Whither Protectionist Measures?

by Patrick Liew on March 29, 2018

The recent proposed protectionist measures by the US and China raise many potential challenges for not only both countries but also for the world at large.

Currently, both countries are posturing to make their points, negotiate from a presupposed position of strength, and fight for their own interests.

1. While leaders on both sides should have calibrated their moves, however, there is a possibility of misjudgment and it may exacerbate bilateral tensions and other challenges.

If they do not maintain their cool and should protectionist measures escalate, it may result in a lose-lose-lose outcomes for all parties.

2. A tit-for-tat series of reactions may eventually put both countries in a gridlock.

Or worse, it may result in erosion of economic and trading partnership, and start a trade war that may cause protracted geopolitical conflicts.

3. For example, the Smoot-Hawkes Tariff in 1930 was enacted to protect US farmers from agricultural imports from Europe.

By the time the bill made it to Congress, additional tariffs were initiated.

Those tariffs caused many countries to retaliate, resulting in a trade war that deepened the extended severity of the Great Depression.

4. Protectionist measures will increase prices of targeted imported products.

Consumers may have to pay more for their purchases and have less choices, resulting in a decrease in their satisfaction levels.

5. The increase in costs may have a multiplier effect on related industries and eventually, the economy as a whole.

Manufacturers that are dependent on imported goods and raw materials will have to pay more for them.

That will have a negative effect on their competitive edge, productivity and profits.

6. Inflation may drive the Federal Reserve to increase the interest rates and that may have a dampening effect on business growth, and economic welfare and stability.

7. Manufacturers may even relocate their operations to countries that are not affected by the protectionist measures, leading to a loss of jobs and taxes.

8. If those operations are moved to countries with relatively low corporate governance standards, it may result in abuses of labor and destruction of the environment.

9. Once protectionist measures are adopted, it may be difficult to remove them as it will cause hardships on companies that are reliant on such measures to protect them.

10. Over time, these measures may prevent both countries from optimizing their specialization levels and affect efficient allocations of limited resources and thus, put downward pressures on their economies.

11. Exporters that are hit by protectionist measures may have to market and channel their goods to other countries.

The surge in such imported goods may trigger affected countries to introduce their own protectionist measures.

In short, protectionist measures can potentially cause social unrests and hardships, and affect economic growth.

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