Protectionist measures are restrictions on free trade in the form of tariffs, quotas, government subsidies and other non-tariff barriers. An increase in protectionist measures would therefore mean higher restrictions on free trade. Trade is a large contributor to the global economy, it brings benefits to all countries involved and it can be a powerful driver for sustained global growth, as well as rising average living standards and improved economic welfare. Restrictions are often put in place by individual countries to support and protect their respective domestic industries and welfare.
The most popular form of protectionist measures is tariffs, which protect domestic industries from the overseas competition by increasing the relative price of imports, causing a fall in import demand. Worldwide, significant tariffs have a negative effect on economic welfare worldwide. As seen in the diagram, the higher world price leads to a loss in consumer surplus, which reduces consumer welfare, leading to an area of welfare loss. It also causes trade wars since the introduction of restrictions often leads to retaliation by other countries. A recent example of this is the US-China trade war where each country continues to impose more tariffs on the other’s goods. This causes a reduction in trade and a reduction in growth, which has an overall negative impact on the global economy.
Tariffs however do still provide some benefits for domestic producers, as they are insulated from the international market, as seen by the increase in producer surplus. However, this benefit is not gained by the global economy, only the country that puts the tariff in place. Moreover, protectionist measures to support infant industries are generally short term, limiting the benefit the country can reap itself. Another benefit in favour of tariffs is the increase in employment, which overall benefits the welfare of workers. However, an increase in employment due to a more successful industry in one country is due to importing less from another country, which has an effect of reducing employment in that country which was negatively impacted by the tariff. This leads to the increase in unemployment cancelling out the increase in employment, resulting in no net gain to the global economy. Following the steel tariffs imposed in America in 2018, 16 jobs were lost elsewhere for every job gained in the steel industry. However, Argentina has been successful at implementing tariffs that protect jobs.
Comparative advantage is when countries produce a good or service at a lower opportunity cost than another country. Comparative advantage has a multitude of benefits for the global economy: specialisation leading to higher productivity, output and quality, more choice and standard of living, more innovation and a rise in exports leading to economic growth for all countries. However protectionist measures go against the theory of comparative advantage, losing out on all the benefits the global economy could have gained. One disadvantage is the negative impact on global trade imbalances, leading to a loss in welfare. Countries with CA surpluses would see a lower surplus due to a decrease in exports, and countries who operate on a deficit would see a larger surplus, as there are fewer exports for them to import. Moreover, the global economy would face inflationary consequences. Since the price of imports would rise, there would be higher costs in importing raw goods for manufacturing, increasing cost-push inflation. Inflation has many negative effects on the global economy due to the uncertainty it brings, resulting in reduced business confidence and investment, and slowing global economic growth.
Brexit is a good example of how increased protectionist measures have led to inflation, which has negative effects on the global economy. Brexit has brought about administrative barriers to trade, leading to larger costs and time spent on the customs paperwork. This is passed on as higher import prices for both final goods and intermediate inputs used by UK producers, contributing to the rise in inflation. To evaluate the extent of the loss of gains from comparative advantage, the impact depends on the amount of trade a country takes part in, and how much this is as a proportion of their national income. For example, since China and India are large exporters, they would face a decrease in export growth more than a country such as the UK, which operates on a current account deficit. Therefore the trade imbalances may not be so significant as to be detrimental to the global economy.
An example of a non-tariff protectionist barrier is managed exchange rates, of which an increase will inevitably have an impact on the global economy due to the interdependent nature of the currency. Managed exchange rates are a form of government intervention in currency markets to affect the relative prices of imports and exports. For example, a lower currency will increase export demand and increases the domestic price level, making imports more expensive. The inflationary effect of the rise in import prices has a negative knock-on effect on the economy, but can sometimes be used to reduce the risk of deflationary recessions. Between 2009 and 2013, there was an increase in countries using a managed exchange rate system by 8%, to 82 countries. In the short run, governments benefit from such protectionist policies as they can gain higher tax revenues and are politically popular. However, it can lead to an inefficient economy which stifles growth.
To conclude, it is important to remember that free trade and protectionist measures are not mutually exclusive. This is proven through Brexit's protectionist laws protecting UK industries, while still being freed from the EU's regulations and trade agreements. Though protectionist measures can aid individual countries, it is evident that an increase in these restrictive measures has a net negative impact on the global economy. There are varying impacts on different countries, depending on their current account, whether they are developed or developing and whether they are part of any trade blocs. The negative impacts of tariffs have a global impact, whereas the benefits only apply to those countries that put up the protectionist measures. Moreover, the loss of gains from comparative advantages such as innovation and productivity reduces long term global economic growth, for the sake of the growth of a few infant industries in limited developed countries.
Written by Sanjana Iyer