The light of the global recession, assess the likely economics effects of an increase in protectionism on the world economy. (15 marks)
Protectionism is the theory or practice of shielding a country's domestic industries from foreign competition by taxing imports. Between 2000 and 2008 the value of world trade in goods and services rose by 12% a year. However since the global recession in 2008 the value of world trade in goods and services has substantially decreased.
Many developed and developing countries want to protect their own industries such as India who is still reluctant to give foreign firms greater access to its economy, as shown by the political row over its much delayed decision to open up the supermarket sector to global giants
such as Wal-Mart, Tesco and Carrefour. Single brand firms such as Starbucks and Ikea are already allowed to open stores in India, but only provided they buy 30% of their goods from domestic small industries. Countries that have upheld protectionism have lost out in comparative advantage to manufacturing in more developing economies. With protectionism specialisation is likely to reduce and world trade consequently will fall. This will be detrimental to countries such as Germany and Japan who are the big exporters of capital goods such as cars and electronics as these industries will shrink. With an increase in protectionism developing countries will find it harder to export goods, which will result in loss of employment and an increase in absolute poverty. Adam Smith who came up with the term "invisible hand" to describe the workings of the "marketplace" would have argued to remove protectionism as it will worsen global recession and it would be best to leave the market forces of supply and demand alone and allow them to correct the global economy. Protectionism results in higher prices and less choice for consumers and this combined with the global recession it could severely limit economic growth within a developed economy. Consumers would also have to pay higher prices for a better produced import or could be denied the ability to acquire it at all and this may reduce the standard of living in a country. A country that upholds protectionism could result in another country retaliating by raising trade barriers against imports from that country. However Restricting imports helps a country's domestic economy develop new industries that might otherwise be quashed by imports from other countries that have had a head start. These developing industries can add to the country's economic growth, create jobs, increase the overall wealth of the country and lead to a better balance of trade. Protectionist strategies may also be used to correct the balance of payments on the current account. Protectionist strategies reduce the number of imports. In addition, tax is gained from the tariffs placed on imported goods. Ideally though, a correction on the current account should occur under a system of floating exchange rates alone and does not need to be distorted by such protectionist measures. Globalisation affects different economies in different ways. Countries like India and China where exports are only around 15% of GDP will be less affected then countries like Taiwan whose exports are around 60% of GDP. Also an increase in protectionism could benefit the world economy as it can also prevent dumping, this is where foreign and bigger economies enter an economy and sell their goods at a price lower than the costs of production. An example of this is America and China. America had an abundance of chicken feed and proceeded to export it to China which led to China putting a quota on the amount of chicken feed America could export to China. In conclusion there are many economic effects of an increase in protectionism on the world economy. However with the global recession and the increase in protectionism it seems the disadvantages outweigh the benefits
In a protectionist position, the government is aiming to ensure American businesses and at the same time decrease the amount of sales of foreign business. The fastest method for accomplishing this task is to increase tariffs, as in taxes on foreign goods coming into the country.... ... middle of paper ... ...
...ystem primarily responsible for promoting global competition. Free trade also promotes shifts in production so as to fit the “comparative advantage” model. Though free trade is widely practiced concerns with how to regulate free trade, something supposedly unregulated, countries have to subject themselves to the controversial institutions of the IMF and WTO. Fair trade policies while potentially creating smaller markets support workers’ rights in both the U.S. and developing nations. Though the pros and cons of globalization continue to be debated the United States can no longer escape its role in the global economy nor can it impose policies that are detrimental to the United States founding ideals. However policies that play towards the advantages of both free and fair trade could stimulate a healthy domestic economy that is also competitive in the global market.
American companies purposely make their goods in other countries such as India because their labor practices do not meet US standards and can easily be manipulated for maximum profit. By paying their employees extremely low wages, they are still able to manufacture their products. As a result they pull out more profit that does not have to be given back to their employees due to minimum wage laws not being in effect in these countries. In “Distributional Effects Of Globaliz...
In realising that foreign investments are the key source of the nation’s economic rise, the Chinese government has given special preferences to foreign investors (Financial Express, 2006). This is mostly done through reduction of most favoured nation (MFN) tariff rate. In India, on the other hand, fair competition exists between domestic and foreign investors. Although the Indian government states that it aims to reduce its MFN tariff rate, which currently doubles the rate in China, to other ASEAN country levels, it is in reality a big challenge because a large portion of the nation’s tax revenue comes from customs tariffs (Henley, 2004).
