Protectionism, traditionally was associated with doctrines like mercantilism (the economic concept that said trade creates prosperity, which a government need to encourage by means of protectionism), and import substitution (economic theory that depend on the presumption that a country should commit to scaling back its import through the native production of industrial merchandise).
Some have argued that no major country has ever with success industrialized without some variety of economic protection.
Economic historian Paul Bairoch who was from Belgium wrote that historically, free trade is the exception and protectionism the rule.
The United States of America
Throughout the history, USA has been a major supporter of protectionism. From its independence till the end of the nineteenth century it remained a protectionist country. There were a series of tariff laws which raised its barriers so that its local industry could grow without restraint. But in the late nineteenth century, they began exporting more than they imported, which led to their increasing integration into the global marketplace. A major setback for US liberalization came during 1930 when Smoot-Hawley Tariff act was passed. This act implemented the protectionist trade policies on over 20,000 imported groups.
But during the Great Depression (1929-1939) it became clear that strong protectionist policies had led to it. Thus, after the WW-II in 1948 GATT (General Agreement on Tariffs and Trade) was launched to protect the free trade worldwide.
Europe became progressively protectionist during the eighteenth century. It was noted by Economic historians that immediately after the Napoleonic Wars, Europe increasingly became protectionist, but some smaller countries like Netherlands and Denmark believed in free trade.
But in the mid-nineteenth century, Europe started becoming more and more progressive and liberalized in trade. Countries like United Kingdom, Netherlands, Denmark, Portugal, and Switzerland almost liberalized themselves in 1860. The 1860 Cobden Chevalier Written agreement was signed between France and the United Kingdom, which was a major step in the direction of free trade in Europe. Similar Trade agreements were signed between many countries in Europe. In less than two decades after the aforementioned trade agreement, in 1877 Germany was almost a free trade country.
Some European countries that failed to liberalize during the nineteenth century remained Protectionist like Russian Empire and Austro-Hungarian Empire. Western Europe began to steadily liberalize their economies after World War II.
Traditionally, Asia was a very protectionist for its local markets and Manufacturers and producers. This was due to the difference in technological advancement in the east and west. They also kept certain sectors of industry with them (their government). India was in the late 20th century famous for its license raj, whereby for trading, setting up the industry and many others you have had to buy the license from the Indian Government.
A variety of policies have been used to achieve protectionist goals. These include:
Import Tariffs: Tariffs are a kind of tax which is generally placed on imported or exported goods. Tariff rates vary as per the kind of products exported or imported.
Import quotas: The government imposed trade restriction that allows an only certain number of goods and thus increases the market value of imported (or exported) products. They are typically used in global trade to regulate the trade between any two countries.
Direct subsidies: Government gives cheap loans to local companies which are not able to compete in the international markets. These subsidies protect the local jobs by assisting the local companies to adjust to the international markets.
Export subsidies: Export subsidies is a government scheme that increases the exports of goods and decreases the sale of them on the domestic market.
Import licensing – governments grants importers the license to import goods
Anti-dumping legislation: It is a type of tariff that is imposed on imports from foreign countries that the government believes are placed well below the market price.
Exchange rate control: A government can reduce or increase the value of its currency by intervening in the foreign exchange market by either selling or buying its currency. This causes the cost of imports to increase and cost of imports to decrease that results in the improvement of its balance of trade.
And many others.
Current Situation and Facts
Issues and Discussions
The US President Donald Trump, signed an executive order removing the US from the Transpacific Partnership (TPP), which was signed on his first day. This was advantageous from the economic point of view, but from the strategic point, it would be disadvantageous. TPP gave USA influence in the Asia Pacific region. This can allow the major Asian countries to fill the vacant seat in the Asia-Pacific Region. The many policies taken by US President Donald Trump under his “America First” agenda will be a threat to the international free trade.
When the USA increases tariff rates for its imports, prices level will increase because many of the consumable products are produced outside the country. Of course, many are also produced in the country but at a higher cost. Due to higher prices, competition in the US of international companies will decrease. Hence exports will decrease, which results in the lower production, employment and finally income.
In Europe also after the Brexit memorandum has caused the wave of protectionism to rise in countries like Britain, Germany, France, and many others. This will cause a negative impact on the world’s free trade. If the European Union, worlds one of the major free trade supporters became less liberalized and more protectionist, will cause a negative impact on trade between the countries. As the major South-east Asian countries have trade relationships with EU, primarily Britain. After Brexit, if there is a negative impact on trade and commerce, the businesses globally will be less inclined to spend in Britain causing a chain reaction, which can negatively affect South-East Asia.
Malaysian open economy is 35th largest in the world. But due to US’s protectionist policies in the recent years, such as import tariffs and renegotiation of Free trade agreements, will cause it to be undermined. This is because the US is Malaysia’s one of the major trading partners. The US coming out from the pro-free trade to becoming protectionist country will cause the volatility to increase on the world level. This will cause the Malaysian companies to suffer. As Malaysia is one of the largest suppliers of electronic items to the US, the increased tariffs will cause the trade to suffer.
This protectionist stance of US will cause the Asia-Pacific countries to focus on RCEP (Regional Comprehensive Economic Partnership) which is more Asia Specific trade Treaty. This Treaty will cause the consumption in the Asia-Pacific region to increase which will help the consumption driven sectors such as Transport, Logistics, Healthcare, etc.
India’s one of the major IT company Infosys Ltd. Announced that it will hire about 10,000 Americans in the period of two years. This statement came after US government criticized the Indian Information technology companies over its hiring. US president has signed an executive order to review the H-1B visa programme. Indian IT companies earn their major bulk of their income from the US market and are major beneficiaries of the visa programme. Not the only US but many developed nations like Australia and New Zealand are also introducing the protectionist policies. This has caused the professionals from India and other low-cost countries to have labor market disruptions.
Asia has made significant progress in the last half of the 20th century because of the free trade policies of the USA and Europe in general which were created after the Great Depression and World War II. Take Singapore, where their government has led a key role in globalization that took place in the late twentieth century. Singapore has promised to sectors that will suffer from the protectionist policies of Western Countries, like construction sector to extend the assistance like targeted reliefs that may balance the initial losses. They have also lowered their trade barriers so that foreign companies and start-ups will create new partnerships and create jobs for the people of Singapore.
The impact of Protectionism to China will be majorly on the industry level. Special tariffs can be imposed on the Steel and Aluminum imports from China, which can cause a negative impact on US-China bilateral relationship. US president also signed an order to determine if any investigation is needed on the trade policy of China regarding any Intellectual property, technology, and Innovation. As the US is China’s largest trading partner, any problem in that will cause China’s growth rate to slow down. This can also lead to Trade war.
A trade war between China and USA will cause Hong Kong, the world’s freest economy, to become vulnerable in sectors beyond Trade. Because of the deteriorating relationship of US with China, will cause the financial sector to become volatile, causing detrimental effects on Hong Kong’s financial and property Sector. This will also cause the direct effect on the export and imports of Hong Kong.
Philippines because of Trump’s “America First” Policy will cause the loss of two of the major sources of Dollars, first the BPO (Business Process Outsourcing) industry and the remittances the Filipinos send to their country.