Protectionism — A shield for disaster!
Exactly a decade back, as a student and a political/economic enthusiast, I used to flip through every expensive financial magazine in those gleaming bookstores. That was one of my favorite pastimes, when I deviated from my college route map. The effort then was to learn more about Global Financial Crisis that impacted almost every part of the world and a meaningful understanding of what globalization meant. Recession, a loose term which did rounds in those days was pretty much a part of every civilized discussion of urban India. The quest for exact definition, origin story and ramifications really meant few more years of asking around for an engineering student with average calibre.
Having been a part of multiple oratory and literary clubs at that time, I needed more understanding on Politics and Economics and that drove me into reading more to understand every fact behind the recession. And then for the first time I heard an American presidential candidate speaking to a large cheering crowd (2008 US election Campaign), promising them to bring jobs back and explore the possibility of putting brakes on a relatively easy immigration system. Punch lines used by this presidential candidate may have sounded too layman(ish) at that time, but surely drove him to a decisive victory. That I believe was pretty much the beginning of the steaming inherent insecurities of the developed world.
Another fancy term which did rounds was Globalization. It was everywhere, from movies to speeches, articles to arguments, newsrooms to textbooks. Since the coordinated series of celebrations at the dawn of this millennium, this term took a center stage in almost every aspect of the developing world. People crossed the confines of their respective shorelines and companies were looking elsewhere to avoid hitting an impending threshold in the domestic markets. It was the same time when innovation and ease of life from the West gradually entered the Eastern Suburbs of the World.
Never would have someone imagined a 360 degree turn from the most used fancy word just a few years back. The Global Financial Crisis of 2008 originated in USA and the subsequent EU crisis have led to a sudden spring of the political ideology of protectionism. This post mainly focuses on the Protectionism related to Economics, leaving aside the Social angle for later.
Precisely put, Protectionism is a tool that defies the entire foundation of Free Market economy. Trying to use Trade restrictions such as Tariffs/Duties to boost one’s economy or a specific industry and shielding it from Foreign competition is no different from the Socialist methodology of safeguarding State’s own businesses by restricting private industry. It is no different from artificially inflating exports by managing currency by countries like China. I always felt that protectionist measures are nothing but declaring intellectual bankruptcy. I had also always believed (maybe I was wrong) that the world always kept its international political divide away from Trade and Commerce (which is how mature markets operate). This has always been evident atleast between countries like China-Japan, China-USA, EU-Russia, India-China etc. What today’s Western leaders fail to realize is that Free Market societies are supposed to go through various crests and troughs and trade deficit is bound to be there. These are inherent characteristics of Capitalism and are necessary to maintain a healthy equilibrium. There could be two reasons for this sudden insecurity and accountability called Protectionism: Fear of losing superiority or temporary political gains. From Trump’s election to the re-election of the Conservatives in UK, the campaign had only focused on the latter to woo the unemployed and the lower middle class.
World Trade War:
What surprised the World is that the hard-line Protectionism began with the Worlds Greatest nation — USA. For easy political gains and temporary trade balance, the current President of the USA (it’s unfair to say the Government), had taken few drastic unilateral measures in the recent past with regards to international trade with its major partners of China, EU, Canada, Mexico etc. which includes its closest allies in the Northern Hemisphere. This began a massive Trade War already and could threaten the global economic balance as a whole which I have elaborated in this post.
The Leader of the Free World or Donald Trump didn’t live upto the title and had ordered the levy of upto 25% duties on goods imported from China valued at around $200 Bn to address the $375 Bn worth of deficit without envisaging what a potential could do to the domestic businesses which are heavily reliant on exports to the East. Also little thought has gone by in understanding what would happen if these domestic companies expanded internationally to dodge import tariff retaliation by countries like China. That challenges the entire election-rhetoric of Trump (Jobs, Jobs, Jobs). Trump administration had already slapped duties on China to the tune of USD 34Bn in July and plans another $16 Bn duties to take the total tally to $50Bn. What this has done is increased the chances of China further meddling with its currency. In retaliation, China has readied a plan to impose between 5%-25% duties on 5,207 American imported goods which as on today stands at $60 Bn on total import value.
On the other hand, India has already proposed to raise duties on 30 US products ranging from automobiles to lentils. The duties that India plans to raise are expected to hit the levels of 50%. This is in response to the US hitting Indian imports with duties that could take a direct hit of about $240Mn.
