completely liberalizing agricultural 

markets in rich countries would provide an immediate 

annual benefit to developing countries of $26 billion, 

Developing Countries Need to Open 

Markets to Each Other

David Dollar

Auto shoppers in Malaysia have more choices since the country opened its markets to imports from 

neighboring Southeast Asian countries.

© AP Images/Teh Eng Koon

Economic Perspectives / January 2007
Economic Perspectives / January 2007 12 eJOURNAL USA 

according to a recent World Bank estimate. To put this 

number in context, it is about one-half of the annual flow 

of foreign aid from rich countries to poor ones. Thus, 

opening agricultural markets in rich countries is one 

important issue.

Less well publicized is the fact that opening the 

agricultural markets of developing countries would provide 

to these countries a similar—even slightly larger—gain of 

$28 billion per year. This gain comes partly from the fact 

that trade liberalization will enable each country to expand 

production of goods and services that the country makes 

efficiently and sell them at better prices. Another benefit 

from trade is that consumers will buy at lower prices 

goods and services that their country does not produce so 

well.

In addition, developing country liberalization would 

stimulate South-South trade—trade among developing 

countries—providing benefits to other poor countries. 

Where it can be achieved, liberalization of markets for 

staple foods can particularly help reduce poverty, since 

these goods account for a large share of expenditure of 

poor households in developing countries.

CUTTING INDUSTRIAL TARIFFS

While a lot of attention in trade discussions focuses 

on the agriculture issue, there is an equally strong case 

for further liberalizing markets for industrial products. 

Many developing countries are now efficient producers 

of manufactured products, especially labor-intensive 

ones such as textiles and electronics. In fact, 80 percent 

of the exports of developing countries are manufactured 

products.

The largest markets for industrial goods are in the rich 

countries, but their import tariffs are already relatively low. 

Right now, about two-thirds of all industrial tariffs paid by 

developing-country producers are paid to other developing 

countries because import tariff rates for industrial products 

tend to be higher in developing countries.

Developing countries thus have a lot to gain from 

better access to each other’s markets. This will enable 

more efficient firms to expand production and achieve 

scale economies and will encourage more specialization, 

as has been seen during European integration over recent 

decades. 

The phrase “development round” may suggest to 

some that the key objective of the current round is to get 

rich countries to drop their barriers against goods from 

poor countries. But that move alone would provide only 

half of the potential benefit that developing countries 

could gain from a more open trading system. Fully half 

of the potential benefit to developing countries of trade 

liberalization comes from better access to each other’s 

markets. 

DYNAMIC BENEFITS

The benefits that I have discussed so far are what 

economists call “static benefits”—gains that could come 

quickly based on current production capabilities. Full 

trade liberalization would lead to the developed countries 

reducing production of certain agricultural products, 

while such production expanded in developing countries 

having adequate land and water. Developing countries 

would also expand production and export of laborintensive manufactures, whereas developed country 

production would tend to shift into heavy machinery, 

technology-intensive products, and services. But beyond 

these static gains, there are also important dynamic 

benefits. The dynamic effects are hard to quantify, but 

they are arguably more important than the static gains.

What we mean by dynamic benefits is that connecting 

to a large, global market tends to stimulate innovation 

and productivity growth at the firm level. Innovation is 

not just major technological breakthroughs; it is most 

commonly small changes in the process or products 

of a firm. Firms in protected markets tend to become 

complacent, whereas a large competitive market provides 

a significant outlet for good ideas and high-quality 

production.

The large market also provides for a finer division of 

labor. A developing country that lowers its own import 

barriers against manufactured products will typically find 

that its firms become part of global production networks 

in which different components and activities that feed into 

one final product originate in different countries. 

For developing countries to take part in sophisticated 

global production networks, they need to have investment 

climates in which it is relatively easy for firms to start up 

and expand. They need good transport links to the wider 

world and efficient customs administration.

A final point about the Doha Round is that it is also 

trying to take up issues of liberalizing trade in services. 

Many modern services contribute to a good investment 

climate: finance, insurance, logistics, port management, 

and transport services, to name a few. Liberalizing imports 

of these modern services can help developing countries 

build a stronger investment climate so that their firms can 

more easily take advantage of global market opportunities.
13 eJOURNAL USA

POLITICAL LEADERSHIP NEEDED

A comprehensive round of trade liberalization will 

provide benefits to all the countries that are members of 

the World Trade Organization. If that is true, then why is 

it so difficult to strike a deal?

The well-known political problem with trade 

liberalization is that a more open market provides diffuse 

benefits to the whole population, but also imposes 

large adjustment costs on some specific industries. Of 

course, the protected farmers in the rich countries lobby 

against trade liberalization in their sectors. The protected 

industrial firms and service industries in developing 

countries likewise lobby. So it takes real political 

leadership from each country to bring about a deal.

It is also both smart and humane to be aware of the 

losers and to design as much as possible compensation 

schemes to ease the adjustment. Many countries have 

adjustment assistance programs to help workers retrain 

or relocate so that they can take advantage of the 

opportunities opened up by expanded trade.

Previous trade liberalization rounds have appeared 

close to collapse before an eleventh-hour deal emerged. 

