Protectionism and Trade Wars
The Trump administration has opened trade wars in every corner of the globe with their main trade partners due to the fear of losing billions of trade deals. The most heard of and discussed trade wars are those between the US and China, EU, Canada among other countries. President Trump has employed tariffs as the main weapon in his trade wars. Tariffs are fees levied on goods coming into a country and collected by the customs and border protection. When tariffs have been imposed on goods, they become costly for importers who will have to pass on the cost to their customers making the goods expensive to afford (Ncube et.al. 2014).
The US has levied tariffs on a broad range of products for instance, 25% on $34 billion worth of Chinese imports, 20% on washing machines, 30% on solar equipment and products, 25% on steel, and 10% aluminum. The goods from china that have been affected by the US tariffs include LEDs, batteries, vehicles, boat motors, nuclear reactors, aircraft engines, electricity transformers, machinery for food processing, and imaging, navigational, scientific, medical, and radio equipment. In a retaliatory effort, China has imposed equal measure tariffs on US goods including meat, cotton, diary, fish, vehicles, fruits, nuts, tobacco, grains and vegetables (Irwin, 2017).
The EU is also exercising tariff charges on US goods spanning from rice, sweetcorn, peanut butter, clothing, motorcycles, whiskeys, boats, among many more. In essence, the US trade partners have specifically targeted agricultural products to try and prove a point whereas Trump’s tariffs have mainly focused on industrial products like machinery components and metals. Looking at the pattern or trend of which opposing nations impose tariffs on US imports cannot be considered random but a political move poised at proving a point. It is obvious that the products originate from the various states within the US (Adam, 2018). The farmers are really feeling the pinch especially in those states that Trump has popularity. According to analysts, the tariffs are meant increase the amount of political pressure on President Trump owing to the fact that midterm elections are fast approaching in 2018. Even recent statistical polls reveal that majority of the Americans are not happy with the tariffs in place for they are affecting trade (Switzer & Hannan, 2017).
It is important to stress that it brings into the equation political processes and interests, which contribute to the case more than reasons of strict economic interest and efficiency. The incongruence between free trade economic theory and real world trade relations is to be explained mainly through factors in the political realm, which represent the variety of dimensions of the relationship between trading actors, and form the institutional channels for the pursuit of private and corporate economic interests. It is not by chance that we using the framework of International Political Economy to look for explanations (Pelagidis, 2018).
The Benefits of Global Protectionism
Protectionism provides also a strong source of government revenue. While this may not be considered in the liberal view, where states are given a minimalist role in the economy and are believed to pursue the only goal of wealth maximization, it is of considerable importance, and is just an initial realization of the fact that states have a variety of interests which may cause a trade off with that of income maximization. Some scholars have also noted that growing democratic participation may be in itself, if not a direct cause, a contributing cause to the continued use of protectionist policies, as more groups in society have a voice in representing their interests (Ncube et.al. 2014).
Where economic interests seem to be the ones that cause protectionism, it is their partial (as opposed to global) nature which requires political elements and justifications. Thus the infant industry argument justifies political state intervention with reasons of equality of opportunity and justice for developing countries, of improved welfare for the nation’s citizens who often live in poverty; the national security argument is very clearly political in its ultimate defense of national political sovereignty; the unequal exchange perspective refers to international political relations; and the fair trade argument is made in defense of human rights in the most altruistic version and of western country workers and industries in its more self-interested version. Politics is the means by which these concerns and interests are transmitted, represented and protected (Switzer & Hannan, 2017).
The Costly Nature of Protectionism
Some European companies are rethinking their strategies to cushion the impact of trade tensions between the world’s two biggest economies, the United States and China. China is slapping additional tariffs of 25 percent on $16 billion worth of U.S. imports from fuel and steel products to autos and medical equipment, the Chinese commerce ministry said it was contemplating to activating them on Aug. 23. In the case of China, Trump threatened that he was ready to impose tariffs on an additional $500 billion of imports. The United States has already imposed tariffs on $34 billion of Chinese imports. In return, China has levied taxes on the same value of U.S. products (Irwin, 2017).
