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Source: www.asiaecon.org |

HOW PROTECTIONISM CAN HURT: IMPACT OF PROTECTIONISM IN THE EAST


As nations are starting to feel the pinch of the global economic slowdown, central banks are slashing interest rates and policy makers are formulating stimulus packages to help rouse their domestic markets. The resilience of the global economic depression becomes evident as these policies  have not been able to curb the rising unemployment rates and failing industries.


As nations are starting to feel the pinch of the global economic slowdown, central banks are slashing interest rates and policy makers are formulating stimulus packages to help rouse their domestic markets. The resilience of the global economic depression becomes evident as these policies  have not been able to curb the rising unemployment rates and failing industries.  

As a drastic step, many government officials have shifted their attention to their policies on international trade. In the most recent stimulus package, the United States included a provision to ‘Buy American’, which stated that only domestic steel and iron could be used in U.S. public projects. India recently implemented a similar policy to not buy Chinese-made toys for up to six months.

The elementary principle behind any type of protectionist policy is that you are protecting local industries against international competitors who can sell the same product for less. The cost of the goods will go up for the consumer, but because the money used to buy the product stays in the domestic market, the producers of the good will use the additional revenue to buy other domestic products, leading to a stronger overall economy.

The problem with protectionist policies is that trade restriction is a two-way street and any act of protectionism can be easily retaliated with other forms of protectionism resulting in a trade war. If India enacts an embargo against Chinese toys, China can retaliate by enacting an embargo against Indian-made textiles. The question for each nation is if the benefits of practicing protectionism outweigh the costs.

The U.S. House of Congress has already approved the “Buy American” provision of the latest stimulus package, but the amendment was softened in order to avoid a trade war with China and Japan. Japan’s chief cabinet secretary, Takeo Kawamura, has strongly advocated that nations must not practice protectionism and has insinuated that doing so could lead to a trade war.  

India is in a much different position. They are not the global economic power that China and the U.S. are, so they have less leverage to negotiate. India currently imports more goods than it exports to China, but China is India’s second largest buyer of goods. India is not a major buyer of Chinese goods. If the Chinese placed a retaliatory trade embargo on Indian goods, the resulting change in trade for China would be fractional compared to the change for India. Needless to say, India is more heavily reliant on the trade relationship between the two countries and the recent temporary embargo could hurt India if China chooses to retaliate.

The U.S. is working closely with both Japan and Australia to ensure that each nation is acting in a manner that will help bolster each country’s domestic economy. The Chinese have insinuated that they will seek assistance from the WTO rather than retaliating.



Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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