THE RISE OF

PROTECTIONISM

Ayush Jindal Supervised By -

B.Com(Hons.) Ms. Sushma Rani
3rd Year, Section 3 Department of Commerce
Roll No. 2163 Hansraj College
University of Delhi
Shruti Bansal
B.Com(Hons.)
3rd Year, Section 3
Roll No. 2245

ACKNOWLEDGMENT

We take this opportunity to acknowledge the invaluable

assistance of the people who helped me in successful
completion of this project report on the subject
International Business and also extend my special
thanks to Ms. Sushma Rani, who provided me with this
opportunity to complete this study.

This project has proven to be a treasure of knowledge

for me. We have been acquainted with various aspects
of Protectionism and its impacts by analysing
information from various diverse sources.

MEANING

Protectionism refers to government actions and policies that restrict or restrain international
trade, often with the intent of protecting local businesses and jobs from foreign competition.

The merits of protectionism are the subject of fierce debate. Critics argue that over the long term,
protectionism often hurts the people it is intended to protect by slowing economic growth and
pushing up prices, making free trade a better alternative. Proponents of protectionism argue that
the policies provide competitive advantages and create jobs. Protectionist policies can be
implemented in four main ways: tariffs, import quotas, product standards and government
subsidies.

Tariffs
There are three types of tariffs, also referred to as import duties, that can be implemented for
protective measures. All forms of tariff are charged and collected by governments to raise the price
of imports to equal or exceed local prices. Scientific tariffs are imposed to raise the prices of
products to end users. Peril point tariffs are implemented when less-efficient industries are in
jeopardy of closure due to an inability to compete on pricing. Retaliatory tariffs can be used as a
response to excessive tariffs being charged by trading partners.

Import Quotas
Trade quotas are non-tariff barriers that are put in place to limit the number of products that can be
imported over a set period of time. The purpose of quotas is to limit the supply of specified
products, which typically raises prices and allows local businesses to capitalize on unmet demand.
Quotas are also put in place to prevent dumping, which occurs when foreign producers export
products at prices lower than production costs. An embargo, in which the importation of designated
products is forbidden, is the most severe type of quota.

Product Standards
Limitations based on product standards are implemented for a variety of reasons, including
concerns over product safety, sub-standard materials or labeling. Whether these concerns are
valid or exaggerated, limiting imports benefits local producers. For example, French cheeses made
with raw, instead of pasteurized, milk must be aged at least 60 days prior to being imported to the
U.S. Because the process for producing young cheeses is often 50 days or fewer, some of the
most popular French cheeses are banned, providing local producers the opportunity to compete
with pasteurized versions.

Government Subsidies
Governments can help domestic businesses compete by providing subsidies, which lower the cost
of production and enable the generation of profits at lower price levels. Examples include U.S.
agricultural subsidies and subsidies paid by the Chinese government to help grow the country's
automotive industry.

HISTORY

Throughout history wars and economic depressions (or recessions) have led to increases
in protectionism, while peace and prosperity have tended to encourage free trade. The
European monarchies favoured protectionist policies in the 17th and 18th centuries in an
attempt to increase trade and build their domestic economies at the expense of other
nations; these policies, now discredited, became known as mercantilism. Great Britain
began to abandon its protective tariffs in the first half of the 19th century after it had
achieved industrial preeminence in Europe. Britain’s spurning of protectionism in favour of
free trade was symbolized by its repeal in 1846 of the Corn Laws and other duties on
imported grain. Protectionist policies in Europe were relatively mild in the second half of
the 19th century, although France, Germany, and several other countries were compelled
at times to impose customs duties as a means of sheltering their growing industrial sectors
from British competition. By 1913, however, customs duties were low throughout the
Western world, and import quotas were hardly ever used. It was the damage and
dislocation caused by World War I that inspired a continual raising of customs barriers in
Europe in the 1920s. During the Great Depression of the 1930s, record levels of
unemployment engendered an epidemic of protectionist measures. World trade shrank
drastically as a result.
The United States had a long history as a protectionist country, with its tariffs reaching their
high points in the 1820s and during the Great Depression. Under the Smoot-Hawley Tariff
Act (1930), the average tariff on imported goods was raised by roughly 20 percent. The
country’s protectionist policies changed toward the middle of the 20th century, and in 1947
the United States was one of 23 nations to sign reciprocal trade agreements in the form of
the General Agreement on Tariffs and Trade (GATT). That agreement, amended in 1994,
was replaced in 1995 by the World Trade Organization (WTO) in Geneva. Through WTO
negotiations, most of the world’s major trading nations have substantially reduced their
customs tariffs.