So for the sake of poor countries, let’s hope that political 

leadership is found all around. A Doha deal will require 

significant movement on the agricultural protection 

issue from the United States, Europe, and Japan. But 

it will also require real leadership on the part of the 

developing world, especially the big developing countries 

that have benefited so much from globalization. Further 

trade liberalization for industrial products and services 

is very much in the interest of the developing world, 

but developing country leaders will have to convince 

their populations of this and find smart ways to help the 

people who are temporarily hurt during the 

adjustment. 

The opinions expressed in this article do not necessarily reflect the views 

or policies of the U.S. government or of the World Bank and its member 

countries.

This apparel factory in Lesotho stands to gain from the elimination of tariffs on trade with its neighbors in the Southern African 

Customs Union.

© AP Images/Ben Curtis

Economic Perspectives / January 2007
Economic Perspectives / January 2007 14 eJOURNAL USA 

Even though the global economy has been expanding, 

workers and the governments that represent them show 

increased anxiety about trade. Most changes in the 

workplace leading to job displacement can be attributed 

to advances in technology, but it is increasing imports that 

attract more blame. Protectionism is the wrong response. 

Better solutions have been proposed for governments to 

address workers’ anxiety.

David H. Feldman is professor of economics at the 

College of William and Mary in Williamsburg, Virginia.

Pascal Lamy, director-general of the World Trade 

Organization, has called on the international 

community to reinvigorate the moribund Doha 

Round of negotiations because he fears that failure could 

put at risk the rules-based multilateral trade regime. The 

real difficulty goes beyond the specific negotiating issues 

at Doha. In developed and developing countries alike, the 

idea that global economic integration brings social benefit 

is increasingly controversial. As a result, many countries 

show a growing appetite for using discriminatory and 

trade-distorting practices as discretionary policy tools.

Anti-dumping actions, temporary tariffs or quotas 

in response to import surges, production subsidies, and 

trade-distorting regulations are easy to understand when 

economic growth is stagnant. Unless a growing economy 

can create easy opportunities for other industries to 

absorb labor quickly, then trade concessions and economic 

shocks, or both, can create clear losses in importcompeting industries, especially for workers whose skills 

and experience are tied to their existing employment. Such 

policies can be used to preserve the status quo.

Rapid contraction within any sizable sector of the 

economy exacts a political toll. But the erosion of faith 

in open global markets and multilateral rules seems 

surprising in an era of robust overall economic growth. 

The answer to the conundrum lies in the quickened pace 

of technological change.

David H. Feldman

Calming Workers’ Fears About Trade

Workers in developing countries, such as this one in Nicaragua, need not only a basic social safety net but also an 

education system that trains them for rapid change.

© AP Images/Edgard Garrido
15 eJOURNAL USA

TECHNOLOGICAL CHANGE AND JOB ANXIETY

We have witnessed significant labor-saving 

technological change in manufacturing over the past 60 

years. In most developed economies, productivity growth 

in manufacturing has averaged 3 to 5 percent per year 

since 1950. At the same time, manufacturing employment 

has grown little or has actually declined. This has reduced 

the share of employment in manufacturing and has led to 

a corresponding rise in the share allocated to services.

At the same time, falling global transport costs have 

contributed to a rising share of manufactured output that 

is traded internationally. More recently, service-sector 

outsourcing has led companies in many countries to 

restructure the way they do business. 

Structural change is equally rapid in many developing 

countries as cities expand and traditional agriculture 

and small-scale cottage industries give way to greater 

specialization for the global market.

All of these shocks mean that more sectors of 

the economy feel threatened by actual or potential 

international competition, and this view is common in 

countries at different levels of economic development. 

A second and related issue is the fear that growing trade 

between more-developed and less-developed regions of the 

world is the main cause of increased income inequality 

in the United States and high unemployment in Europe. 

Yet as Princeton University economics professor Paul 

Krugman and others have argued, the probable cause is 

falling internal demand for unskilled labor, which is likely 

generated by technological change that is biased toward 

highly skilled workers. International economic integration 

may have had some small influence on the timing of these 

labor market changes, but they would have occurred in 

any case. 

Nonetheless, public anxiety about job insecurity 

focuses on trade liberalization in part because job 

displacement is often quite costly in industries that face 

strong competition from imports. Yet governments should 

not respond to this sense of insecurity by abandoning a 

principled commitment to open engagement with the 

world market or by relying more heavily on administrative 

protection and other policies that favor particular domestic 

companies or sectors of the economy.

THE PROBLEMS WITH A PROTECTIONIST REMEDY

The most important competition that takes place 

within any country is not between domestic companies 

and foreign rivals, but among domestic companies for 

scarce labor and capital at home. Trade barriers and 

domestic subsidies may raise output, employment, and 

profit in certain domestic industries, but they do this by 

disadvantaging other domestic companies not favored 

by subsidies or protection. And if the source of profit in 

favored industries is higher domestic prices instead of 

higher productivity, then that profit represents lost income 

to someone else in that country. It is not a gain in national 

income. 

These policies pit domestic consumers as well as 

companies that use imported intermediate inputs against 

often politically well-connected producers of importcompeting products. Because the protective policies often 

are opaque and the process that leads to them hidden from 

view, they expand the scope for special-interest lobbying. 

