Trade protectionism involves restraining imports through various policy measures including tariffs, quotas, and subsidies to protect domestic industries from foreign competition. On the other hand, cronyism refers to the practice of favoring close associates, friends, or relatives in economic and political matters, often resulting in the allocation of resources or benefits based on personal relationships rather than efficiency.
Although they are distinct concepts, in some contexts trade protectionism and cronyism are related. Trade protectionism can provide opportunities for rent-seeking behavior, where some individuals or groups seek economic benefits beyond what they would receive in a competitive market. Those with political connections have more influence on trade policies, which leads to cronyism. This can result in trade barriers that disproportionately benefit specific industries or companies linked to influential individuals. When government officials have discretionary powers in implementing trade policies, they may use their positions to promote personal gain or favor their acquaintances, family members, or close allies. The result is the unfair allocation of trade licenses, permits, or quotas to cronies. In short, the combination of trade protectionism and cronyism undermines fair competition, distorts market outcomes, and hinders economic growth and development.
The economics of non-tariff barriers
Tariff rates have fallen by 66% since 1996. However, as tariff levels have fallen to historic lows, non-tariff barriers (NTBs) have emerged as a potent substitute and become the most dominant form of trade protection. NTBs are trade barriers that do not involve tariffs. Instead, they include measures such as quotas, regulations, embargoes, and technical requirements.
NTBs have recently become more and more popular. There are several reasons why they have gained popularity. They are often harder to measure and quantify compared to tariffs, making it more challenging for countries to get caught violating trade agreements. Moreover, NTBs can better protect domestic industries from foreign competition. Unlike tariffs, which can be avoided by importing goods through tariff-free countries, NTBs cannot be bypassed very easily.
NTBs are definitely harmful. In fact, their impact on trade is higher than that of tariffs. They make it more difficult for businesses to operate in the global economy, leading to higher prices and low quality. Moreover, they increase the risk of cronyism. NTBs are frequently enforced or waived selectively for specific businesses or individuals with close links to the ruling elite. Finally, the cost of following NTB rules is typically higher for some products, sectors, and firms. Not surprisingly, NTBs can cause substantial trade frictions.
Non-Tariff barriers as a tool of cronyism: evidence from Morocco
The case of Morocco and the EU is a good example of how NTB and cronyism interact. Morocco and the European Union (EU) signed an association agreement in 1996. This agreement remarkably reduced tariff barriers. However, it also led to a significant increase in Morocco’s NTBs. These barriers include approximately 300 technical regulations and nearly 12,000 standards.
A recent study has examined more than 1,500 manufacturing companies in Morocco and discovers that politically connected firms received substantially higher nontariff protection following the agreement with the European Union. On average, politically connected sectors had an NTB coverage ratio that was 9 to 11 percentage points higher than the unconnected sectors, whose ratio stood at 24 percent. Upon examining various trade barrier types, the researchers have also found that the results are principally driven by technical requirements, the enforcement of which increase administrative control and are susceptible to political abuse.
Moreover, the study also analyzes the ad valorem equivalents (AVEs) of NTBs. Between 1997 and 2009, the AVEs of non-tariff barriers experienced a general rise, and the rise was significantly higher in sectors with political connections. The median AVEs in crony sectors witnessed an approximate 300 percent surge, compared to a mere 100 percent in unconnected sectors. In other words, the NTBs that accompanied the EU-mandated tariff reductions not only compensated for the decline in tariffs but also resulted in an overall augmentation of trade protection in privileged industries. Thus, the overall trade obstacles in these industries increased from 54% in 1997 to 58% in 2008. Had the AVEs of NTBs in connected sectors risen at the same pace as those in unconnected sectors, the median trade restrictiveness would have decreased to 33 percent.
In short, while traditional protectionism and non-tariff barriers may initially appear as a means to safeguard domestic industries, their less visible consequence can undermine long-term economic growth and fairness. By fueling rent-seeking behavior, regulatory capture, and market distortions, these barriers create an environment that rewards well-connected entities at the expense of competition, innovation, and consumer welfare. Policymakers must recognize the inherent risks of protectionism-driven cronyism and work towards promoting an open, transparent, and competitive economy that benefits the whole society, rather than selected groups.
Photo by Max Brown