With European economies announcing austerity packages to tackle debt, another agenda is brewing within the economic circle. The agenda is that of trade protection. The World Organizations and economists are consistently warning against implementation of trade protectionist measures. It is feared that such measures will only prolong the current crisis.
But, with inflationary pressures holding up, the debt crisis emerging in the developed countries and the fragile economic recovery, could trade protection be really avoided?
Trade protection is viewed as a draconian measure, which if unleashed, would swallow the economic prosperity and cripple the global economy. Henn and MacDonald (2010) warn that enforcing protection measures could repeat the scenario of the Great Depression in 1930 that ‘exacerbated and extended the economic and social chaos around the world.’
But in a time, where growth has slowed down - in some cases even stagnated - and high unemployment rates, is there a possibility that trade protection could actually stimulate growth?
Arguments Against Trade Protection
Economists and policymakers argue against trade protectionist measures based on the experiences of various countries in the past. Russia, China, India, Pakistan and Latin American countries adopted 'central planning' ideologies for their economic development. These were agrarian economies with weak industrial base. At the time, economic growth that would translate itself in to world power was a critical issue.
The adoption of import-substitution policies was to develop an industrial base that would become the engine of economic growth. Baer (1972) states that import substitution (ISI) consists of establishing domestic production facilities to manufacture goods which were formerly imported. The infant -industry argument – which was that industries need protection in early stages as they are going through the learning-by-doing process – was applied and the industries were protected by the state.
However, the ISI failed in developing a strong industrial base in developing countries. Industries developed under the strategy were not fit for the world markets and resources were wasted. The industries were inefficient and there was a lack of creativity. Exports were weak.
On the other, the isolation from the world markets and government protection gave way to massive corruption. Wealth was held in the hands of few. An example is of Pakistan in 1974, when chief economist Mr. Mahbub-ul-Haq reported that the 'economic power in Pakistan lied in the hands of 20 large families' (White 1974). Trade protection also led to aggravation of income inequalities within the countries.
The resulting failure of the policies in the 80s led to 'Twin Deficit Crisis' – the budget and the fiscal deficit - in various developing countries. IMF and the World Bank were approached and policy change took place to avoid the economic meltdown.
Could Trade Protectionism Induce Growth?
If trade protection was the cause of the lack of economic growth, did trade liberalization work? The view that trade liberalization leads to economic growth is based on the example of East Asian economies’ rapid growth and development through export-oriented policies.
The intention of trade liberalization was ‘to dilute the monopoly power, by throwing the big fish into a very much larger, global pool’(Shipman 2002). It was strongly argued that trade liberalization will allow the markets to work in an efficient manner, thereby, boosting exports and growth. But, Shipman (2002) argues that markets don’t work in the way they are meant to as ‘no nation got rich through specialization in the way the theory suggests.’
The link between trade liberalization and economic growth is highly controversial. The studies linking trade liberalization to economic prosperity ignore role of institutions, macroeconomic policies, geographical and social structures and economic ideologies that are critical for the creation of the dynamics of economic growth.
Rodrik (2001) argues that ‘countries that opted for trade liberalization are discovering that openness does not deliver on its promise’ as scores of Latin American countries’ economic growth is stagnating. Rodrik (2001) gives the example of India ‘which significantly raised its economic growth rate in the eighties remains one of the world’s most highly protected economies’ even today.
The liberalization of trade has led many firms to shift their production processes from high wage countries to low wage countries as trade opened. Countries like ‘Japan is alarmed about inequality, stagnant wages and jobs going to China’ (The Economist 2001). Spain is currently facing a 20% unemployment rate. Although the link between liberalization of trade and income inequality remains ambiguous, it is argued that liberalization of trade has aggravated the income inequalities within the countries.
With debt crisis looming and with bailout of financial sector, developed countries are looking into protection measures of trade to boost their domestic output. But, the enforcement of protectionist measures could trigger trade wars, which Stiglitz believes will have no winners. It remains to be seen whether the trade protection measures could steer the economies towards growth or lead to further chaos in the global economy.
Sources:
Baer, Werner (1972) 'Import Substitution and Industrialization in Latin America: Experiences and Interpretation', Latin American Research Review, Vol 7, No.1, Accessed on 19 March 2007
Henn, Christian and MacDonald, Brad (2010) 'Avoiding Protectionism', Finance and Development, IMF Publication, Accessed on 05 March 2010
Rodrik, Dani (2010) 'Trading in Illusions' , Foreign Policy, Accessed on 23 Jan 2007
Stiglitz, Joseph (2010) 'American should be wary of Igniting a Trade War', Gulf Times, Accessed on 10 April 2010
Shipman, Alan (2002) 'The Globalization Myth' UK, Icon Books Ltd, Cambridge, UK, Accessed on 10 Feb 2007
The Economist (2007) ' Globalization and the rise of inequality. Rich man, Poor Man' , Accessed on 12 Mar 2007
White, Lawrence (1974) 'Industrial Concentration and Economic Power in Pakistan', Princeton University Press, Princeton, USA, Accessed on 07 June 2007
Samreen Khan - Samreen M. Khan, an expat born and raised in the small Gulf State of Qatar, began her writing journey with a blog. She pursued a degree in ...
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