What do protectionism and an angry teenager have in common? – They are both unaccommodating, volatile, and put their own interests before others’. Now suppose this angry teenager did metamorphosize into a mature adult, it is highly likely that his ideologies would lean towards globalization – the ability to communicate and integrate with those outside your comfort zone so as to be open to new ideas and innovations. Unfortunately, the world we live in today has gone from being that teenager to sprouting the wings of globalization and then gone back to being that sulky kid.
Simply put, globalization is the interconnectedness between the different countries. It is a powerful force that enhances international trade, ideas, and culture. Protectionism on the other hand, creates an imaginary yet powerful shield around a country, thereby preventing the entry of foreign goods and services into the country. Such a policy not only affects the economic health of countries that primarily trade with the protectionist but also harms the protectionist. Citizens belonging to a protectionist nation generally witness a fall in supply as the goods that were once so easily available through import, now must be manufactured in their country, from scratch. This leads to a supply shock and a consequent inflation in the economy. Oh, before we proceed, if you want to know what inflation is, how else it can be caused, and the ways by which it can be controlled, you can read our previous article. It does a decent job at describing the entire economic cycle and what drives it forward.
Now, let us get into the nitty-gritties of the afore-mentioned phenomenon with the help of a globally condemned policy that is said to have sown the seeds of protectionism in the present era. The Donald Trump Administration, during the 2016 presidential campaign, promised to put the interests of Americans before the interests of the rest of the world by imposing tariffs on imported goods. This basically means that it would be significantly more expensive for America’s trade partners to export goods to them, and hence discourage inflow of goods into the nation. Why did the Trump administration do this? Well, their argument was simple – they believed that by discouraging imports, they would nudge American factories to produce their own goods, resulting in higher domestic production. This increased domestic production would be the key to putting the interests of Americans before those of others since factories would need more workers to produce more goods. And this would ultimately increase employment levels. Sounds good, right?
Unfortunately, the very same citizens whose interests were to be protected, lost more than they gained. The very first set of import tariffs was imposed on solar panels, back in January 2018. While the trade embargo aimed to boost the productivity of the manufacturing sector of the United States, it resulted in quite the opposite; A $28 billion industry that relied on 80% of its supply of solar equipment from foreign sources, took a direct hit as costs skyrocketed. However, the cherry on the cake was provided by the next set of tariffs on $200 billion worth of Chinese goods, since, it not only discouraged the inflow of certain goods into the country but also triggered a “trade war”. The trade war was officially inaugurated when China, in response to the trade restrictions, retaliated by announcing tariffs on $60 billion worth of US goods. Nevertheless, cakes and cherries apart, no one wins against protectionism; not the workers, not the consumers, and not even the policy makers. Let’s understand why protectionism is bad.
So, import tariffs hurt America in 3 ways, as Geoffrey Gertz rightfully pointed out here. They are –
Thus, it is now evident that protectionism is not exactly the best route to take if you want to accelerate economic growth.
Finally, why would a nation choose protectionism over globalization? Let’s compare and contrast. In the short term, protectionism leads to inflation (due to the supply shock that we discussed earlier). However, protectionism could be a desirous long-term growth driver owing to its ability to gradually improve the GDP of the protectionist nation- growth that arises due to increased manufacturing activities in the country. Globalization on the other hand, prevails over protectionism in both the short as well as the long term since it not only gives consumers plenty more to choose from but also acts as a trigger for healthy competition between domestic firms and foreign firms, which in turn causes the hosts to improve themselves so as to not get diluted by hostile MNCs. Furthermore, it ensures that there is always bountiful supply of goods and commodities in the country, thereby resulting in a highly competitive market and thus bringing prices down for the consumers.
We live in a highly interconnected world in which ideas, trends and cultures traverse thousands of miles with the click on a button. It has been proved by numerous cosmologists that once the universe has ceased expanding, it will contract back to form a nutshell over the next billions of years. However, it would be a shame if we followed the same path.
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