This socially unproductive excessive profit seeking often 

redistributes income away from society’s most needy 

citizens and diverts scarce resources away from sectors 

likely to produce high levels of economic growth. 

One advantage of trade openness is that world prices 

usually provide better information about scarcity than 

prices distorted by interest group pressure. World prices 

provide better incentives to domestic consumers and 

companies to use resources in a way that maximizes the 

value of national income. Companies and consumers in 

more open economies often have a wider choice of higherquality goods, and these economies may experience a faster 

rate of technological diffusion if technology is embodied 

in imported inputs or foreign investment.

Yet another advantage of trade openness is that it 

diminishes the market power that highly concentrated 

domestic industries have within their home country. 

Openness is a very effective competition policy. This is 

especially true for smaller developing economies in which 

many domestic industries have only one or two major 

companies.

HOW BEST TO RESPOND?

In nations with a well-developed public sector, 

job insecurity among workers can be addressed using 

a number of targeted programs. Older tools such as 

expanded trade adjustment assistance (TAA), which is 

money spent on retraining workers laid off as a result of 

trade, can help make trade agreements more palatable 

to skeptical legislatures. Unfortunately, TAA systems are 

administratively complex, and they do not always reach 

the workers who most need the assistance or who are 

most adversely affected by trade. Programs that are more 

likely to restore vitality to trade liberalization are ones that 

Economic Perspectives / January 2007
Economic Perspectives / January 2007 16 eJOURNAL USA 

directly address the causes of worker anxiety and that reach 

more people. 

In a policy paper for the Peterson Institute for 

International Economics, Peterson senior fellow Lori 

Kletzer and Brookings Institution senior fellow Robert 

Litan advocate a new safety net for all displaced workers. 

The two pillars of the proposal are wage insurance and 

subsidies for health insurance for qualifying workers upon 

reemployment. Though their argument is directed at the 

U.S. experience, the idea of providing social insurance 

against the things people fear most about job loss has 

great appeal. Existing unemployment insurance does 

nothing to allay the fear of wage loss upon reemployment, 

and paying the benefit only upon reemployment would 

tend to shorten unemployment duration and hasten the 

development of new skills on the job.

Another approach involves expanded use of tax 

advantages for retraining. Companies could spread the 

costs over years for qualifying forms of worker training, 

and individuals could receive tax deductions or credits for 

individual educational expenses in qualifying programs. 

In many developing economies, the public sector’s 

effective reach is much shorter, and there are clear 

government priorities that should rank much higher 

than industrial policy or managing trade. One such 

priority should be to build a sound fiscal architecture of 

clear tax codes enforced by independent and impartial 

judiciaries so that revenue can be collected efficiently and 

fairly. In addition, broadening the tax base would permit 

governments to collect more revenue while reducing high 

tax rates—including high taxes on imports and income—

that breed tax evasion and public corruption.

A sound revenue base would permit governments in 

developing economies to perform many tasks that only 

they can do. Young people need a basic framework for 

educational advancement, especially at the primary and 

secondary levels. Comparative advantage is a moving 

target, and, given the rapidity of change in the recent past, 

workers will need transferable skills that will permit them 

to work in many industries over their working lives. Basic 

health care needs to be extended to more people so that 

productive lives are not compromised by easily prevented 

chronic illness. And lastly, every citizen should be able 

to rely on a basic social safety net so that anxiety about 

employment does not translate into a phobia about the 

changes the world market is bringing.

Pascal Lamy may be right. There is some risk that a 

failed Doha negotiation could trigger a round of inwardlooking policies or even “beggar-thy-neighbor” tactics 

such as competitive currency devaluations and increased 

protective barriers. On the other hand, the real future 

of global economic integration may be decided less at 

the global negotiating table and more by how countries 

respond to domestic job anxiety. 

The opinions expressed in this article do not necessarily reflect the views or 

policies of the U.S. government.
17

Learning the Correct Lesson About 

Protectionism

Gary Hufbauer and Costantino Pischedda

War-ravaged East Asian economies briefly used 

protectionist policies to revive their economies. Developing 

countries today should not misinterpret history, however. 

Only when Japan, South Korea, and Taiwan opened their 

markets to imports did their economies realize enduring 

rapid expansion. The remaining protectionist barriers only 

detract from those huge successes.

Gary Hufbauer is the Reginald Jones senior fellow 

at the Peterson Institute for International Economics in 

Washington, D.C. Costantino Pischedda is a research 

assistant at the Peterson Institute.

After the Second World War, East Asia rose from 

grinding poverty to spectacular prosperity. In 

retrospect, Japan, South Korea, and Taiwan are 

sometimes depicted as historical posters for fostering 

growth through protection. Indeed, to varying degrees, 

all these countries adopted protectionist policies in the 

first decade of their postwar ascent. If protection worked 

for them, free-trade skeptics ask, why should the poorest 

countries of Africa, Asia, and Latin America not adopt the 

same approach today?

THE THEORY

The theoretical case for trade protection rests on 

market failures that can be corrected by government 

intervention. Here are a few examples:

• If the activities of firm A benefit firm B at no 

cost—for example, by creating a trained labor 

force that firm B can hire—firm A will likely 

invest too little in training. Government subsidies 

to help pay for firm A’s training efforts could 

benefit the entire production system.

