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PROTECTIONISM AND TRADE WAR

Context:

Post electoral success of conservative politics across countries, trade war and protectionism lately has gained substantial currency affecting not only actively engaged countries like US, China, Mexico, EU, and Canada among others but also is adversely impacting developing world to a large extent.

What is protectionism?

  • Protectionism is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations.
  • Protectionist policies help immune the producers, businesses, and workers of the import-competing sector in the country from foreign competitors.

Why protectionism is gaining prevalence?

  • To protect indigenous industrial sectors especially infant and sunrise sectors.
  • High unemployment rate.
  • Slow growth recovery post global financial crisis.
  • Rising apprehensions with respect to immigrants leading to xenophobia.

What is trade war?

  • Trade war is an economic conflict between two or more nations regarding trade tariffs on each other.
  • This type of conflict usually arises because the nations involved are trying to improve imports or exports for its own country.
  • The last time the world saw trade war was in the 1930s when countries had tried to boost their trade surplus. The result was a massive slowdown around the world, which eventually resulted in the Great Depression of the 1930s.

Recent updates:

  • China: S. recently imposed tariffs on Chinese Steel and Aluminium to protect American producers.
  • EU, Mexico, and Canada: Last week, the U.S. imposed a 25% tax on steel and a 10% tax on aluminium imports from the EU, Mexico and Canada.
  • Trump has also indicated desire to end the North American Free Trade Agreement with Canada and Mexico.

Why US imposed tariffs?

  • To boost the US manufacturing industry.
  • To support US producers of steel and aluminium.
  • Workers in America’s manufacturing sector had played a key role in Trump’s electoral success, so his zealousness to be seen to be protecting their interests is unsurprising.
  • The main reason for imposing higher tariffs was China because the U.S. ran a trade deficit of $375 billion with China, which had gone up from a zero deficit situation in 2001.

Response against US higher tariffs:

By China:

  • China has fired its riposte against the U.S.’s decision to impose fresh tariffs on steel and aluminium products, by levying up to 25% duties, mostly on agricultural products.
  • China imposed additional tariffs on 128 items imported from the U.S.,including wine, nuts, and pork.
  • China also threatened to curb imports of U.S. Soyabeans.
  • China also initiated a WTO complaint against the U.S. steel and aluminium tariff

By EU, Mexico and Canada:

  • The European Commission announced imposition of tariff as high as 25% on imports worth $3.3 billion from the U.S.

Negative implications of Protectionism:

  • According to World Bank the effect of the increased use of tariffs to regulate international trade could lead to the significant drop in global trade just as the financial crisis a decade ago.
  • Levying tariffs of 25 percent on steel and 10 percent on aluminium would “seriously damage multilateral trade mechanism represented by the World Trade Organizations.
  • According to former Reserve Bank of India Governor Raghuram Rajan said that the ongoing trade war is a “lose-lose situation” for the warring parties.
  • Protectionism has led to uncertainty in regional groupings and international agreements owing to exit of major players for example Brexit and US exiting TPP & Paris Climate deal.
  • Protectionism has been manifested into liberal use of dumping duty and countervailing duty by members of global trade order.
  • The increase price in turn discourages consumers from purchasing something they can purchase cheaper domestically.
  • It also reduces trade and adversely affect consumers and harm the producers and workers in export sectors, both in the country implementing protectionist policies, and in the countries protect against.
  • Cascading effect- Imposing higher tariffs will encourage further protectionism.
  • Jobs losses could be even greater if other countries retaliate against the United States with their own tariffs on various American products.
  • Could impact the domestic industrial growth of many developing countries, especially those which are export oriented.
  • Affect capital inflows into developing countries and decrease demand for goods.
  • Could lead to systemic trouble for banks/financial institutions in developing countries.

Benefits of free trade policy over protectionist policies:

  • It brings benefits of specialization especially to developing countries.
  • It allows developing countries greater access to market.
  • It encourages international competition and trade.
  • It encourages freer movement of goods and services thereby making globalisation more efficient.
  • Freeing trade reduces imported-input costs, thus reducing businesses’ production costs and promoting economic growth.
  • Consumers have the opportunity to purchase goods and services at a comparative lower price.

Way ahead:

  • Role of international organizations like WTO etc and other regional organizations like ASEAN, NAFTA etc need to play an effective and engaging role.
  • Global free trade will eventually prevail over protectionist policies so it is high time countries worldwide come together to promote the cause of free trade.
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