Arguments in favour of protectionism
 
Infant industry argument: It is argued that government should go in for protectionist
measure to protect infant industries, or else they will not get an opportunity to survive due
to international trade.
Efforts of a developing country to diversify: Developing countries need to
protect industries in which they want to diversify.
Protection of employment: Protecting domestic industries also means protecting
domestic employment.
Source of government revenue: Tariffs form a good source of revenue for
governments.
Strategic arguments: it means use of a tariff to protect military capability. The idea is,
to consume the goods of our country to promote the national industry and so, in the case
of war we don't have to buy the products in a foreign country and our industries have the
capacity to produce all the goods that our country need. We want tariffs to reduce the
“dependence” on international resources.
Means to overcome a balance of payments disequilibrium: High imports as
compared to exports might lead to severe balance of payments issues. Government might
resort to protectionist measures such as tariffs and quotas to restrict import and thereby
control the balance of payment disequilibrium.
Anti-dumping: Dumping is when manufacturers export a product to another country at
a price either below the price charged in its home market. This harms the domestic
industry and employment. The importing country might resort to protectionist measures
such as tariffs to control dumping of these goods. 

 
Arguments against Protectionism

Misallocation of resources: It leads to global misallocation of resources, as it

supports inefficient producers and in certain cases (tariffs and quotas) consumer surplus is
scarified.
The danger of retaliation and “trade wars”:  Continuous protectionist measures
by a country might lead to retaliation of other countries and they might also put
protectionist measures on the imports.
The potential for corruption: Putting administrative controls might also lead to
corruption.
Increased costs of production due to lack of competition: Constant
protection to the domestic producers and lack of competition propagates inefficiency and
lack of initiative to control cost.
Higher prices for domestic consumers: As we can see due to tariffs and quotas
domestic consumers end up paying more.
Increased costs of imported factors of production: Imported goods become
expensive which might also lead to imported inflation.
Reduced export competitiveness: Continuous protection to domestic industries
(such as subsidies) might make them inefficient in terms of cost and technology. In the
long run they might become uncompetitive in the exports market.

GLOBAL INSTANCES

BREXIT

Withdrawing from the single market without a trade deal would be “the biggest single act of
protectionism in the history of the United Kingdom”, George Osborne has warned.
In a forthright attack on the Prime Minster, the former Chancellor said making trade deals with
other countries around the world would not make up for the loss of trade caused by a hard Brexit
that saw Britain slide out of the trade bloc.

Theresa May said in a speech at the start of the year that Britain “cannot possibly” remain in the
single market after Brexit and that staying in “would not mean leaving the EU at all”. She has since
said that if MPs reject her Brexit deal Britain will crash out of the bloc with no special provisions.

But on Tuesday Mr Osborne put himself on a collision course with the Prime Minister, telling the
British Chambers of Commerce’s annual conference in Westminster: “Let’s make sure that we go
on doing trade with our biggest export market, otherwise withdrawing from the single market would
be the biggest single act of protectionism in the history of United Kingdom and no amount of trade
deals with New Zealand are going to replace the amount of trade we do with our European
neighbours.”

There were a whole set of other questions that we were not asked – what would the immigration
policy look like, what would the trade policy look like, what would the business policy look like?

Do you want to go on paying farming subsidies paid for by other taxpayers, do you want to make
sure industry competes in a fair and free market or are you going to allow secretaries of states to
make decisions to support individual companies and is that a good thing? There are a whole range
of questions and my sense is that there’s quite a lot of fighting the last war – fighting the referendum
campaign that’s taken place where there was a clear decision.

US - EUROPE

 Analysts trying to decipher the U.S. president’s strategy believe that a confrontation with
the EU is a probable next step following the revamping of the North American Free Trade
Agreement and his current efforts to slash the U.S. trade deficit with China from a record
375 billion dollars in 2017.

“We are next in the queue,” warns BNP Paribas’ chief economist William De Vijlder, adding
that “the subject of the EU-U.S. trade negotiations has been under the radar up to recently
but could resurface soon.”