• If learning-by-doing is critical for success, a firm 

can become internationally competitive only 

by acquiring extensive production experience. 

However, during its learning period, the firm 

may sustain large financial losses. Unless farseeing capital markets provide ample credit, 

government help may be necessary to give the 

firm a start.

• Firm A (for example, a mining enterprise) will be 

profitable only if firm B (for example, a railway) 

is established, and vice versa. The government 

could help coordinate the two firms’ business 

relationship.

These three examples illustrate market failures that 

potentially justify policy intervention. The real question, 

however, is whether such theoretical possibilities are 

important in practice. After all, plenty of theory can 

eJOURNAL USA Economic Perspectives / January 2007

Economists can show that Japanese productivity has gone up as 

imports increased and protectionist barriers decreased.

© AP Images/Hiroshi Otabe
Economic Perspectives / January 2007 18 eJOURNAL USA 

be cited on the other side of the protection debate: 

economist David Ricardo’s theory of comparative 

advantage, the proven power of competition to boost 

efficiency, and the widely recognized danger that 

protection will foster corruption.

CASE: JAPAN

In the first phase of its economic recovery, between 

the end of the Second World War and the Korean 

War (1945-1955), Japan enjoyed rapid growth. The 

government protected key sectors as part of a wider 

industrial policy aimed at restoring pre-war industrial 

levels. Government policy concentrated on heavy 

industries that were badly damaged, such as steel, 

chemicals, and transportation equipment.

In retrospect, Japan’s recovery was easy because pre-war 

know-how, managerial talent, and industrial networks 

were largely intact. Missing were domestic savings and 

foreign exchange to reconstruct the stock of physical 

capital and to buy inputs and technology from abroad. 

Government intervention undoubtedly increased savings 

and marshaled foreign exchange. Achievement of these 

goals likely accelerated, rather than generated, the postwar 

recovery process.

In the second phase (mid-1950s to mid-1980s), the 

Japanese economy was gradually liberalized (except for 

agriculture) yet continued to enjoy rapid economic 

growth, and Japan soon became an international leader 

in technology. Trade restrictions played little role in 

sustained Japanese success. In fact, on an industryby-industry basis, economists can show a negative 

relationship between effective protection and export 

performance in Japan.

Similarly, for 1955 to 1990, economists can show 

a negative relation between effective protection rates 

and changes in productivity. The same scholars find a 

positive association between the level of imports and the 

growth of productivity. At least two mechanisms explain 

this finding. Imports of new and improved intermediate 

inputs increase the efficiency of local firms. Further, 

imports expose local firms to competition, stimulating 

management to improve performance. Japanese 

growth, good as it was, would have been even better if 

government had given less protection to domestic firms.

CASE: SOUTH KOREA

The Korean War (1950-1953) devastated South 

Korea’s plant and equipment, but surviving workers 

carried their skills into the postwar era. For the following 

decade, the government maintained a protectionist 

outlook, not only imposing high trade barriers but also 

maintaining an overvalued exchange rate. Starting in the 

mid-1960s, Korean leaders shifted the policy mix toward 

outward orientation. A combination of trade, tax, credit, 

and exchange-rate incentives gave the Korean economy a 

pro-export tilt.

© AP Images/Lee Jin-man

South Korea’s boom in technology-intensive production followed the country’s shift away from high trade barriers.
19 eJOURNAL USA

During 1961-1980, Korean exports grew by almost 

24 percent per year in real terms, while the share of 

exports in Korea’s economic output soared from about 

5 percent to 33 percent. While the initial phase of 

industrial development focused on labor-intensive sectors, 

in the early 1970s Korea moved to a second phase of 

capital-intensive and technology-intensive production. 

Today, of course, Korea has become a premier exporter of 

electronics, machinery, steel, and autos.

But residual protection detracted from overall Korean 

performance. Data for 38 Korean industries over 1963-

1983 demonstrate a negative correlation between 

protection and productivity growth. “The Korean data 

present evidence that less intervention in trade is linked 

to higher productivity growth,” says economist Jong-Wha 

Lee of Korea University in Seoul. In fact, plain old special 

interests better explain the pattern of Korean protection 

than calculations of economic gain.

CASE: TAIWAN

Taiwan’s economic renaissance can be divided into 

two phases. In the first phase, extending from the end of 

the Chinese civil war in 1949 until the late 1950s, the 

Taiwanese government erected high tariff and nontariff 

barriers to limit imports and promote domestic industrial 

expansion.

In the second phase, during the 1960s and 1970s, 

Taiwan’s leaders shifted to outward-oriented policies, 

significantly liberalizing imports and correcting an 

overvalued currency. Leaders realized that Taiwan’s inward 

orientation limited the country’s growth prospects, owing 

to the small size of its domestic market.

During its outward-orientation phase, Taiwan’s exports 

increased very rapidly. The export share of economic 

output exploded from 8.5 percent in 1952 to 44.5 

percent in 1976; manufactured exports accounted for less 

than 8 percent of total exports in 1955, but more than 91 

percent in 1976.

During the second phase, Taiwan retained some 

trade barriers (particularly important in agriculture), but 

residual protection was a concession to special interests, 

not a contribution to economic growth. Taiwan’s growth 

took place in spite of, not because of, restrictive measures. 

