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Protectionism in economic downturn

March 18, 2012

PROTECTIONISM and free trade are combined in a variety of ways by different countries, both to safeguard against injury to their economies and develop competitive national markets.

While over time one may witness movements in one direction or the other, often working at cross purposes, the overall stated international preference is for freer trade, notwithstanding the setback it has received from rising protectionism in the current global financial crisis.

The US, EU and Japan have jointly decided to file a case against China in the WTO against restriction it has imposed on its exports of rare earth minerals. Similarly, China has been opposing moves by Western powers, from time to time, to restrict its exports. However, the trend towards protectionism is gaining ground. The latest example is the ban on cotton export by India to protect its textile industry. Free trade is also being curbed by Western sanctions on countries like Iran and curbs on sale of their ‘strategic’ technology/products to developing countries. In the late 1990s Malaysia imposed temporary capital controls to beat back speculative attack by foreigners on its currency and shares market during the East Asian crisis.

The most extensively used weapon to restrict imports (to make foreign goods expensive and depressed their domestic demand) is through devaluation of national currencies and customs tariff. But devaluation is not industry or product-specific unlike tariff rates.

Subsidies also distort free market mechanism which is being extensively used by US/EU to protect their agriculture.

The depreciation of national currency creates space for development of import substitution while making exports goods cheaper in international markets. For free trade to prosper, a country’s imports and exports need to be balanced unless financed through sustained external capital and financial inflows.

Many countries have managed their trade deficits through bilateral and multilateral support and foreign investment which is not so much forthcoming with developed markets and governments in financial distress. The problem is unlikely to go away anytime soon. So the best option is to seek balanced trade.

Yet another major issue is that in recent decades, liberalised foreign trade has tended to foster pre-capitalist mercantilism rather than promoting industrialisation ( that creates jobs and self-reliance) of semi-agricultural economies with few exemptions like China as an outstanding example. Pakistan is currently going through a process of what may be described as a phase of de-industrialisation or at best prolonged and slow industrial consolidation process despite surge in foreign trade over the past two decades or more.

Even countries like Germany which have huge exports and trade surpluses show that the domestic economy lags much behind the buoyant export-industries/sector. Normally, countries suppress domestic demand through low wages and export incentives. Exports help economic growth but they do not necessarily lead to widespread prosperity and affluence in the domestic market.

The developed economies which have benefited immensely from the global financial system like the United States resort to selective protectionism to safeguard their strategic assets.The West’s liberalisation has not embraced their banking, financial sector and seaports.

Those who stand for free market hold the strong belief that free trade promotes efficiency through competition and serves consumers best. However, it is forgotten that it is manufacturing that promotes jobs and self-reliance. Without employment and incomes, the jobless are left with no spending power. How many countries can survive as a trading nation? And that is why buying the infant industry argument many countries have opted for free market practices within national frontiers while pursuing restrictive international trade practices. India has erected non-tariff barriers.

The World Bank president Robert B. Zoellick rightly points out that “Today, the world urgently needs to move beyond the economic crisis and lay the foundation of a world beyond aid.”

The United States has still a global financial system, though weakening, to fall back upon, say as in the case of closure of hundreds of textile mills; probably its economists can still afford to think of ‘post-industrial era’ while President Obama is encouraging manufacturing. But industrialisation is a dire need for Pakistan to ‘manufacture agriculture’, create employment, attain self-reliance and stand on its feet to be able to face international market challenges. The persisting chronic trade deficit can only be managed through diverse economic activity and growing productivity.

The current phase of de-globalisation is making it imperative for nations to focus on their domestic market while exchanging trade surpluses with each other after meeting their domestic needs. Export-oriented industrialisation has very limited scope.

No doubt external trade leads to foreign investment. But it is the fast growing economies with a high level of domestic investment which attracts foreign capital spending in any significant manner and on a sustained basis in selective fields. For this, infrastructure is the best candidate particularly for logistics needed to develop farming on modern lines in Pakistan. It must be realised that ‘Washington Consensus has been discarded’, as recognised by economists like Julia Kirby and Christopher Meyer. They also believe that the narrow corporate focus on equity should also go.

But how can fast growth and development be achieved? A study by leading economists, Fuad Hasanov from the IMF and Oded Israeli of Oakland University based on ‘other data’ shows: “Heightened inequity shortens growth spells and may halt growth.

Reducing inequality, though, has clear benefits over time. It strengthens the people’s sense that the society is fair, improves social cohesion and mobility, and broadens support for growth initiatives. Policies that aim low growth but ignore inequality may ultimately be self-defeating, whereas policies that decrease inequality, say by, boosting unemployment and education, have beneficial effects on the human capital that modern economies increasingly need.”