Protectionism – UPSC Economy Notes

Protectionism refers to the economic policy of a country that aims to shield and support its domestic industries by imposing barriers on foreign competition. This protection is typically achieved through measures such as tariffs, import quotas, subsidies, and other trade restrictions. The primary objective of protectionism is to safeguard domestic businesses and workers from foreign competition.

Methods of Protectionism:

1. Tariffs: Taxes imposed on imported goods, making them more expensive and less competitive in the domestic market.
2. Import Quotas: Restrictions on the quantity of certain goods that can be imported.
3. Domestic Subsidies: Financial assistance provided to domestic industries to make them more competitive.
4. Export Subsidies: Financial incentives offered to domestic companies to promote exports.
5. Currency Manipulation: Altering the value of a country’s currency to gain a trade advantage.
6. Imposing Standards: Setting specific labor or environmental standards to create barriers for foreign goods.
7. Technical Barriers: Imposing restrictive certification procedures on imports.

Historical Perspective on India: India practiced protectionism for about four decades until 1991, primarily to shield its nascent industries. Protectionism was considered necessary for safeguarding food security and supporting small and marginal farmers in the agricultural sector. However, India has gradually opened up to foreign participation in recent times.

Challenges and Concerns of Protectionism:

1. Unfair Competition: Lack of international competition can make domestic industries uncompetitive, unproductive, and costly.
2. Restricted Consumer Choice: Protectionism limits the variety of goods available to consumers.
3. Inflationary Pressures: Closed economies may experience inflation due to limited competition.
4. Impact on Growth: Protectionist policies can hinder economic growth by inhibiting innovation and efficiency.
5. Employment Issues: While intended to protect jobs, protectionism may result in job losses in the long term.
6. Inhibition of Innovation: Reduced competition may lead to a lack of incentive for innovation and improvement.

Global Example – U.S. Protectionism: The United States, under certain administrations, has adopted protectionist measures, such as the “Buy American” philosophy and the “America First” policy. These policies have been driven by concerns about job losses due to globalization and the relocation of industries to countries like China. However, critics argue that protectionism may not be the optimal solution, as its drawbacks often outweigh the perceived benefits.

In summary, protectionism is a complex economic strategy with historical roots, and its effectiveness and consequences depend on various factors, including the global economic context and the specific policies implemented by individual countries.

US Protectionism and its Legality under WTO Rules

The World Trade Organization (WTO) has established rules to regulate international trade, and these rules emphasize non-discrimination among trading partners. However, there are exceptions, and one such exception is outlined in Article XXI of the WTO Agreement.

Article XXI: Security Exceptions Article XXI allows WTO member countries to take actions they consider necessary for the protection of their essential security interests. The three specific areas mentioned in the article where these exceptions may be invoked include:

1. Fissionable Nuclear Materials: Actions related to fissionable nuclear materials.
2. Traffic in Arms: Actions related to the traffic in arms, ammunitions, and implements of war.
3. Times of War or Emergency: Actions taken in times of war or other emergencies in international relations.

WTO Dispute Settlement Panel Ruling: In 2019, a significant ruling was issued by the WTO dispute settlement panel in a dispute between Russia and Ukraine. The ruling clarified that the panel, rather than the country imposing tariffs, had the authority to determine whether there was a legitimate emergency or not. The panel specified that political or economic differences between members are not sufficient, by themselves, to constitute an emergency.

Implications for US Protectionism: The ruling implies that the United States, when raising tariffs based on national security reasons, must meet specific criteria to justify its actions under Article XXI. Simply citing political or economic differences may not be considered a valid reason for invoking the security exception.

While countries have the right to protect their essential security interests, the WTO’s dispute settlement mechanism plays a crucial role in ensuring that such measures are not misused to implement protectionist policies without a genuine security threat.

In summary, the legality of US protectionism under WTO rules depends on whether the actions taken by the US government can genuinely be justified as necessary for the protection of its essential security interests, as outlined in Article XXI. The WTO dispute settlement process serves as a mechanism to evaluate and adjudicate such claims.

Trade War: Recent Examples and Implications

A trade war occurs when two or more countries engage in a series of tit-for-tat measures, such as imposing higher tariffs and quantitative restrictions (QRs) on each other’s goods, with the aim of protecting their own economies and causing harm to the other’s economy. One notable recent example is the series of tariffs imposed by the United States, led by President Donald Trump, as part of the “America First” economic policy.

Key Examples of Trump Tariffs:

1. Solar Panels and Washing Machines: Tariffs were imposed on solar panels and washing machines, affecting global trade in these products.
2. Steel and Aluminium Tariffs: The U.S. imposed tariffs on steel and aluminium imports from various countries, including India. These tariffs were implemented to address what was perceived as unfair trade practices and to protect domestic industries.
3. China Tariffs: The U.S. imposed tariffs, including a 25% tariff, on hundreds of categories of goods imported from China. In response, China and other trading partners implemented retaliatory tariffs on U.S. goods.