This analysis assumes that a maximum of two countries are trading with each other. They both have made negotiations to not to impose a tariff but are thinking to go back on their word and impose a protectionist measure. The analysis also assumes that organisations such as World trade organisation don’t exist and that trading will cease after both countries retaliate.
Introduction India is the world’s second most populated country with over 1.2 billion people. Since its independence from British rule in 1947, the country has been more or less a stable democracy. Until 1991, Indian governments imposed economic austerity and its markets were comparatively closed to the world. Economic reforms in 1991 brought about a change which made India an attractive and huge market for multinational corporations from all over the world (Joshi 8). Retail industry within a globalized world is one of the most thriving and profitable sectors.
...es currently does possess an enormous trade deficit, but the importance of this problem and the best means of solving it is a sharply debated issue. Clearly, while a return to protectionist policy would have some positive effects in the short run, it ultimately would undue the enormous growth that free international trade has caused for the US economy. The more moderate approach, of increasing domestic capital, reducing reliance upon foreign money and goods, and reducing government spending, deals with the situation much more effectively. A deficit is often times natural, especially in a wealthy country with a very strong economy, such as the US. Using these techniques, the negative aspects of the deficit can be overcome, while still ensuring the efficiency and affectivity of a liberal international trade system.
Political factors: In India, there are very tough regulations put in place by the Indian govt. to avoid the monopoly conditions and govt. control remains at the top. This company is generally the state owned company therefore the decision making is very hard for the company and company has to follow the political changes which happen in the India. India has disputes with the Pakistan and China, which is continuously affecting the industry.
And even though the tariff barriers have been reduced significantly, but the other barriers still exist. The developing nations have argued that the protectionist trading policies of developed nations is being an obstacle against the industrialization of many developing nations. Accordingly, developing nations have sought a new international. trading system with improved access to the market of developed nations. Some of the problems that the developing nations faced have been unstable export markets. Deterioration of terms of trade, and limited access to the market of developed.
American protectionism believes that if we remove foreign countries that our unemployment rate will decrease. I am not sure I agree with this. I think that as other countries have corporation in our country is creates jobs as well. For example, Ikea is a corporation that was not started in America, but they have many stores here. The stores in America hire local people, even though they are working for a foreign company. They are still supplying jobs for Americans even if America is not their home country. Also, not only do foreign businesses in America provide job, but they also help our economy some. Businesses in the United States still are responsible for paying some taxes to our government, which in the long run helps our economy.
Political arguments for trade intervention are mainly concerned with protecting the interests of certain groups at the expense of other groups. Most of the time domestic firms benefit from this, while customers suffer the consequences.
Economic risks faced by companies that want to expand their business globally are exchange controls, local content laws, import restrictions, tax controls, price controls, and labor problems (Cateora, Gilly & Graham, 2011). These risks can be just as harmful, in some cases, as the political risks faced. As implied by its title, import restrictions are limitations placed on certain goods being shipped in from another country. “There are especially tight import restrictions on goods with a potential to be hazardous” (Dugger, 2016). Many restrictions are placed on imports in order to protect and promote the domestic market within the host country. Tax controls are put into place primarily to generate revenue and operating funds. Unfortunately, many companies that attempt to expand their business overseas experience unreasonably high taxes. Elevated tax rates can also be seen as a form of protectionism in efforts to deter threatening foreign companies from entering their market, thus allowing domestic companies to
...y supply and this causes the collapse in the U.S. and elsewhere (Pinnell, Lecture notes, 3/23). Consequently, countries become very protectionist to protect firms at home and international trade collapses (Pinnell, Lecture notes, 3/23). Therefore, states must make decisions with reciprocity and consequences in mind (Pinnell, Lecture notes, 3/23).
Free trade is a policy that relies on the concept of comparative advantage that when comparing two countries one of those countries will have the capability to make a product that is better than the other country. So it is best if each country focuses its efforts and resources into one product to increase the economic activity for both countries. The determination of who produces a product better is based on the open market without intervention from a government who may try to control a trade by imposing government protective measures such as tariffs. The World Trade Organization has been tasked with monitoring free trade, but it has been noted that their policing has not been effective to stop such interventions. Free trade not only relies on a laissez-faire approach but also on assumptions of conditions. The assumptions used by many for economic theories are not always accurate but rather the justification for using the assumptions is so that economic theories can be applied for the greater good of an economy.
Warwick J. McKibbin, Andrew Stoeckel, The Potential Impact of the Global Financial Crisis on World Trade