Trade barriers could end up doing more harm than good

Trade and investment restrictions are proliferating around the world, driven by a combination of security concerns and protectionist pressures.

In each instance, policymakers can usually cite a justification of why trade and investment restrictions are necessary. But taken together, a thickening web of restrictions on cross-border transactions is imposing a growing burden on business as well as complicating supply chains.

The United States and China have threatened to hit each other with tariffs covering up to $300 billion of bilateral trade in a dispute over intellectual property and technology transfers.

The US has already imposed anti-dumping and countervailing duties on imports of steel, aluminium and solar panels from China, citing concerns about unfair trade.

China has responded with its own anti-dumping duties on imported sorghum from the US and is investigating other products.

US officials have raised security concerns about telecommunications switch gear from Chinese company Huawei and sought to exclude it from the American market. The US has also suspended export licences linked to Chinese telecoms company ZTE, while Britain has warned companies not to install any more ZTE equipment on the country’s network.

There are broader concerns about ZTE equipment being used for spying and cyber-warfare.

The US government has pledged to restrict Chinese investment and acquisitions in sensitive high-technology sectors.

The Committee on Foreign Investment in the US has already been applying heightened scrutiny to transactions involving Chinese firms. In turn, China’s anti-trust authorities have started to slow down merger approvals involving western companies operating in the Chinese market.

The US has also hit Russian companies and individuals with multiple rounds of sanctions in a dispute over Ukraine. In many cases, Washington has imposed secondary sanctions.

The European Union has implemented its own sanctions on Russia, although it has generally refrained from extraterritorial application. The US and the EU are both readying further sanctions on Iran in response to its ballistic missile programme and regional activities. They, China and other nations are enforcing sanctions on North Korea (including secondary sanctions) for nuclear-related activities and America appears to be preparing sanctions on Venezuela.

Sanctions represent a relatively low-cost way of inflicting economic pain on an adversary and have become the instrument of choice for foreign policymakers (The Art of Sanctions: A View from

the Field, Richard Nephew, 2018). Complying with the ever-increasing number of restrictions is becoming increasingly difficult for businesses operating across national frontiers and is causing a growing number of distortions.

Setting aside the question of whether restrictions are justified in individual cases, there are broader questions about the economic impact of the proliferating barriers:

1. If increasing openness to trade and investment was a major driver of improved efficiency and living standards in the post-1945 period, does its retreat threaten to slow economic growth?

2. Can the spreading web of trade and investment restrictions, often imposed at short notice, be consistent with a rulesbased and predictable trading system that facilitates cross-border transactions?

3. If the global trade and investment regime becomes less predictable, will the growth in international trade slow or reverse?

4. Sanctions are generally treated as an extension of foreign policy, a traditional area reserved for executive authority, with minimal legislative and judicial oversight: does that raise concerns about due process?

Policymakers are rapidly embracing trade and investment restrictions for a range of reasons, ranging from trying to raise wages to protect strategic sectors and national security concerns.

But their enthusiasm for trade and investment barriers arguably threatens the foundations of the post-1945 international economic system and could end up doing more harm than good.

Policymakers are rapidly embracing trade and investment restrictions raise wages and protect strategic sectors