Several studies found that the Taiwanese trade protection 

was driven by political considerations rather than by 

market failures.

LESSONS LEARNED

The lesson emerging from the postwar experience of 

Japan, South Korea, and Taiwan is clear: The prolonged 

era of remarkable growth was associated with progressive 

liberalization, not enduring protection. After an initial 

phase of inward orientation, all three countries opened 

their economies to international competition. By doing 

so, they achieved rates of economic growth rarely seen in 

world history. Protection was not eliminated overnight, 

and evidence suggests that residual protection detracted 

from stunning overall performance.

Those who embrace high barriers to trade may argue 

that East Asian growth began under protectionist policies. 

While true, the argument fails to distinguish between 

the start of the growth process and its continuation over 

long periods. In all three cases, development began in the 

aftermath of destructive war. Economic growth in the 

earliest phase simply returned the East Asian economies 

to their pre-war levels.

A leading advocate of export-led growth, the late Béla 

Balassa of Johns Hopkins University, recognized the 

positive role played by import substitution in the early 

years of Korean and Taiwanese growth. However, the 

positive role for protection was limited to a short phase 

when domestic production was substituted for imports of 

consumer goods. Once this process was completed, the 

East Asian economies needed to open to world markets—

both to acquire intermediate inputs and to sell on a much 

larger scale. In terms of per capita growth in economic 

output, the years of outward orientation outperformed 

the years of import substitution. In the case of Korea, 

for example, the annual growth of per capita economic 

output was 2.2 percent between 1955 and 1965 and 8.2 

percent over the following 10 years.

Virtually all developing countries have long since 

passed the stage of easy import substitution. The clear 

lesson of the East Asian experience for developing 

countries in 2006 (not 1946) is that sustained growth 

requires progressively lower barriers to world trade. 

The opinions expressed in this article do not necessarily reflect the views or 

policies of the U.S. government or of the Peterson Institute for International 

Economics.

Economic Perspectives / January 2007
Economic Perspectives / January 2007 20 eJOURNAL USA 

A Clear Model for Reform

Jonathan Kimball

The difference in economic development between the 

many former Soviet bloc countries that have opened their 

markets on the way to joining the European Union (EU) 

and the few that have not done so is sharp and revealing.

Jonathan Kimball is director for Central and 

Southeastern Europe in the U.S. Department of 

Commerce.

S

eventeen years after the fall of the Berlin Wall, 

liberal, free market democracies have firmly taken 

root in Central and Eastern Europe, including in 

the Baltic States of the former Soviet Union. The Czech 

Republic, Estonia, Hungary, Latvia, Lithuania, Poland, 

Slovakia, and Slovenia are all members of the European 

Union, which Romania and Bulgaria also joined on 

January 1, 2007. While EU membership demonstrates 

international recognition of the region’s monumental 

transformation, the trade liberalization that was a critical 

part of the accession process will have an even greater 

impact on the well-being of the region’s population over 

the long term. 

In contrast, the former Soviet states of Belarus, 

Moldova, and Ukraine, geographically the most western 

of the non-EU members of the former Soviet Union, 

have not adopted trade-liberalizing policies to the same 

extent, and thus they have not reaped the same rewards. 

In fact, while their economies have grown during the past 

15 years, they have not benefited from the same influx of 

capital and foreign investment as their neighbors to the 

west. This can be partly explained by differing historical 

circumstances, a lack of political 

commitment for reform, and, maybe 

most importantly, the nonexistence 

of a persuasive outside force pushing 

for trade liberalization, such as the 

likelihood of EU membership. But 

what has been most missing is a serious 

commitment to eliminate the nontariff 

barriers that greatly inhibit the growth 

of trade and foreign investment. These 

nontariff barriers act as a protectionist 

wall, favoring local companies with the 

knowledge and connections that lead to 

increased market share.

Only after Romania and Bulgaria, 

for example, began seriously addressing 

nontariff barriers—such as weak 

intellectual property rights enforcement, 

bloated bureaucracies that inhibited 

the ability of companies to work with 

the state, nontransparent procurement 

systems, and widespread corruption—did their economies 

turn around, foreign investors flood into the markets, and 

export-led growth take off. 

The model to be followed for countries like Moldova, 

Ukraine, and Belarus is very clear. It is that of Central 

and Eastern Europe. The Central and East European 

economies have expanded specifically because they have 

opened their economies to foreign competition, reduced 

the state’s influence on the economy, and introduced 

far-reaching structural reforms. Examples of key reforms 

implemented in the region include the following:

• Tariff reductions: Reducing tariffs was an 

important means of injecting competition into 

This Audi plant in Gyor, producing 50,000 autos annually, reflects Hungary’s embrace of 

foreign investment.

© AP Images/Bela Szandelszky
21 eJOURNAL USA

the market. Higher-quality 

and less-expensive goods 

force inefficient companies 

out of the market and 

demand innovative and 

efficient production 

methods from companies 

that remain. 

• Price liberalization:

Although politically 

difficult, freeing prices 

was critical to implement 

market pressures on 

producers of everything 

from consumer goods 

to energy. Eliminating 

subsidies also allowed 

foreign products to enter 

the market without having 

to face additional barriers to free competition.

