E-Paper
Rise of protectionism and the free trade conundrum
The economic marvel achieved by China compels one to introspect on the efficacy of free-market and free-trade doctrines.
Despite a large number of eminent trade theorists backing free trade, many people across the globe, especially in developed countries, hold free trade detrimental to their interests, national and personal; they hold free trade beneficial to the extent it provides market access for their goods and services, but it becomes a villain when goods, services or investment enters domestic markets, challenges inefficiencies, infirmities and protected profit-making machineries.
Fundamental trade theories of absolute advantage, comparative advantage or factor endowment, promote free trade to achieve factor efficiencies, economic welfare, and growth. The considerable rise in production costs in high-income countries led to the shifting of their manufacturing to locations with relatively cheaper costs of production, especially labour. The latter could carry out labour-intensive production activities more efficiently, as they possessed an abundance of less-educated workers. In return, these countries would buy more of the high-value goods made by skilled labourers, on which the high-income countries have a comparative advantage. This shift in production led to considerable job cuts in high-income countries. Subsequently, the high-income countries began to feel the heat of imports from countries such as China that flooded their markets with cheap goods.
The economic marvel achieved by China, despite being a non-market and closed economy with significant opacity, compels one to introspect on the efficacy of free-market and free-trade doctrines. Despite volumes of economic research, based on empirical and elaborate data analysis, rising nationalism based on protectionist economic policies seems to be the recipe globally for rising on the power ladder.
Policymakers and politicians around the world find an easy scapegoat in economic liberalisation for the mess created by their faulty economic policy formulation and its implementation infirmities. The recent years have witnessed a rapid rise of Right-wing political parties across the world that thrive on the promise of making their countries “great again” and regain lost glory. Donald Trump is not the first leader in history who understood the pulse of his country’s citizens and made an electoral promise to erect formidable protectionist barriers against the rest of the world. Neither is he the only one in the current scenario. The truth of the masses hating free trade is well understood in India too, political ideology notwithstanding. The political leadership of Europe, including major powers such as Germany, France, and the United Kingdom are not far behind in competing against each other to protect their national interests and curb imports and have mainstreamed this into electoral agendas, as the success of the German far-right shows in the recent election shows.
However, one should also learn from history and never forget that, not even a century ago, in the late 1930s, massive tariff barriers built by other European nations and the US to protect their own economies — along with the Treaty of Versailles — brought financial chaos to Germany that soon spread to the rest of the continent and eventually precipitated the rise of Adolf Hitler and World War II. Donald Trump’s resurrection in the US with massive popular support for his America First slogan reflects the absolute rapture of millions of voters, especially in the US hinterland, with the idea of Making America Great Again.
In his quest for rapid economic gains, Trump has shaped his trade doctrine on a basic mercantilist theory, that the US should export more and import less, take the axe to trade deficits with the likes of China and shift the direction of the US’s huge trade imbalances as early as possible. In the months to come, expect the US to act grossly heedless of established multilateral systems such as the World Trade Organization whose foundation is based on tariff reduction, reducing non-tariff barriers, and applying uniform tariffs under its most favoured nation treatment. Trump has already imposed 10% additional tariffs on Chinese merchandise, 25% tariffs on the US’s neighbours, Canada and Mexico, despite their longstanding geopolitical and trade relations and the new avatar of the NAFTA — the US-Mexico-Canada Free Trade Agreement. The latter’s implementation has been deferred to April 2025. Moreover, tariffs of upto 100% could be laid on imports from countries that do not trade in US dollars. To the shock of the well-defined multilateral trading system under the World Trade Organization framework, Trump is threatening trade partners with reciprocal tariffs.
Trump openly identifies as a tariff lover even as he accuses other countries of high tariff regimes. In Trump’s scheme of things, hard negotiations and bargains based on the give-and-take are likely to be the order of the day, with the added element of arm-twisting. Thus, the survival strategy in the Trump era lies in preparedness and meticulous empirical research to defend India’s interests and use them effectively in multilateral and bilateral trade and investment negotiations.
Rakesh Mohan Joshi is vice-chancellor, Indian Institute of Foreign Trade.The views expressed are personal
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