Lombard Odier strategist Charles St-Arnaud believes a period of prolonged EU-U.S.

tension, with daily incendiary headlines making European markets jittery, is a distinct
possibility.
With a concerns about Brexit, unrest in France, Italy’s populist government and May’s EU
elections, the big European benchmarks are seen by many foreign investors as
“uninvestable”, especially as growth slows.

“It’s pretty clear that during the course of conversation with any client, political risk
premium, political uncertainty will come into the conversation,” said Andrew Milligan, head
of strategy at Aberdeen Investments.

Joerg Kraemer, Commerzbank’s chief economist, said a confrontation with Washington

could be very damaging, notably for the German car industry and that the European
Commission would be wise to make a pre-emptive move.

Europe needs to take the wind out Trump’s sails and move first.

US - CHINA TRADE WAR

US President Donald Trump has complained about China's trading practices since before
he took office in 2016.
The US launched an investigation into Chinese trade policies in 2017. It imposed
tariffs on billions of dollars worth of Chinese products last year, and Beijing retaliated in
kind.
After months of hostilities, a breakthrough of sorts came in December. Both countries
agreed to halt new trade tariffs for 90 days to allow for talks.
Those talks have yielded some progress and a 1 March deadline for raising tariffs has
been delayed.
What tariffs are in place?
So far, the US has imposed three rounds of tariffs on Chinese goods, totalling more than
$250bn (£191bn).
The duties range from 10% to 25% and cover a wide range of industrial and consumer
items - from handbags to railway equipment.

President Trump has threatened tariffs on another $267bn worth of goods - meaning all
Chinese imports could be subject to tariffs.
The US has also put tariffs on worldwide imports of goods like steel and washing
machines, which further affects products from China.

Beijing hit back with tariffs on $110bn of US goods, accusing the US of starting "the largest
trade war in economic history".

China has targeted products including chemicals, coal and medical equipment with
levies that range from 5% to 25%.
It has strategically targeted products made in Republican districts, and goods that can be
purchased elsewhere, like soybeans.

SCALE



IMPACT ON INDIA

India’s second largest information technology company Infosys Ltd has announced that it will hire
10,000 Americans over the next two years. This comes after the US administration’s criticism that
Indian technology companies are taking jobs away from Americans. Last month, US President
Donald Trump signed an executive order to review the H-1B visa programme. Indian IT companies
earn the bulk of their revenue from the US market and are big beneficiaries of the work visa
programme. Legislation has also been introduced in the US House of Representatives, aiming to
double the minimum salary of H-1B visa holders to $130,000 per annum. According to analyst
estimates, this could affect the operating margins of Indian technology companies by up to 300
basis points. One basis point is one-hundredth of a percentage point.

India will have to tread carefully, given this situation. Former commerce minister Nirmala
Sitharaman recently hinted at counter moves against US companies operating in India.
Indian policymakers should avoid taking such measures for multiple reasons.
First, Indian IT services companies have themselves to blame in part at least for not
realizing in time that the labour-cost arbitrage model has limitations.
Second, the US is not the only country which is making movement of professionals
difficult.
Third, India needs foreign direct investment (FDI) to fund its growth.

The Narendra Modi government has done well to liberalize FDI rules in various sectors,
which has resulted in a significant surge in foreign investments. Any retaliatory action
against companies from the US—or any other country, for that matter—will affect the
confidence of international investors and will bode ill for the economy in the medium-to-
long run. FDI not only creates jobs but also has a spillover impact in terms of knowledge
transfer, which helps increase productivity in general.
It is sometimes said that “Make in India" cannot succeed if we follow a policy of
maintaining low customs duties and leave everything to market forces. This is a straw
man since no sensible person has ever argued that all we need to do is to lower customs
duties and leave the rest to markets. Developing a competitive domestic industry requires
a number of supply-side conditions such as
(i) good quality infrastructure, especially power supply from the utilities at a
competitive price not burdened by cross subsidy;
(ii) good transportation and logistics;
(iii) ease of doing business in obtaining necessary regulatory permissions and
interacting with government agencies;
(iv) easier access to land;
(v) good access to bank finance, especially for small and middle-scale industry;
(vi) simple and transparent tax laws with minimum scope for harassment; and finally
(vii) flexible labour laws which would encourage employers to expand to a scale
where they would have to deal with a large labour force.

