Sunday, October 25, 2009

Drawing The Wrong Conclusions About Protectionism

Mark Thoma and Yves Smith points to a study that links the gold standard to protectionist measures during the 1930s on the basis that countries that remained on the gold standard were more likely to restrict trade than those that didn't.

I haven't tried to verify that statement, but I think it is probably true. However, the conclusion that the gold standard caused the restrictions is mistaken. Because just what kind of trade was restricted. I don't think it was exports, but imports. And the reason why it is likely that countries that stuck to the gold standard were more likely to take fiscal measures to restrict imports is that other countries had by leaving the gold standard implemented "beggar thy neighbor" competitive devaluations. And as I pointed out in my report for the European Enterprise Institute, such competitive devaluations are in effect equivalent to combined export subsidies and import tariffs.

The point here is not that counter-measures were really justified (there are good arguments both for and against that), but that the responsibility for creating this situation lied on the countries that tried to distort trade through competitive devaluations as they were in effect protectionist.