In the 1900s, globalisation started occurring, connecting different countries and creating more networks than previously, resulting in the formation of trade blocs, i.e., the ability to trade freely between countries. Consequently, there was a significant increase in the number of imports and exports traded between countries. An example is the North American Free Trade Agreement (NAFTA), implemented in 1994, now known as the United States-Mexico-Canada Agreement (USMCA), to promote trade between the USA, Canada and Mexico. This was achieved by eliminating multiple tariffs over time. In theory, this benefits all three countries in the agreement because businesses within these countries have a larger market to sell goods and services to, increasing their profits, suggesting that America strongly supports globalisation and would therefore be against protectionism.
How has protectionism started to occur?
However, in recent years, America has started to implement protectionist policies. Due to reduced government legislation some countries, such as China, can supply goods and services at a lower price than America. For example, China does not have a minimum wage, which means they have lower labour costs, consequently reducing the costs of factors of production for the supply of goods and services in China, compared to America. Furthermore, the Chinese currency (yuan) is much weaker than the US dollar, meaning Americans can cheaply import goods and services from China, further incentivising them to import. This means that American businesses were significantly losing profits, given that Americans started to import goods and services more and more.
Therefore, Donald Trump decided to implement tariffs on goods and services from foreign countries, such as solar panels and metals, which began in 2018. Overall, in 2019, the value of tariffs in America was $79 billion, a sharp increase from previous years, as shown by the graph below. The graph shows that before 2018, tariff revenues did not exceed $40 billion, which shows just how significant the increase to $79 billion was. Arguably, this has been successful because thousands of jobs were created in America, particularly in the steel and washing machine industries, suggesting that globalisation can be negative for some countries, hence explaining why America has started trying to reduce some of the impacts, leading to protectionism.
On top of this, the American government has been giving out subsidies to many firms for years, which reduces supply costs artificially, meaning that American goods and services are more competitive.
How has protectionism benefited America?
Job creation, as a result of protectionism, is likely to have significantly benefited America through a reduction in unemployment. This means that consumption is also likely to have increased, due to increased consumer confidence, given that workers would have had increased job security. An increase in consumption increases aggregate demand, therefore increasing economic growth for America. This is important because it increases the country’s power in many ways, one being that the government would receive more sales tax, thus increasing their spending budget.
Furthermore, more consumption is likely to lead to increased confidence for firms, meaning the quantity supplied may also increase. People may also decide to set up new businesses if they can see that existing firms are already successful, leading to an increase in the amount of corporation tax paid to the government, increasing their revenue. An increase in the government’s revenue is beneficial because it means that fiscal policy can alter so that more money can be spent on public services, such as roads and street lighting, thus improving the country’s infrastructure, but also on other significant expenses, such as providing benefits to those on lower incomes and improving education.
How could the increased tariffs be negative in the long term?
The main benefits are only likely to be short-term because other countries are likely to retaliate, by also introducing tariffs on imports from America, which means that America’s trade connections are weakened. For example, China has started to introduce subsidies to help their firms reduce their supply costs and make the pricing of their goods and services more competitive compared to American imports. An increasing number of countries have started to do this in response to America’s tariffs. Moreover, other countries could complain about America to the World Trade Organisation (WTO), which prohibits subsidies and promotes free international trade. In the event of WTO intervention, America could be forced to end its subsidies for its firms, which would have to find new ways of remaining competitive. Relying on subsidies is therefore unlikely to be sustainable.
In addition, this could lead to impacts on the global economy. If many countries start to subsidise their firms, a subsidy race could occur, where trade becomes about which government can provide the greatest subsidies to their firms, as opposed to which firms are the most productive. Overall, this could lead to a reduced focus on productivity, ultimately leading to less efficient production of goods and services, limiting global economic growth.
Have the benefits outweighed the costs?
In the short run, the benefits have outweighed the costs because America has been able to protect its businesses by introducing tariffs and not reducing subsidies, which means that these businesses are making an increased profit. There is also likely to be an increase in Foreign Direct Investment (FDI) if firms from other countries can see that American businesses are successful, which could lead to a positive multiplier effect, further boosting America’s economic growth.
However, in the long run, depending on how other countries retaliate, the protectionism measures could negatively impact America. If other countries were to also introduce subsidies, America would no longer have as much of an advantage for producing goods and services, which means that their economy could start to suffer. Additionally, if other countries were to introduce tariffs for goods and services from America, this could significantly damage American businesses, due to the fact they would have a reduced market to sell to. This could therefore reduce investment, which could lead to a negative multiplier effect and a period of economic decline.
What can be done?
If America were to focus on improving productivity as opposed to subsidising firms, they may be able to reduce supply costs by increasing efficiency naturally, rather than artificially. This could be achieved by increasing money spent on training and education so that workers are more highly skilled and therefore able to work faster and to a higher standard. Consequently, America would not need to be so reliant on subsidies and tariffs on foreign goods, which, in turn, would mean that other countries would be less incentivised to introduce subsidies for their firms and tariffs on American goods or services.
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