• Privatization: Reducing the state’s role in 

controlling the means of production allowed 

companies to respond effectively to the cyclical 

nature of the market. Privatization also allowed 

the state to rid itself of loss-making companies 

that placed a significant strain on the state 

budget, and it attracted foreign investors to the 

region’s economies. 

• Establishment of independent regulatory 

bodies: Reducing the state’s influence over 

regulatory decisions was critical to the 

establishment of a predictable market economy. 

Corruption and political influence are too easily 

exercised when the state has significant input 

in the market. This is especially important in 

the financial, telecommunications, and energy 

sectors.

• Sound fiscal and monetary policies:

Controlling inflation has been critical to 

developing a market that is predictable and 

stable. At the same time, limited, effective, and 

accountable government expenditures have been 

highly important to direct and soften the effect 

of the introduction of market principles. 

The results have been highly impressive. According 

to the International Monetary Fund’s World Economic 

Outlook database for September 2006, the average gross 

domestic product (GDP) per capita (in purchasing power 

parity terms) in Central and Eastern Europe increased 

by 112 percent between 1993 and 2005. In contrast, the 

average growth of GDP per capita in Belarus, Moldova, 

and Ukraine during the same period was 48 percent. 

In addition, foreign investors have been attracted 

by these far-reaching reforms. Whether entering the 

economies via privatization, joint venture, or “greenfield” 

investment in new sites, foreign investors have brought 

jobs, know-how, and significant tax revenue to the 

transitional economies. As a result, during the same time 

that bloated state-owned industries were streamlined 

or liquidated, foreign investors, attracted by the 

predictability of a transformed economy, have helped 

fill the employment gap. While some of the abovementioned reforms have been implemented in Belarus, 

Moldova, and Ukraine, the lack of a true commitment to 

the enforcement of the new laws and regulations has led 

to lower levels of foreign investment. 

The economic transitions of the new members of 

the European Union are far from over. Throughout the 

region, corruption still needs to be reduced, bureaucracy 

must be trimmed, public procurements must be made 

more transparent, and other nontariff barriers must be 

tackled. However, trade liberalization and the extensive 

structural reforms implemented since 1989, which have 

resulted in strong, impressive economic growth, are 

unlikely to be reversed. This predictability—lacking 

in Belarus, Moldova, and Ukraine—creates a business 

climate that attracts domestic and foreign capital, leading 

to jobs, economic growth, and a stronger, wealthier 

middle class. These are all prerequisites for a modern, 

global economy. 

Economic expansion has proceeded more slowly in Belarus than in its neighbors that have 

opened their markets to trade and investment.

© ANDREI LIANKEVICH/epa/Corbis

Economic Perspectives / January 2007
Economic Perspectives / January 2007 22 eJOURNAL USA 

The World Trade Organization (WTO) fights 

protectionism in a number of ways. Member countries 

agree to abide by WTO trade rules aimed against 

protectionism. From time to time, they try to negotiate 

more agreements and rules, eroding even further 

protectionist barriers to trade. They use the WTO dispute 

settlement system in enforcing those agreements and rules. 

And they make sure new members start with commitments 

to shed protection.

Carla A. Hills is chairman and chief executive officer 

of Hills & Company, International Consultants. She 

served as U.S. trade representative from 1989 to 1993.

The World Trade Organization does much 

more than simply regulate global trade. It 

encourages trade liberalization and fights against 

protectionism through:

• principles and rules 

• ongoing rounds of trade negotiations

• dispute settlement

• accession process.

Together, these four elements make the WTO the 

most successful of the postwar multilateral institutions 

and our greatest bulwark against trade protection. 

TRADE RULES

Today, the WTO manages trade through its 400 

pages of detailed trade agreements, including the General 

Agreement on Tariffs and Trade (GATT) and the General 

Agreement on Trade in Services (GATS), supplemented 

by 22,000 pages of schedules of commitments agreed to 

by its 150 members.

When the GATT was negotiated in the late 1940s, 

it set out various rules and principles for governing 

international trade. At its heart were two fundamental 

principles of nondiscrimination—national treatment and 

most-favored-nation (MFN) treatment. 

• National treatment requires WTO members 

to treat the goods and services of other WTO 

members as favorably as similar goods and 

services produced domestically. 

• Most-favored-nation treatment says that WTO 

members must grant the same advantage (such 

as a lower tariff) to all members as that given to 

other WTO members. 

Commitment to these central principles helps to keep 

global markets open. National treatment means that a 

country cannot block the import of a product if it allows 

the production and sale of the same product domestically. 

And MFN means that when a World Trade Organization 

member agrees to lower its tariffs on imports from one 

WTO member, it must do so for all WTO members.

Carla A. Hills

How the WTO Fights Protectionism

Japanese Agriculture Minister Shoichi Nakagawa clasps the hand of 

WTO Director-General Pascal Lamy at a meeting in Brazil aimed at 

breaking the impasse in the long-stalled Doha Round of negotiations.

© AP Images/Eraldo Peres
23 eJOURNAL USA

TRADE ROUNDS

The GATT’s founders agreed not only to certain 

rules for conducting global trade, but also to progressive 

trade liberalization through what has become a series 

of multilateral trade negotiating “rounds.” The current 

round—the Doha Development Agenda—is the ninth.