Rationale and Impact: The rationale behind these tariffs, as cited by the Trump administration, was to address trade imbalances and protect American economic interests, including growth, investment, and jobs. However, the economic impact and rationale of such policies have been subject to debate.

Criticism and Implications:

1. Negative Economic Rationality: Critics argue that such protectionist measures have negative economic consequences, including higher costs for U.S. consumers and businesses.
2. Global Trade Slowdown: Trade wars can lead to a slowdown in global trade as countries engage in retaliatory measures, impacting the overall economic environment.
3. Short-Term Populism: While trade protectionism may have short-term populist appeal by addressing immediate concerns, the long-term economic implications can be detrimental.
4. Supply Chain Disruptions: Tariffs on imports can disrupt global supply chains, affecting multinational companies and industries that rely on interconnected production processes.
5. Impact on Specific Sectors: Certain industries, such as automotive and manufacturing, may face challenges due to higher input costs and disruptions in international trade.

In summary, trade wars, particularly exemplified by the Trump tariffs, highlight the complexities and consequences of protectionist measures. The economic rationale, long-term implications, and impact on global trade dynamics are crucial considerations in evaluating the effectiveness and sustainability of such policies.

WTO Plurilateral: Contention and Background

Within the World Trade Organization (WTO), most agreements involve all member countries subscribing to common rules and obligations. However, there exists a category of agreements known as “plurilateral agreements” that have a narrower group of signatories. These plurilateral agreements have become a source of contention within the WTO, and the background of this issue is rooted in the dynamics of international trade negotiations.

Background and Context:

1. Doha Round and Development-Centric Agenda: The Doha Round of WTO negotiations, launched in 2001, aimed at an ambitious development-centric agenda, focusing on issues such as agriculture subsidies, market access, and services.
2. Irreconcilable Differences: As negotiations progressed, irreconcilable differences emerged between developed and developing countries, leading to a stalemate in the multilateral discussions.
3. Shift to Plurilaterals: Faced with challenges in achieving consensus on multilateral issues, some major economies abandoned the broader negotiations and began pursuing plurilateral agreements that align with their specific interests.

Issues Covered by Plurilaterals: Several plurilateral agreements have been initiated, covering diverse issues:

• Electronic commerce
• Investment facilitation
• Disciplines for micro, small, and medium enterprises
• Gender-related considerations

Contestation and Perspectives:

1. Threat to Multilateralism: Many stakeholders, including India, Brazil, South Africa, and Indonesia, express concern that plurilaterals could undermine the multilateral nature of the WTO. There is a belief that plurilaterals may not be a suitable alternative to the consensus-driven decision-making process at the WTO.
2. Call for Consensus: Some countries argue that the introduction of plurilaterals should only occur with the consensus of all WTO members. This reflects a commitment to maintaining an inclusive and collaborative approach to rule-making.
3. China’s Participation: China has actively joined many plurilaterals, aligning itself with these initiatives. The dynamic participation of major economies, including China, adds complexity to the ongoing contestation.
4. Advocacy for Multilateralism: Countries like India emphasize the importance of preserving multilateralism in international trade negotiations. They argue that plurilaterals could disadvantage non-participating nations and potentially weaken the overall effectiveness of the WTO.

In summary, the emergence of plurilaterals reflects the challenges faced in reaching consensus on multilateral issues within the WTO. The debate revolves around the balance between pursuing specific interests through narrower agreements and upholding the principles of multilateralism that promote inclusivity and equal participation.

Threats to WTO: Post-2008 Challenges

The World Trade Organization (WTO) has encountered significant challenges and threats since the global economic downturn in 2008. Several factors have contributed to the complexities faced by the WTO, posing risks to the multilateral trading system. Key threats include:

