Protectionism – or mercantilism – is the opposite idea to free trade and was noted by Smith (1789) as one of the reactions for the apparent overwhelming of foreign goods being imported at the expense of local producers.
The ultimate weapon of a mercantile nation is the imposition of tariffs on the imported goods to make them more expensive than the local goods. This tends to start a trade war where the exporter then imposes tariffs on goods that they import. This causes a spiral in tariffs and goods increase in price. Ultimately, the consumer pays the higher prices and inflation increases.
In 2019, the US government engaged in a trade war with China and threatened tariff increases on goods from the EU and Southeast Asian countries to reverse trade imbalances to the benefit of the USA. The resulting uncertainty is affecting the global economy and especially global supply chains.
This bout of protectionism is mainly politically driven to bring back US-based jobs lost to supposedly unfair overseas outsourcing. The irony is that it is US-based global brands that have led the global outsourcing revolution.
The usual channel to argue that another country is practicing unfair trade is to use the dispute system at the WTO. The USA considers that this is not working and argues that the price of globalisation is too high in local jobs. This is a typical protectionist response to imports by some nations and is usually politically driven.
Many other smaller nations practice protectionism at times, often in response to economic difficulties and rivalries with neighbouring countries. There are problems with the WTO dispute system and some countries do try to avoid WTO rules to gain an advantage which can be deemed as unfair.
As the WTO is a global organisation with 164 members, it can be very difficult to agree on the best way to improve the dispute system, but since its creation, global growth and the poorest nations have benefitted the most from increased wages.
Find evidence of the success of protectionism. Are protectionist policies giving some nations a trade advantage and making their citizens richer? Discuss in the comments area.
Smith, A. (1789) The Wealth of Nations 5th edn
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