TheCable

Protectionism or the use of tariffs, subsidies, import quotas and other trade restrictive policies to protect domestic industries is fast increasing on the global landscape and prompting a major shift away from global free trade. Between 2009 and 2015, over 6,000 new protectionist measures were implemented globally,  as opposed to the 2,500 policies that support free trade.

Governments often implement protectionist policies with a view to improving national economic activities, but such policies trigger a ripple of negative consequences for both the individual countries and the global economy as a whole. Amongst other negative effects, protectionism stifles innovation and competition, reduces consumer spending,  and triggers trade wars among nations, leading to stagnation of economic growth.

Globalization and trade liberalization are solutions to protectionism.  When paired with increased investment in research and development, and a favourable business environment, countries can improve their economy without fear of foreign businesses taking the market share of their domestic industries.

A barrier to innovation and competition

One major impact of protectionism on businesses is that it restricts innovation and competition. Protectionist policies stifle innovation by lowering competition from foreign businesses. Shielded from competing with foreign industries, domestic enterprises may fail to invest in research and development which results in complacency over time. To address this, countries should rather prioritize investment in national research and development over protectionist policies. This, they can do by increasing funding for research and development, as well as through training and implementation programs for workers. Such policies promote innovation and healthy competition between foreign and domestic industries and ensure national sustainability in the long term.

Furthermore, restrictive access to foreign technologies and ideas heavily hampers innovation, which most often occurs through the cross-border exchange of technologies and ideas. Without access to these resources, domestic industries face difficulties which hinder their capacity to innovate and develop new products and services, thereby stagnating the national economy. A viable solution is for countries to adopt globalization and liberalisation of trade.

This leaves them open to opportunities for the exchange of technologies and ideas that aid in innovation. However,  they should also make domestic policies that support domestic industries. These could include increased governmental support and investments in education and training programs to help workers develop new skills and aid domestic industries to withstand foreign competition through innovation. It also aids them to maximise opportunities from foreign trade and prompts domestic industries to innovate and evolve in the face of the changing times.

The imperative of protecting consumer choice

For consumers, protectionist policies tend to undermine their welfare by limiting consumer choices and increasing the risks of inflated prices for domestic products. Import restrictions mean fewer options and variety for the consumers and domestic industries exploit this by inflating the prices of products at no added value in quality. Consumers who are faced with no alternative foreign products are then forced to buy indigenous products irrespective of quality and price.

Consumer spending is a huge driving force of an economy, such that even a small downturn in consumer spending slows economic growth. To avoid this, countries should prioritize making free and open trade policies that allow for freer movement of goods and services. Global competition is a key factor in keeping the price of numerous goods and products down. This in turn gives consumers the ability to spend.

Beyond the negative effects on businesses and consumers, protectionism triggers trade wars and retaliation among nations. When a country imposes trade policies that make it impossible for foreign businesses to compete, they may retaliate by imposing their own trade policies against the initially protecting country, which results in trade wars. Such tensions between nations impede the global economy through reduced foreign investment and increased unemployment rates in the protecting country. A notable instance of this is the United States imposed tariffs under Trump’s administration in 2018 on steel and aluminium imports from several countries including China, Canada and the European Union. In response, these countries made retaliatory tariffs against the importation of agricultural products and automobiles from the United States, which resulted in 75,000 fewer jobs in the US steel and aluminium manufacturing sector and a trade war that lasted for years.

Rather than implement protectionist policies and instigate trade wars, countries can jointly address the root causes of protectionism by engaging in multilateral trade negotiations and agreements that establish clear rules and encourage globalization and liberalization of trade.

Summarily, it is important to realize that trade wars and protectionism can have a ripple effect on the global economy, as reduced trade and increased tensions between countries can lead to reduced investment and consumer spending, and reduced economic growth. This can affect not only the protecting country and the retaliating countries, but also other countries that rely on global trade. The solution involves a collaborative approach that addresses the root causes of protectionism and implements policies that support domestic industries without resorting to trade barriers.

Chiamaka Adinnu is a trade fellow at the Ominira Initiative for Economic Advancement. She is currently studying for a master’s degree in Food Safety and Quality Engineering.  She can be reached via [email protected]