1. Tariff and Trade Wars:
   • Context: The period following the 2008 global recession witnessed an increase in protectionist measures by various countries.
   • Impact: Tariff and trade wars emerged as nations, particularly major economies, imposed higher tariffs and trade barriers on each other. This undermined the principles of free and fair trade, disrupting global economic relationships.
2. Plurilaterals:
   • Shift in Negotiation Dynamics: Frustrated by the challenges of achieving consensus in multilateral negotiations, some countries turned to plurilateral agreements.
   • Impact: Plurilaterals, agreements involving a subset of WTO members, raised concerns about potential fragmentation and the selective pursuit of interests, diverting attention from the inclusive multilateral approach.
3. Weakening of Dispute Settlement Body (DSB):
   • Context: The dispute settlement mechanism is a critical component of the WTO, ensuring the resolution of trade disputes among member countries.
   • Impact: Attempts to undermine or cripple the DSB weakened the enforcement and dispute resolution capabilities of the WTO. The dispute settlement crisis hampered the organization’s effectiveness in addressing trade conflicts.
4. Rise of Unilateralism:
   • Trend: Some countries, notably the United States under various administrations, adopted unilateral approaches to address trade grievances, deviating from the principles of collective decision-making.
   • Impact: Unilateral actions, such as the imposition of tariffs without multilateral consensus, strained international trade relations and challenged the cooperative ethos of the WTO.
5. Slow Progress in Doha Round:
   • Stalled Negotiations: The Doha Development Round, launched in 2001 with a focus on addressing the concerns of developing countries, faced challenges in making substantive progress.
   • Impact: The prolonged stalemate in Doha Round negotiations led to frustration and disillusionment, hindering the WTO’s ability to deliver on its developmental agenda.
6. Erosion of Trust:
   • Trust Deficit: Disputes and disagreements among member countries, coupled with challenges in addressing the needs of developing nations, eroded trust within the WTO.
   • Impact: A lack of trust hindered constructive dialogue and cooperation, impeding efforts to find common ground on trade issues.

In summary, the post-2008 period has seen the WTO grappling with threats that undermine its core principles, ranging from escalating trade tensions and plurilateral agreements to challenges in dispute resolution and the erosion of multilateralism. Addressing these threats requires concerted efforts to revive trust, strengthen dispute resolution mechanisms, and reinvigorate the commitment to inclusive multilateral trade.

Asian Clearing Union (ACU): Overview

The Asian Clearing Union (ACU) is a regional clearing system that facilitates economic cooperation and payment transactions among its member countries. Here are key details about the ACU:

1. Establishment:
   • Year: The ACU was established in 1974.
   • Initiative: It was initiated by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
2. Headquarters:
   • The headquarters of the ACU is located in Tehran, Iran.
3. Member Countries:
   • The ACU has Central Banks from several Asian countries as its members. The current member countries include:
     • Iran
     • India
     • Bangladesh
     • Bhutan
     • Nepal
     • Pakistan
     • Sri Lanka
     • Myanmar
     • Maldives
4. Objectives:
   • Facilitation of Payments: The primary objective of the ACU is to facilitate payments among member countries for eligible transactions on a multilateral basis.
   • Economizing Foreign Exchange Reserves: By using the ACU for transactions, member countries aim to economize on the use of foreign exchange reserves.
   • Promotion of Trade: The ACU plays a role in promoting trade among the participating countries.
5. Asian Monetary Unit (AMU):
   • Common Unit of Account: The ACU operates with the Asian Monetary Unit (AMU) as its common unit of account.
   • Denominations: The AMU has denominations known as ‘ACU Dollar’ and ‘ACU Euro,’ with values equivalent to one US Dollar and one Euro, respectively.
   • Payment Instruments: All instruments of payment under the ACU must be denominated in AMUs.
6. Multilateral Clearing:
   • ACU facilitates payments on a multilateral basis, streamlining the settlement process among member countries.

The ACU serves as a regional mechanism to enhance economic collaboration, reduce reliance on foreign exchange reserves, and foster trade relationships among its member countries in the Asian region.

FAQs

1. What is protectionism?

Protectionism is a government policy that restricts or discourages imports to protect domestic industries. This can be done through tariffs (taxes on imports), quotas (limits on import quantities), or subsidies (financial aid) for domestic producers.

2. Why do countries use protectionism?

There are several reasons why countries might use protectionism:

• To protect jobs: If foreign imports are cheaper, domestic producers may struggle to compete, leading to job losses.
• To nurture infant industries: New industries may need temporary protection to grow and become competitive in the global market.
• To promote national security: Some countries may want to ensure they can produce essential goods (like weapons) domestically.
• To retaliate against unfair trade practices: If another country is unfairly subsidizing its exports, a country might use protectionism to counter it.

3. What are the potential benefits of protectionism?

• Save jobs: Protectionism can help to preserve jobs in domestic industries facing stiff foreign competition.
• Boost domestic production: By making imports more expensive, protectionism can encourage consumers to buy domestically produced goods.
• Strategic industries: Protectionism can help ensure the production of essential goods within a country’s borders.

4. What are the potential drawbacks of protectionism?

• Higher prices for consumers: Protectionism can lead to higher prices for consumers as they have fewer choices and import competition is limited.
• Reduced innovation: If domestic producers are shielded from competition, they may be less likely to innovate and improve their products.
• Trade wars: Protectionist policies can lead to retaliation from other countries, escalating into trade wars that harm everyone involved.

5. Is protectionism good or bad?

There is no easy answer. Protectionism can have both benefits and drawbacks. The best policy depends on the specific situation and the goals of the government.

In case you still have your doubts, contact us on 9811333901. 

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