Since the GATT was established in 1947, membership 

has broadened from 23 member governments discussing 

tariffs on industrial goods to today’s 150 members 

negotiating rules covering agricultural trade, industrial 

goods, nontariff trade barriers, services, subsidies, and 

intellectual property rights.

When nations agree to reduce their tariffs, they also 

commit not to raise them above that agreed, or “bound,” 

level on pain of paying compensation to an affected 

exporting country or facing retaliation from that country. 

To date, developed countries have bound 99 percent of 

their tariffs, and developing countries 73 percent. The 

result creates a bulwark against protection through tariff 

increases.

Commitments to adhere to rules covering an 

expanding universe of trade by most of the world’s 

trading nations have enhanced clarity and predictability 

in international commerce, enabling global exports to rise 

from $58 billion in 1948 to $8.9 trillion in 2004. World 

trade volume today is more than 23 times that of 1948. 

This opening of global markets has boosted standards of 

living worldwide.

DISPUTE SETTLEMENT

Even with clear trade rules, protectionist pressures may 

arise in disagreements over whether certain actions violate 

the agreed rules. Hence, there also must be a fair, timely, 

and effective mechanism for settling trade disputes. 

For much of the postwar period, dispute settlement 

was a weak link in the GATT system. The GATT dispute 

resolution system permitted a party to a dispute to block 

indefinitely the adoption of a final determination in the 

case. As a result, disputes could remain unresolved for 

years, generating protectionist sentiment as countries 

grew frustrated over the system’s failure to resolve trade 

disagreements. 

In a particularly egregious case, the United States 

complained for more than a decade that subsidies 

provided by the European Community (EC) to its 

oilseed processors encouraging their use of domestic seeds 

nullified the EC’s zero tariff commitment on imported 

oilseeds made in the 1961 Dillon Round. The EC 

repeatedly blocked formation of a GATT panel. Finally, 

the U.S. Congress passed a provision in the Omnibus 

Trade and Competitiveness Act of 1988 requiring that 

the U.S. trade representative take unilateral action 

under section 301 of the act to raise U.S. tariffs on an 

equivalent amount of EC exports if the case were not 

resolved by 1989. A trade war was avoided when the EC 

agreed to a panel that ruled for the United States. 

In January 1995, when the WTO came into being, 

members strengthened the dispute settlement mechanism 

by removing the right to block the formation of a panel. 

Under the new rules, if a dispute cannot be resolved 

through the required consultations, a WTO panel will 

hear the case and a final ruling will be issued within 12 

to 15 months of the formal case filing (including time 

for a possible appeal). A member found to be in violation 

of its WTO obligations is required to bring itself into 

compliance, generally within 18 months after a final 

ruling.

The improved system has encouraged WTO 

members—both developed and developing countries—to 

use the dispute settlement system to resolve differences. 

Since 1995, more than 55 countries have initiated cases 

and more than 120 dispute settlement panels have been 

formed. Because the process begins with mandatory 

consultation, hundreds of disputes have been settled 

before a panel is established. In addition, this stronger 

WTO dispute settlement system has helped members 

to manage domestic anger about perceived unfair trade 

practices by other members and to use WTO panel 

findings as reason for bringing their own nonconforming 

practices into line with their WTO obligations.

ACCESSION

Another way the WTO has helped limit protection 

is through accession agreements. When a nonmember 

country applies for WTO membership, there is a rigorous 

examination of that country’s trade regime, followed by 

bilateral negotiations with WTO members in areas of 

their interest. The process can take years. For example, 

China spent 15 years in negotiating bilaterally the terms 

of its accession prior to becoming a WTO member 

in 2001. Vietnam, the WTO’s newest entrant, just 

completed 11 years of bilateral negotiations.

After the bilateral negotiations, an agreement is drawn 

up stating what the applicant commits to do when 

it joins the WTO. In China’s case, it agreed to phase 

out all quantitative restrictions on industrial products; 

remove such mandates on foreign investors as requiring 

Economic Perspectives / January 2007
Economic Perspectives / January 2007 24 eJOURNAL USA 

their production to 

be exported; enforce 

property rights for 

intellectual property; 

and open a range of 

services, including 

telecommunications 

and financial services, 

to foreign providers. 

Vietnam has agreed to 

cut tariffs, quotas, and 

agricultural subsidies 

and to open up a range 

of services to foreign 

providers. 

Finally, the entire 

WTO membership 

must approve the 

package of marketopening commitments, 

typically covering 

hundreds of pages, 

which constitutes the 

country’s accession 

agreement. Failure of the new member to abide by its 

commitments can become the basis for bringing a WTO 

case against it. In 2006, the United States, joined by six 

other members, brought a case against China charging 

that fees it applied to imported auto parts violated its 

accession agreement.

THE DOHA ROUND

Through negotiations, rules, dispute settlement, and 

accession, the WTO has fought off protectionism. The 

system is not perfect. Agreements have not been reached 

in key areas where they are sorely needed. For example, 

there is no international agreement outlawing export 

subsidies or tariff rate 

quotas—in which 

prohibitive tariffs are 

imposed on imports 

exceeding a quota—in 

agricultural trade. 

