Rise of Economic Protectionism in Global Economy: Re-examining the Theory of Comparative Advantage

Recent trends in global economy have shown that many countries throughout the world have been undertaking measures that have been associated with what economists call protectionist policies. This includes measures such as an increase in tariffs and import duties, competitive devaluation, embargoes or other non-tariff barriers, which are aimed at substantially restricting free trade. Free trade and comparative advantages, supported by classical economic theorists, is the dominant thought that guides economic functioning and the recent rise in economic protectionism in many parts of the world is proving to be a perplexing phenomenon. Data has shown that the number of free trade agreements, by and large, is on the decline since the past few years. In contrast, the numbers of protectionist measures that are still in force have been consistently on the rise.

The Classical View

Classical economic theory encourages, and acknowledges the significance of comparative advantages within an economic structure characterized by free trade. The theory of comparative advantage was first propounded in 1817 by a British economist and businessman, David Ricardo, in his treatise ‘On the Principles of Political Economy and Taxation.’ Ricardo’s position was that the specialization achieved by a country gives them an “advantage”, as a result of which free trade would inherently benefit all trading partners. The theoretical support for such a position is based on the logic that comparative factor advantages are the reason why trade happens in the first place. The specialization achieved by any particular country in the production of certain goods benefits the global economy at large. In the complete absence of comparative advantages, economic systems function as autarkies, that is, isolated consumption and production behavior within a self-sufficient and independent economic structure. Such a system fails to realize the potential welfare gains of its people. According to classical theorists, protectionist policies that create significant barriers in free trade result in contraction of international trade. This contraction, often a result of misplaced trade pessimism among the policymakers of various countries, does have a cascading negative impact on global growth since empirically, increase in exports has always been associated with concomitant global gains in income and investment. In other words, trade restrictions as a consequence of protectionist policies have negative multiplier effects for the global economy at large. In addition to that, protectionism is costly whereby elevated prices result in less consumption of any particular good. This in turn reduces the overall consumption within the economic system due to an accompanying reduction in the purchasing power. In stark contrast, classical theorists believe that free trade not only expands the size of markets, but also helps increase competition which in turn decreases prices, reduces monopolistic hegemony and incentivizes producers to improve the quality of their products, thereby improving overall efficiency. 

The Rise of Protectionism 

Notwithstanding the classical theoretical viewpoint in favor of free trade, which makes up a dominant section of economic thought, a number of countries have, over the years, adopted and implemented various measures associated with protectionism. In recent history, countries such as Japan, South Korea and China, which have all witnessed high levels of growth and technological advancement, have had government intervention in economy at some point or another. The commonality among Japan (during the first two decades after the end of the Second World War), South Korea (between the decades of 1960s to 1980s) and China (1980s onwards) was the close government regulation of large businesses, contradicting the liberal argument. Recent political rhetoric focusing on economic nationalism in a number of countries, including in the world’s largest economy United States, provide an impetus to the mercantilist position of protecting infant industries and domestic jobs, while also strengthening protectionist arguments related to national security which claims that certain domestic industries are so vital to national security that any dependence on any other country for such products hampers the safety of the people of the country at large. The argument of “fair trade” as opposed to “free trade”, which focuses on wages and working conditions, is also given to question the assumption that free trade benefits all equally. 

Although protectionist ideas can at times be based on rhetoric to mitigate domestic fears, it can also be based on concerns of protecting infant companies in the developing world, in order to reduce the burden of competing with already established companies of the developed world. This seemingly unfair competition, according to the dependency thesis, results in the developing world becoming part of the periphery, with a circular cycle of low income and low standard of living while the developed world forms the core with high incomes and high standard of living. 

A recent example of trade protectionism and its potentially far-reaching effects is the recent trade-war like situation between the United States and China, in which both countries threatened to take reciprocal actions against trade barriers put into effect by the other. Due to US President Donald Trump raising tariffs on many Chinese products, China retaliated by increasing the tariffs on agricultural products of US, such as soy. In 2018, Donald Trump also raised the tariffs on import of steel and aluminium, by 25% and 10% respectively. 

In the Indian context, even after the liberalization reforms of the early 1990s, Indian tariffs continue to be some of the highest in the world. In fact, the US trade department has accused India of having some of the highest tariffs in the world out of all the major global economies, hovering around 13.8%. 

With regard to the recently concluded free trade agreement between 15 countries of South Asia and Oceania, Regional Comprehensive Economic Partnership (RCEP) was overshadowed by withdrawal of India from the agreement in favor of protectionism. The withdrawal was taken in order to prevent cheap goods from China from flooding Indian markets and destroying local manufacturing economy and similarly, to prevent cheaper milk from New Zealand, which otherwise would have detrimental effect on the Indian small scale dairy producer. 

Other contemporary examples of protectionist policies include the Common Agricultural Policy (CAP) of the European Union, done with the aim of increasing the income of European farmers, hike in food tariffs by Argentina to protect the interests of Argentinian farmers and currency devaluation by countries such as South Korea to encourage export industries.  

In conclusion, although much of the dominant economic thought has been what the classical liberal school espoused, trade protectionism continues to very much be a reality in the contemporary world. Even when it comes to countries that are largely in favor of free trade and minimal restrictions, such as the countries of European Union, protectionism and protectionist policies are employed to protect certain domestic industries and producers.

Mahananda Ray is pursuing an M.A. in Politics (specialisation in International Relations) at Jawaharlal Nehru University, Delhi India

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