What’s the real impact of trade protectionism?

“This is protectionism, pure and simple.” Those were the words from the European Commission (EC) last month, aimed at the US and President Donald Trump after tariffs were imposed on the country’s steel and aluminium imports.

The statement has reignited the debate about protectionism and the future of globalisation, with world leaders taking to the World Trade Organisation (WTO) to challenge the ruling.

While politics appears to be at the heart of Trump’s decisions, there are undoubtedly economic consequences that need to be explored. To get to grips with this, our latest blog takes a closer look at trade protectionism, considering why it happens and the potential effects it can have.

What is trade protectionism?

Put simply, trade protectionism is a deliberate attempt to limit imports or promote exports by implementing barriers to trade. The aim in general is to protect a nation’s economic interests, including their key industries, commodities and employees.

How can it be implemented?

Protectionist policies can be implemented in various ways, including:

Tariffs are taxes on imports that are charged by governments to restrict the flow of goods and services coming in from foreign countries. As a result, the cost of imported goods often rises to meet or exceed local prices. Tariffs can be fixed, flexible (priced per unit) or ad valorem (priced as a proportion of value).

Quotas are put in place to limit the number of goods that are imported to a country. Due to limitations with stock, this generally raises prices and enables local businesses to capitalise on excess demand.

Product standards are implemented and often justified as necessary for consumer or environmental protection. This could involve setting a requirement to use certain commodities to produce a product, with the aim of deterring companies from importing goods as a result.

Subsidies are a sum of money granted by the government to help an industry or business keep production costs low. This allows producers to generate profits even when their product or service is priced lower.

Why is it implemented?

There is a long list of reasons as to why a nation would adopt trade protectionist policies. In the case of the US currently, President Trump has cited Section 232 of the Trade Expansion Act by claiming that foreign steel and aluminium constitutes a threat to the country. This is based on the idea that relying on foreign manufacturers would affect their position in the event of war.

Other reasons include:

Protecting jobs to ensure workers’ livelihoods and the firms they work for are safe. This is vital for a nation’s economic growth and well-being.

Protecting consumers from unsafe imported products that could result in illness or injury.

Protecting infant industries and new companies that would find it difficult to compete against established, profitable firms that operate internationally. This is generally more short-term, giving enough time for infant industries and new companies to gain market share and a competitive edge.

What are the effects?

Advantages

1. Trade protectionism keeps the domestic economy rolling. Thanks to the decrease in imports, domestic firms can sell their products and services with fewer companies to compete against.

2. It helps to improve a country’s positioning within particular industries. Companies can work to develop their own competitive advantages until they’re able to compete on a global scale.

3. Foreign countries can be prevented from dumping, where goods are sold at lower prices than the cost of production.

Disadvantages

1. Without competition, domestic companies are free to raise their prices without improving the quality of goods. Manufacturers who need to purchase raw materials are left with limited options and consequently pay more, leading to higher prices for consumers, too.

2. Foreign companies that offer unique products and services are limited in the areas they can sell their products and consumers find it harder to purchase.

3. Protectionism typically causes retaliatory measures from other nations, which can ruin vital relationships. The EU has just implemented its list of tariffs on US imports in response to the White House’s new measures, ranging from Harley-Davidson motorbikes to jeans. Elsewhere, China is threatening to pull out of US trade deals all together if the country continues with its tariff hikes.

4. It can have a detrimental effect on the global economy. Before Trump executed his plan, economists warned that it could cost the global economy $400bn in the first year alone. This takes into account the steel and aluminium producers who will find their exports hampered, as well as the tit-for-tat that is expected over the coming months.

How will it end?

As of now, no one can be sure. Economists have historically always been against protectionist plans, and with good reason; consumers could face adverse effects in as little as a few weeks if trade disputes escalate. An economic showdown between some of the world’s biggest players is something we can never be sure on, and only time will tell!

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