Why protectionism is not good for the global economy

Protectionism defies the tenets of the concept of comparative advantage laid down by the founding fathers of economic science. Adam Smith’s ‘The Wealth of Nations’ showed how both parties can benefit from trade. However, it is David Riccardo’s book “Principles of Political Economy and Taxation” in 1817 that the law of comparative advantage is attributed to. The concept of comparative advantage basically notes that all players, at all times, can mutually benefit from collaboration and free trade. The recent rise in anti-internationalist rhetoric stems from most people feeling being left out and not advancing from globalization and free trade.

Calls for increased tariffs on imported goods in order to protect local industries and curb rising levels of domestic unemployment are piling pressure on governments and further propelling the populist wave in developed countries. However, countries need to work together and those that have lower costs of production to specialize in producing goods where they enjoy lower opportunity costs. Developing countries are still at the very bottom of the international trade food chain. They are yet to be significantly integrated into global value chains. A decline in global trade as a result retaliatory actions from targeted countries will have devastating effects on the global economy. A decline in demand for goods and services leads to a decline in exports. A decline in exports means less income putting pressure on a country’s foreign reserves and consequently increasing their debt burden.
Countries exploit their domestic limited resources and export surplus. Income generated from the surplus is used to acquire resources they need but do not have. Trade improves efficiency through competition and the final consumer enjoys reduced costs thus raising the purchasing power of their income as a result. This improves utility and the general welfare of societies across many regions.

To put things into perspective, the global crisis in 2007/8 led to a decline in international trade. This, in turn, led to massive layoffs as restructuring kicked in. Stock markets tanked due to the bleak picture that reality painted. In the United States alone, the stock market erased $6.9 trillion in shareholders’ wealth in 2008. Factories across Asia were deserted. Since the crisis affected the drivers of Africa’s economic growth, the demand for and prices of African commodities fell and capital inflows from abroad declined. Oil prices plummeted during the recession. They fell from a high of $147 in July 2008 to a low of $33 in February 2009.
Protectionism cuts off competition. This offers a soft landing for domestic firms leading to complacency and lack of innovation. Eventually, industries start producing high priced low-quality products that reduce utility. Trade progresses the incomes of households and improves efficiency in global value chains through specialization and division of labor. In the long run, countries are better of supporting trade rather than restraining it.

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