Evaluate how protectionism affects nations facing trade restrictions, and discuss if it brings lasting benefits to the economy that imposes them.
The recent refugee crisis has contributed to growing resistance against decades of economic integration, with anti-globalisation sentiments on the rise.
b. Evaluate how protectionism affects nations facing trade restrictions, and discuss if it brings lasting benefits to the economy that imposes them. [15]
Introduction
Protectionism refers to the use of trade barriers by a government to restrict imports and shield domestic industries from foreign competition. Common forms include tariffs, quotas, and regulatory standards. In recent years, rising geopolitical tensions and social unrest—exacerbated by refugee inflows and anti-globalisation sentiments—have led to a resurgence of protectionist policies globally. While countries may adopt protectionist measures to safeguard jobs or strategic industries, these policies can have significant ripple effects, both on the countries facing these trade restrictions and on the imposing country itself.
Impacts on Economic Growth of Countries Facing Trade Restrictions
One of the most immediate effects of protectionism is a contraction in the export revenues of the targeted countries. When a country imposes tariffs on imported goods, demand for those imports falls, and the exporting country suffers a reduction in its net exports (X-M). As net exports form a component of Aggregate Demand (AD), this decline causes a leftward shift of the AD curve, leading to a fall in real national income and output (Y). This slowdown in economic activity can result in lower corporate profits, rising unemployment, and slower GDP growth.
Take, for instance, China during the US-China trade war under the Trump administration. As tariffs were placed on hundreds of billions of dollars worth of Chinese goods, demand from the US for Chinese exports fell sharply. In response, many Chinese manufacturing firms scaled back production, and job losses followed—especially in export-heavy regions like Guangdong. Thus, the imposition of tariffs not only affects the directly targeted firms but also has a broader, economy-wide impact by dampening investment confidence and reducing economic momentum.
Even countries not directly involved in the trade dispute may suffer collateral damage. For example, if global demand shrinks due to widespread protectionist policies, third-party countries (like Singapore!) that depend on global supply chains may face weaker demand for their intermediate exports, which again dampens global economic growth.
Impacts on Inflation in the Affected Countries
The inflationary consequences of protectionism are nuanced and can go in both directions. On one hand, tariffs imposed on a country's exports may lead to a fall in its export revenue and overall AD, thereby weakening domestic demand. This fall in AD may produce deflationary pressures, especially if consumers cut back on spending and firms lower prices to stay competitive.
On the other hand, if the trade restrictions lead to higher costs for imported inputs—such as raw materials or intermediate goods—cost-push inflation may arise in the targeted country. For example, if European countries impose trade barriers on agricultural exports from a developing economy, domestic food producers in that economy might face rising storage costs due to unsold stock, and those dependent on imported inputs may experience higher costs. In either case, the economic environment becomes more uncertain, and inflation volatility may increase.
Impacts on the Standard of Living of Affected Countries
A sustained trade restriction can have significant implications for the standard of living, both material and non-material. Material standard of living is likely to deteriorate due to falling real incomes, reduced consumption, and potential increases in unemployment. Lower export revenues translate into job losses in export sectors and related industries. As workers lose income and domestic consumption declines, overall welfare suffers.
Moreover, non-material aspects of the standard of living may also worsen. Rising unemployment often leads to social unrest, mental health issues, and higher crime rates. For example, regions that are heavily dependent on specific export industries may suffer disproportionately, widening regional inequalities and fuelling political instability. These deteriorations in both economic and social welfare contribute to a general decline in living standards for affected populations.
Evaluative Conclusion
The effectiveness of protectionism in securing long-term economic benefits for the country implementing it is a subject of much debate. In the short run, protectionism can safeguard domestic jobs, preserve national industries, and reduce reliance on foreign goods. For instance, tariffs on steel may protect domestic steelmakers from cheaper foreign competition, thereby preserving employment in that sector.
However, such short-term gains often come with long-term costs. Protectionist policies may reduce incentives for domestic firms to innovate or become more efficient, as they no longer face pressure from international competitors. This can lead to complacency, higher production costs, and technological stagnation over time. Furthermore, retaliation from trade partners can hurt the imposing country's exporters, potentially wiping out any initial gains from protectionism.
That said, in some cases, protectionism has been used strategically to nurture infant industries—sectors in the early stages of development that require temporary shielding from global competition. If implemented judiciously, this can allow these sectors to grow, achieve economies of scale, and eventually compete globally. This was the strategy behind Japan’s industrial policies in the post-war period, where temporary protection allowed key industries to flourish. However, such successes are rare and require clear exit strategies, effective governance, and a global context that permits such industrial experimentation.
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