“It is good to look for simple solutions, but protectionism is

not a simple solution. It is simplistic”
India’s GSP benefit status withdrawn
US President Donald Trump on March 5, 2019 said that he wants to withdraw India’s GSP
benefit status due to lack of reciprocity, putting at risk the duty-free import of thousands of
goods from India into the US. The move might have an affect on India-US trade, however,
its impact on Indian exports would be ‘minimal’ said the commerce secretary Anup
Wadhwan.
The government had been engaged in discussions to arrive at a solution on the issues
raised by the US,, including those on sectors such as medical devices, dairy products and
the IT sector, India said on Tuesday.
The withdrawal will become applicable after 60 days of the issue of a notification on the
same and would affect India-US trade. Donald Trump said in a letter that India had not
assured the US to provide equitable and reasonable access to Indian markets, in return for
GSP benefit status.
GSP (Generalised System of Preferences) was introduced in 1976 as a US trade
preference programme to promote economic development by allowing duty-free entry for
thousands of products from designated beneficiary countries — both developing and
developed.
“GSP provide opportunities for many of the world’s poorest countries to use trade to grow
their economies and climb out of poverty,” according to the US Trade Representative
Office website (USTR).
The programme allows export of 1900 products from sectors such as chemicals and
engineering worth $5.6 billion from India to enter the US duty free, commerce secretary
Anup Wadhawan said. The other products exported by India are iron or steel, furniture,
aluminium and electrical machinery.
India exports goods worth $5.6 billion under the GSP, and the duty benefit is only $190
million annually, said Wadhwan .

The US runs a trade deficit of $23 billion with India.

Indian companies with the most exposure to the US are in the
technology and pharma sectors
INDIAN PROTECTIONISM
In the run-up to the 2019 Lok Sabha elections, the protectionist din is growing louder in
India. This is not unexpected, since, despite liberalization, we have not fully embraced an
open-market identity. And despite our growing aspirations of becoming a stakeholder at
the global economic high table, most political parties still seem to lack a cogent economic
vision. Consequently, those in the protectionist camp have strengthened their attack on
foreign companies, particularly on digital economy firms. Such companies are the softest
targets, because they tend to lack the institutional experience, and sometimes even the
will, to take political positions in emerging markets. However, in the spirit of debate, some
rebuttals are in order.
Let us analyse the most common protectionist proposition -

1. Government should create different compliance burdens for foreign and Indian firms.
This stems from the assumption that owing to superior technology and abundant capital,
foreign-owned firms can easily outmanoeuvre domestic incumbents, if they compete on a
level playing field. Therefore, like China, we should put strict conditions on foreign direct
investment (FDI).
However, it makes no sense to allow, or even want, FDI, if we simultaneously want to put
fetters on such capital.

2. Proposition of the protectionist camp is that India should adopt a preferential approach
towards strategic government procurements in the digital industries.
In an effort to promote self-reliance, India has been trying to create preferential private
sector partnerships in the defence industry for over a decade. Most recently, strategic
partnerships were defined and envisioned under the defence procurement policy, 2016.
However, this potentially meaningful modality of deep public-private partnerships has been
throttled by reticence on part of the unions representing public sector enterprises, as well
as an all-pervasive lack of trust in the private sector. These are challenges within
government. The solutions cannot possibly lie outside, or in the politics of protectionism.

3. The newest avatar of protectionism is manifesting itself in the so-called “data economy",
the data-driven subset of the digital economy. A legitimate hypothesis is that as India
transitions from data-poor to data-rich, owing to factors such as increased internet
penetration and the Jan Dhan-Aadhaar-Mobile (JAM) trinity, the data-linked rights of
citizens must be secured better.

Despite large volumes, the potential for earning large value from the domestic data market
remains limited. Low average revenues per user in telecom and low transaction values in
digital payments are indicative of this “high-volume and low-value" paradigm. The need for
data services to achieve scale is almost a prerequisite to their survival.
Unlike China, we do not have a large enough economic footprint to deter advanced
countries from taking reciprocal measures against our “tactical protectionism". And unlike
in the US, our institutions and businesses do not generate enough surpluses to invest in
cutting-edge research. Our markets are shallow, and our technological self-reliance has to
be earned through internal reform. So, if we are to be protectionist, we must at least adopt
a strategic lens—investments cannot be turned away for meeting political ends.

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