Case for protection has been built upon the philosophy that it can be used for making desirable redistribution of income from one section of society to another. Protection makes some people better off, while others are worse off. By providing protection to domestic producers their profits can be raised at the expense of consumers who suffer a loss in consumer surplus as protection denies them consumption of low-priced imported goods. That is, protection redistributes income in favour of domestic producers.
First argument for protection has been that nationalistic feeling or patriotism requires that people of a country should buy products of their domestic industries rather than foreign products. In the US, there has been a campaign ‘Be American, buy American’ appealing people to buy American goods instead of imported foreign products. Similarly, in India recent campaign of ‘Swadeshi’ appeals to the patriotic feeling of the Indian people that we should protect our indigenous industries and impose barriers on imports of foreign goods or provide subsidies to our industries. However, this argument is misplaced and invalid.
Those policy makers who yield to such arguments deny the people of a country the gains from trade such as rise in productive efficiency and greater well-being, stimulus to growth through higher capital formation and spread of superior technology. Thus restrictions imposed on trade in the name of nationalism or swadeshi are actually contrary to our national interests because they promote inefficiency and prevents rapid economic growth.
Across the globe, people are wondering why the US, usually the leader in free trade, is now taking such a protectionist stance. In addition to exiting or renegotiating US participation in trade agreements, Donald Trump has stated that he plans to raise tariffs on imports. The US already runs a trade deficit with most of its TPP partners. The TPP would simply have given them tariff-free access to lucrative US markets. Threats of import tariffs, while largely targeted at China and Asia, have also become a threat for European companies, particularly auto manufacturers.
A very concrete negative outcome of a trade war would be that it would make it difficult for US companies to export to Asia, the fastest growing market in the world. On the other hand, the US already runs a trade deficit with those countries. The threat of a trade war would most likely hurt the surplus countries more. Additionally, much of the US trade deficit with these countries derives from US companies operating abroad, exporting products back to the US. Increased tariffs may cause these companies to relocate to the US. If they chose to go out of business, or to seek new markets, rather than moving home, US demand for these products would remain the same and the void would be filled by US domestic companies, producing in the US, albeit at a higher price.
The possibility of protectionism is confusing forecasts for both growth and monetary policy. It will be very difficult to gauge the impact of any rate increases with the possibility of simultaneous protectionist trade policies and large deficit spending.
India would not have entered into trade relations with the US if it did not expect to gain from it. Trade occurs between two countries if it benefits both the trading partners, the developed and the developing countries. Therefore, in our view world trade should be promoted by lifting barriers put up by various countries based on wrong notions about effects of free trade.
Some countries such as the US and Japan have resorted to protectionist measures as a retaliation against foreign countries who restrict imports into their countries. The retaliatory actions of imposing trade barriers have done great harm to the expansion of world trade. New international organization WTO (World Trade Organization) which has replaced earlier GATT has been set up.
WTO has framed rules which every country should observe so that barriers to trade be removed and world trade be promoted without doing any injustice to the member countries. It may be noted that retaliatory activities of restricting imports from foreign countries generally lead to the depression in the economies of the world as it happened during the worldwide depression of 1930s. The retaliatory activities may cause another global depression.
Guest Author
With experience across leading IT organizations, Rahul Goswami is a Bengaluru-based columnist and a certified consultant in sales & marketing advisory services. He is also a member of 'Academy of American Poets' and loves to explore his poetic writings to drive creative transformations in his works
