Mumbai: Last year was a turbulent one for the global economy. Amidst a rising wave of protectionism, trade tensions between the world’s major economies escalated. There is broad consensus among economists that protectionism is harmful for overall economic welfare. Adding to this consensus is a new National Bureau of Economic Research study by Davide Furceri of the International Monetary Fund (IMF) and others which finds more evidence of the dangers of protectionism, especially tariff increases.

The study uses data from 151 countries between 1963 and 2014, sourced from the World Bank and IMF, to study the impact of tariff increases on several economic outcomes such as domestic output, employment and productivity. They find that tariff increases lead to a decline in labour productivity which decreases output and employment in the medium run. The study shows that this decrease in output tends to be more pronounced in advanced economies and during periods of economic expansion.

One reason why the impact of tariffs depends on the state of the economy is inflation. The authors argue that increase in tariffs lead to higher inflation which could prompt monetary policy tightening, especially during times of economic expansion. In such cases, the negative impact of tariffs is magnified due to the contractionary policy shock.

They also find that two years after a tariff increase, inequality rises. This result challenges the narrative that trade liberalization and globalization exacerbate inequality. The study also finds that protectionism leads to a decline in consumption. Finally, tariff increases may not even affect trade. The authors show that tariff increases lead to appreciation of the real exchange rate but the impact on countries’ trade balance is limited. The new evidence in favour of trade liberalization reiterates the need for restraint during global trade conflicts.

Also Read: Macroeconomic consequences of tariffs

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