Every new round 

of multilateral trade 

negotiations aims 

to expand members’ 

commitment to 

open their markets 

and to improve 

the functioning of 

the trading system. 

Experts calculate that 

the last round—the 

Uruguay Round—

created hundreds of 

billions of dollars 

of new economic 

opportunity. 

A successful Doha 

Round, launched 

in 2001, could do the same, for it seeks to reduce or 

eliminate agricultural subsidies, cut tariffs on goods, 

expand market openings in services, and increase 

transparency within the WTO system (including dispute 

settlement). Experts predict that such an agreement could 

lift millions of people out of poverty, contribute hundreds 

of billions of dollars annually to global growth, and correct 

some egregious inequities in our trading system. It is 

something we should all strive to achieve. 

The opinions expressed in this article do not necessarily reflect the views or 

policies of the U.S. government.

The WTO’s Pascal Lamy (right) meets with Foreign Minister Pham Gia Khiem of 

Vietnam, which in 2007 joined the organization dedicated to opening markets.

© AP Images/Keystone, Sandro Campardo
25 eJOURNAL USA

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9544r.htm

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Rivoli, Pietra. The Travels of a T-Shirt in the Global 

Economy: An Economist Examines the Markets, Power, and 

Politics of World Trade. Hoboken, NJ: John Wiley & Sons, 

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Bibliography

Additional readings on trade and protectionism

Economic Perspectives / January 2007
Economic Perspectives / January 2007 26 eJOURNAL USA 

Suranovic, Steven M. International Trade Theory and Policy 

Analysis. 2003.

http://internationalecon.com/v1.0/index.html

Tupy, Marian L. “Trade Liberalization and Poverty 

Reduction in Sub-Saharan Africa.” Policy Analysis, no. 557 

(6 December 2005): pp. 1-23.

http://www.cato.org/pub_display.php?pub_id=5236

U.S. Trade Representative, Office of the. “The Benefits of 

Trade for Developing Countries.” Trade Facts, June 2006.

http://www.ustr.gov/assets/Document_Library/Fact_Sheets/

2006/asset_uploard_file346_9610.pdf

Vant, Thomas R. “Resist Protectionism.” OECD Observer, 

no. 255 (May 2006): pp. 37-38.

http://oecdobserver.org/news/printpage.php/aid/1861/Resist_

protectionism.html

Williams, Walter E. “Trade Charade.” Washington Times 

(26 October 2006).

http://www.washingtontimes.com/commentary/20061025-

092622-8524r.htm

The U.S. Department of State assumes no responsibility for the content and 

availability of the resources listed above.
27 eJOURNAL USA

U.S. GOVERNMENT

Federal Reserve Bank of New York

http://www.newyorkfed.org/education/fx/free.html

Office of the U.S. Trade Representative

http://www.ustr.gov/index.html

U.S. Department of Agriculture 

Economic Research Service, WTO Briefing Room

http://www.ers.usda.gov/briefing/Wto/

U.S. Department of Commerce 

U.S. International Trade Administration 

http://trade.gov/index.asp 

U.S. Department of State

Bureau of Economic and Business Affairs, Trade Policy 

and Programs

http://www.state.gov/e/eb/tpp/

Bureau of International Information Programs, Trade and 

Economics

http://usinfo.state.gov/ei/

OTHER RESOURCES

CATO Institute, Center for Trade Policy Studies

http://www.freetrade.org/index.php

The mission of the Cato Institute Center for Trade Policy 

Studies is to increase public understanding of the benefits 

of free trade and the costs of protectionism.

Economic Strategy Institute (ESI)

http://www.econstrat.org/

The Economic Strategy Institute is dedicated to assuring 

that globalization works with market forces to achieve 

maximum benefits rather than distorting markets and 

imposing costs.

Globalisation Institute

http://www.globalisationinstitute.org/index.php

The Globalisation Institute is a think tank founded in 

2005 with the aim of examining how globalization can be 

harnessed to work for the world’s poorest.

The Library of Economics and Liberty

http://www.econlib.org/index.html

The Library of Economics and Liberty is dedicated to 

advancing the study of economics, markets, and liberty. 

It offers resources for students, teachers, researchers, and 

aficionados of economic thought.

National Foreign Trade Council (NFTC)

http://www.nftc.org/

The NFTC is a U.S. business organization that advocates 

the international and public policy priorities of its 

members on international trade, investment, tax, and 

export finance.

Peterson Institute for International Economics

http://www.iie.com/research/researcharea.cfm?ResearchTopicI

D=5

The Peterson Institute, formerly the Institute for 

International Economics, is devoted to the study of 

international economic policy. Since 1981 the institute 

has provided timely, objective analysis and concrete 

solutions to key international economic problems.

United States Council for International Business 

(USCIB)

http://www.uscib.org/index.asp

Founded in 1945 to promote free trade and represent 

business in the newly formed United Nations, USCIB 

presents businesses’ views directly to U.S. policy makers 

and officials in the United Nations, the European Union, 

and a host of other governments and groups.

World Trade Organization

http://www.wto.org/

The U.S. Department of State assumes no responsibility for the content 

and availability of the resources listed above, all of which were active as of 

January 2007.

Internet Resources

Online resources on trade and protectionism

Economic Perspectives / January 2007