Protectionism – the impacts on international trade

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The world is a very different place from 18 months ago.

With the Brexit vote and then the election of President Trump, is there a trend towards more isolationist policies – and will this echo economically with increased protectionism?

However your political allegiances lie, there’s little doubt that part of Trump’s appeal was his promise to ‘put America first’ and one of the tenets of the Leave campaign was to ‘take back control’. These are strong, emotive sentiments but also ones that can shift the economic debate away from international co-operation.

Yet for the ICC (International Chamber of Commerce), ‘economic and political openness has brought about unparalleled growth and development over the last 60 years, lifting hundreds of millions out of poverty. Protectionism poses risks both to national economies and our potential to face global issues.’ There is no better example of the benefits of openness, the ICC says, ‘than our multilateral trading system, which has helped improve the standard of living of billions of people worldwide by creating new economic opportunities and providing greater choice and lower prices to consumers.’

However, because of the decade-long economic crisis which is still not returning to anything like pre-2007 levels, many are now ‘question[ing] the fundamental benefits of openness.’ Evidence points to ‘an unremitting trend of continued protectionism.’ A WTO (World Trade Organization) report indicates that some 2,978 trade-restrictive measures have been put in place since 2008 in response to the immediate financial crash. Disturbingly, over the past decade, only 740 of these have been removed.

So we do appear to be heading in a protectionist direction.

Why is this an issue now?

Protectionism generally involves placing tariffs or quotas on imports. The idea is to stimulate growth at home by making imports less competitive, thus expanding domestic production and protecting businesses and employees – especially in vulnerable industries. However, most economists broadly agree that protectionism is ultimately negative both for business growth and worker protections. Whilst free trade can lead to greater inequality, reducing trade barriers has a positive long-term effect on economic growth for everyone.

Despite this, consider President Trump’s recent address at the Asia-Pacific Economic Cooperation (APEC) conference in Vietnam. Accusing countries in the region of having ‘stripped’ jobs and factories from the US, he stated that ‘while we lowered market barriers, other countries didn’t open their markets to us.’ The strong tone of the speech was characteristically emotive: ‘Despite years of broken promises, we were told that someday soon everybody would behave fairly and responsibly. People in America and throughout the Indo-Pacific region have awaited that day to come but it never has and that is why I am here today,’ Trump said, adding that countries in the region were not ‘playing by the rules.’ President Trump has been noted for pulling out of regional trade deals (such as TTIP [Transatlantic Trade and Investment Partnership]), and his recent tour of China and Asia Pacific suggests this is setting a template for the future.

In the UK, until deals on Brexit are agreed, it’s hard to predict whether protectionist policies will be introduced by the UK or whether in turn, the UK will face higher tariffs from Europe when importing. The economic argument in favour of Brexit is that we will not be ‘paying in’ to Europe to support economies less buoyant than our own. The argument against is that by reducing the overall market size, you lose the economies of scale that such co-operation brings.

Case study: the manufacturing view

Richard Selby is Director at Pro Steel Engineering, a steel specialist firm delivering construction, installation and project management at sites including the Olympic Stadium, Crossrail Bond Street and Birmingham New Street. With economic nationalism pulling the world towards protectionism, how does Selby think international trade will fare?

‘There’s the potential that international trade could be hugely disrupted because we use more steel in this country than we can produce ourselves,’ he says. In 2015 the UK produced 11 million tonnes of steel – by way of comparison, China produced 804 million tonnes. For Selby, ‘unless the UK Government deals with this situation imminently then it won’t work for Pro Steel and others within the sector I’m sure.’

Selby does believe that ‘if we become more self-sufficient as a country, then ideally the domestic infrastructure agenda would benefit if we can get on and build ourselves.’ But for this to happen, ‘there has to be a significant shift in mentality for the future of the construction industry as a whole. Without this shift in direction, we will still be having these same conversations in years to come.’

Why does Selby think this is happening – is it purely the Brexit effect? ‘I think it’s a result of a combination of frustration from the electorate and from Westernised governments not wishing to upset people and therefore maintaining the centre ground too much. We now face the other extreme in the UK, with right versus left opinions widening. This, combined with the lack of clear direction in the lead-up to Brexit, has given us the challenge of working out how to overcome this for the benefit of industry.’

And what do you think the future holds? ‘A forward-thinking, business-focused, centrist party would be the way forward.’ Is that too optimistic? ‘Perhaps Macron will show us how to do it.’

Economic protectionism – the road ahead

  • Political will is needed to reverse this trend.
  • Protectionism is being touted as a way of ‘saving’ domestic jobs, but this is not borne out by the data.
  • The perceived benefits of protectionism do not add up. For the OECD (Organisation for Economic Co-operation and Development) protectionism makes domestic firms less competitive in the export market, because import barriers lead to retaliation by trading partners; each dollar of increased protection leads to a drop of 66 cents in GDP; and globally, ‘an increase of $1 in tariff revenues can result in a $2.16 fall in world exports and a $0.73 drop in world income.’
  • Better economic education is essential. Despite the arguments in favour of free trade and increasing trade openness, protectionism is still widely practiced, argues Economics Online.

Mark Blayney Stuart is Business Journalist of the Year, Wales Media Awards 2017 and Former Head of Research at the Chartered Institute of Marketing.

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