The protectionism associated with taking away resources from individuals and households as well as industries especially those facing increased prices as a result of protectionist policies. Consumption of goods that have been protected will always fall because there is reduced purchasing power among the customers. As a result of reduced sales in the protected country, a competitor state’s output declines tremendously. Apart from reduced output in competitor nation, protectionism brings about uncertainty in the international trade landscape. Uncertainty in trade policies limit and undermine growth since firms are not sure of how much and when to invest (Switzer & Hannan, 2017).
Though, countries can argue that increased imports to a country causes a higher rate of unemployment. The statement is not true in its entirety. On the other hand, trade restrictions have been found to not contribute to higher levels of employment. It is very possible that incomes in the protectionist country would decline greatly due to reduced foreign income and thus reduced exports. The cost of retraining workers and relocating jobs is far much cheaper than that of protecting local firms and jobs by employing tariffs (Pelagidis, 2018).
Protectionism also causes massive layoffs to be executed in the protecting country as majority of the raw materials used in the local industries might be dependent on imports. For instance, the trade war initiated by the US will definitely affect the economy of the EU members as well as China who have the US as their main export market. The EU, US and China happen to be the largest economies in the world today, and when they engage in trade wars, other developing countries stand to lose revenue (Ncube et.al. 2014).
Protectionist measures are both independent and interconnected – in the same way as Russian dolls are all a part of one another. Traded products can be affected by tariffs, non-tariff measures, regulatory issues, subsidies, import bans, and “buy local” clauses. The interventions can have an effect on some or all traded products. Protectionist measures such as an import license can affect a narrowly defined product whereas customs procedures or balance of payment measures will apply to a broad range. An appropriate analysis of crisis-led protectionism must therefore go beyond merely counting protectionist measures and then estimating the net effect on trade (Pelagidis, 2018).
Protectionism represents a source of puzzle and frustration for neo-classical liberal economists. Liberal economic theory has widely demonstrated the benefits of free trade in providing the global society with the maximum levels of income and material economic welfare. Nevertheless, the use of protectionism in international trade is very widespread. This essay has outlined some of the principal causes and effects of the adoption of protectionism measures (Adam, 2018).
Mercantilist explanations of the causes of protectionism are based on the underlying belief that state interests do not coincide with global income maximization, but that another set of interests are at play which form a trade off with the latter. In this view states are concerned with relative rather than absolute gains, and thus have an interest in maintaining domestic industries, protecting infant ones, and enhancing domestic production and employment. States are also concerned with national security, and are therefore inclined to ensure that they maintain independence in the production of certain fundamental goods. Additionally, states are interested in maintaining an equal playing field in trade, and use protectionism to this purpose, particularly with regards to working standards and wages.
Adam, S. (2018, July 26). Draghi: inflation uncertainty 'receding? but trade risks 'prominent? Retrieved August 9, 2018, from https://www.ft.com/content/669af6a4-90cf-11e8-bb8f-a6a2f7bca546?sharetype=blocked
Irwin, D. A. (2017). The False Promise of Protectionism: Why Trump's Trade Policy Could Backfire. Foreign Aff., 96, 45.
Ncube, M., Lufumpa, C. L., Kayizzi-Mugerwa, S., Murinde, V., Shimeles, A., Salami, A. O., & Ressaisi, N. (2014). Global Protectionism Five years since the great financial crisis. Market Brief, 5(2), 1-7.
Pelagidis, T. (2018). Free Trade, Protectionism, and the Global Economy. World Economics, 19(2), 121-128.
Switzer, T., & Hannan, D. (2017). Life after brexit: Global Britain, free trade and the new protectionism. Policy: A Journal of Public Policy and Ideas, 33(1), 26.