Tuesday, March 13, 2018

Protectionism and Its Consequences

Globalization is in retreat and protectionism is again rising its head worldwide. Recently the American President Donald Trump announced that he will impose very steep tariffs on imported steel, aluminum products and cars . In retaliation the EU has threatened to impose heavy tariffs on American imports in EU. Trump is also waging a trade war with China by threatening to impose heavy tariffs on Chinese imports. In retaliation China is threatening US with heavy import tariffs too. Here in India the Narendra Modi government also imposed heavy tariff on palm oil, chickpea imports and scores of other items like kites to cosmetics to electronic goods etc., in its recent budget.

Is this rising protectionism good for the Indian and the world economy? To understand this question we need to understand how our economic life works. Following brief analysis will show us what will be the impact of this rising protectionism on our lives.

Economics of Protectionism
Human beings act in a world full of scarcity to survive and thrive. The biological objective of every life on earth is to stay alive, reproduce and move ahead. To stay alive we need basic goods like air, water, food, shelter, clothes etc. To enjoy our lives fully we need many more goods like TVs, mobile phones, cars, bikes, computers and on and on. If you think about the goods that you consume on daily basis you will realize how long and endless this list of goods is. Now, we do not have to worry about those goods which are in abundant supply vis-à-vis our needs for them e.g., air (oxygen). Even after nice billion people of earth utilizing oxygen every fraction of a second there is plenty of oxygen left on earth. The goods that we have to worry about are the ones which are in scarce supply. Because they are scarce we have to economize on their use. These are economic goods.

Another fact of human life is that nature has endowed us with unequal resources including our skills and talents. Just like individuals, countries around the world are endowed with unequal and varied natural resources. Some countries have abundant oil reserves, but lack the human skill to extract those resources from ground. Some countries have abundant coal but no corn. Some have abundant water but no wheat. Some have abundant wine but no wool and so on and so forth. Now, as we have seen above, for survival we need more than one economic good. This creates a problem for all of us because we all are not capable of producing all these goods on our own e.g., to type this article I need a computer which sadly I cannot produce on my own; I also cannot produce the t-shirt and jeans that I am wearing right now or the bottle from which I am drinking water or the breakfast that I am going to have in a while and countless other such things. How do we get over this problem? The answer is: Trade. Exchanging what we can produce with what others can produce can help us mitigate this dire problem. For example, on an island economy there are two people viz., Robinson Crusoe and Friday. Mr. Crusoe is very good at producing fish and Mr. Friday coconut. Both can benefit by exchanging/trading fish for coconut. Without this  trade both Crusoe and Friday are poor i.e., they only have one good, either fish or coconut, to consume, but with trade now they can consumer both fish and coconut. Thus trade makes us all rich. This fact of trade is all the more true in our more than two person economies too. We all can consume and enjoy endless varieties of goods if we trade with each other. Trade enriches our lives. If trade within countries enriches their inhabitants’ lives then trade with foreigners will enrich their lives even more. If trade within nation is beneficial then trade between nations, foreign trade, is even more beneficial. This is because, as we have seen above, not all countries are endowed with all kinds of natural and human resources. Some countries are good at producing wool and some at wine and so on and so forth. Indians can export spices, diamonds, textile products etc., to foreign countries and in return can buy textile machines, oil, sugar, coal etc., etc., from abroad. Foreign trade thus benefits all.

Now, these benefits of internal and foreign trades can be realized only when these trades are free from any kind of restrictions and interference. Only when Indians and Americans and Chinese and Brits and everyone else can trade freely within their countries and with each other can the gains of trade be realized. Only when internal and foreign trades are free we all can enrich ourselves. Any kind of restriction on national and foreign trade will kill the gains of trade. Any kind of restriction will make us all poor.

The policy of protectionism, that the governments around the world are following today, puts heavy restriction on free foreign trade. If Indians, Americans, Chinese, Brits, Spaniards, Italians etc., people are not allowed to freely trade with each other by their governments, to protect some local inefficient manufacturers, then that will make them all poor. Protectionism means poverty. Self sufficiency means living a miserable primitive life of tribal people. Forcefully buying costly products from local producers, instead of buying cheap goods from abroad, means poverty.

The rising protectionism around the world is not good for anyone. It is only going to make the world a poor place to live for everyone. And poverty will kill people in the end. Putting restrictions on trade is a policy that invites misery and death. If you love death then you can celebrate protectionism. If you love life then you must oppose protectionism.

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