While this is the story on the east, Trump administration had taken a Unilateral action (atleast that’s what Trump’s favorite Media outlets say) to slap 25% tariff on Steel and 10% on Aluminium imports worth roughly around $7Bn due to “Security Concerns” (Sure). Immediately EU retaliated with tariff’s on Harley Davidson Motor bikes (a common target of both India and EU), Bourbon and Corn worth around $3.2 Bn.
Canada on the other hand imposed 10% tariffs on US products worth $12.5 Bn. These include Chocolate, Ketchup, Beef, Coffee and the more traditional Maple Syrup. This ofcourse comes as a retaliation to the American administrations adventurism. This brings us to the brink of another threat which is a potential “American pull out from NAFTA” which is expected to cost thousands of Jobs in USA and Mexico. The new version of NAFTA is in the danger of not getting ratified by the US congress and hence the President meddles with the threat as of now.
Treaties sent to Cemeteries:
To begin with, Trump had withdrawn USA from the Trans-Pacific Partnership which would have established a trade partnership between USA and the countries on the Pacific Rim. Followed by that, the Paris climate accord (though not relevant to the discussion) and NAFTA.
There is nothing wrong in renegotiating Treaties as per the changing conditions/situations domestically. However the whole idea of unilateralism in breaking treaties and little thought-out executive orders may harm the entire global trade balance and can push the world back to the brink of military engagement.
The fact of the matter which most ignore is that, a Trade deficit is not always bad. We freak out at every negative number so much so that we have coloured it RED. The money that a nation or its citizens save by consuming a cheaper good/service imported from elsewhere may have lost few jobs domestically. But fundamentally the money saved by all the residents collectively gets spent on something more qualitative, produced domestically. International Trade has the impeccable quality of identifying sectors that a country can excel in or a country excels. Trade reshuffles jobs from one industry to the other but never steals away jobs unless a country were to become Venezuela or North Korea overnight. Also a country’s standing on the global platform in terms of their trade is decided collectively and governments policies only give it a temporary shift. US citizens inherently have lesser savings than any other free market economy. This only means that the consumers in USA consume everything that gets produced locally. Hence, they look upto international markets for alternatives as part of discretionary consumption. This is a choice to remain in deficit as the country has reached its pinnacle in terms of development. Whatever government does to green-up the net Exports only goes onto harm the nation further.
A nation like USA employing protectionism might gain out of it initially via job creation, but in the long term will face backlash from every other nation for putting them in deficit which is already evident. Far worse, the whole of EU is ready to follow the footsteps of USA (let the BREXIT happen). This in-turn means everything that gets manufactured locally has only the local markets to look upto. Any company having global ambitions will shift its operations (partially) to a much more liberal economy (EU or Canada or any other emerging free economy). This is quite clearly evident in Harley Davidson’s decision to stall domestic expansion in USA and decide to move those potential jobs into the EU (this move has come after the company was lauded by the President himself for manufacturing locally). The same can lead to a cascading impact on the country with major companies stalling their expansion plans and worse even moving the entire operations abroad leading to a brain drain. Lesser fortunate companies do not have wherewithal to expand and rely solely on domestic markets which would have already hit the roof. The prices of commodities would have hit the roof too, as there are no alternatives for the residents of the country. The much lauded anchor currency depreciates like never before and the world will look upto another currency to replace the same.
Also when there are trade barriers, the factor of innovation takes a back seat as you do not fancy flexing your mind owing to lesser international competition. This means the products produced are no more state of the art and in most cases prices shoot up leading to a debt bubble and hence another man-made crisis. Countries like China will further devalue currency to dump their goods onto foreign soil and this cycle never ends.
Now let’s imagine what would happen if all the major countries were to engage in trade war? It would be another Global Financial Crisis as the balance of the world gets disturbed, only this time it’s not a natural cycle and the impact might be far more worse.
With USA out of the competition, world will start looking for a new lantern in the dark. In this case, if the world expects a China to lead them, then they would be gravely mistaken. China will exactly replicate what they have done to nations like Cambodia, Sri Lanka etc. by pulling them into a debt trap on the name of forced infrastructural development (Read my earlier post on OBOR) just to satiate the needs of its growing workforce.
If someone fancied that this Trade War of US and the world could benefit BRICS (throw out of Russia for now), slow down, as these economies are still being modeled by politicians and are yet to reach their natural course.
Originally published at vanamalisblog.wordpress.com on August 11, 2018.