In recent years, the global economic landscape has seen a significant shift towards protectionism, with many countries adopting measures to safeguard their domestic industries, jobs, and economies from perceived external threats.
The latest is the new US tariffs on goods from Mexico, Canda, and China. US President Donald Trump, under the International Emergency Economic Powers Act, announced 25 percent tariff on goods imported from Mexico and Canada while Chinese products were subjected to 10 percent additional tariffs. Nevertheless, it was later announced that enforcement of tariffs on Canadian and Mexican imports was delayed for 30 days.
Protectionism refers to economic policies that restrict international trade to protect local businesses and industries from foreign competition. These measures include tariffs, quotas, subsidies, and import restrictions. Although protectionism is often seen as a tool to shield national economies, it poses serious challenges, especially for developing countries.
The rise of protectionism
In recent decades, the rise in protectionist policies can be attributed to a variety of factors, many of which have become more pronounced in the wake of the global financial crisis of 2008, and more recently, the Covid-19 pandemic.
In the aftermath of the global recession, many countries resorted to protectionist measures to shield their economies from global market volatility and to secure domestic industries and employment. For instance, the election of leaders with nationalist ideologies, such as US President Donald Trump, who championed “America First” policies, further intensified the shift towards protectionism, in his first and the second terms of office.
These policies often include tariffs on imports, the renegotiation of trade agreements, and the imposition of barriers to foreign investment. The Covid-19 pandemic accelerated this trend, as nations closed borders, restricted imports, and sought to ensure their domestic supply chains were less reliant on foreign sources.
The disruption of global trade and supply chains during the pandemic highlighted the vulnerabilities of globalised trade and the fragility of relying on international markets for essential goods.
Several high-profile examples of protectionism include the trade war between the United States and China, with both countries imposing tariffs on goods worth hundreds of billions of dollars. The United States also pulled out of several multilateral trade agreements, including the Trans-Pacific Partnership (TPP), and adopted a more aggressive stance in its dealings with the World Trade Organization (WTO). Other countries, such as India and Brazil, have also implemented protectionist policies to shield their economies from global competition.
Challenges for developing countries
While protectionism may seem appealing for some nations seeking to protect their local industries, it presents a unique set of challenges for developing countries. These nations, often reliant on trade for economic growth and development, face numerous obstacles as global protectionist sentiment grows.
Reduced access to global markets
Developing countries depend heavily on access to international markets for exports of goods and services, including agricultural products, raw materials, and manufactured goods. Protectionist policies, such as tariffs and import restrictions, limit the ability of these nations to access larger markets for their products.
Higher tariffs on exports make their goods more expensive and less competitive in global markets, reducing demand and limiting their export revenues.For example, countries that export agricultural products and labour-intensive manufacturing products can be heavily affected by rising tariffs in developed countries.
These nations often lack the industrial base or the capital to offset the impacts of higher tariffs, and the resulting reduced exports can lead to a slowdown in economic growth, rising unemployment, and increased poverty.
Increased trade barriers
The imposition of protectionist trade barriers, such as quotas and tariffs, can significantly harm developing countries that rely on Foreign Direct Investment (FDI). In many cases, developing nations depend on imports of machinery, technology, and other capital goods to fuel their industrial development.
Protectionism that makes it more difficult or expensive to access these goods could hinder the growth of key sectors such as manufacturing and technology. Rising protectionism could lead to the formation of regional trade blocs that exclude smaller developing countries from preferential trade arrangements.
This could force these countries into less favourable trade terms with major economic players, further marginalising them in the global economy.
Economic slowdown and declining foreign direct investment
As protectionism grows globally, the interconnectedness of the global economy diminishes. A slowdown in global trade can lead to an economic downturn, as demand for goods and services from developing countries decreases. Foreign direct investment (FDI) is often critical for developing countries, as it brings capital, technology, and expertise. A protectionist climate, however, can discourage foreign companies from investing in smaller developing countries due to concerns about market access, higher tariffs, and uncertain trade policies. The US-China trade war, for example, not only affected trade between the two nations but also caused ripple effects throughout the global economy.
Many developing countries that were part of global supply chains faced disruptions in production, falling export earnings, and higher costs for imports. As multinational companies sought to relocate their supply chains away from countries affected by tariffs, developing countries faced difficulty in attracting new investment, further slowing economic growth.
For many developing countries, including Sri Lanka, remittances from migrant workers abroad are a vital source of income. Protectionist policies that limit the movement of labour or impose restrictions on immigration can result in a decline in remittances.
This situation could impact millions of families who rely on funds sent home by relatives working in wealthier countries. Global migration is often an essential outlet for people seeking better economic opportunities. Rising protectionism, particularly in the form of more stringent immigration laws, could limit the flow of skilled labour to developed nations, leaving developing countries with a brain drain.
This migration also has a cascading effect, as it impacts the skill development of the domestic workforce and further limits the potential for local innovation. Newly elected government in the U.S. has already started sending back illegal migrants and introduced additional measures for border protection.
Hindrance to technology transfer and innovation
Developing countries are often in need of technology transfers and access to cutting-edge innovations to build their industries. Protectionist measures, such as the imposition of export bans on high-tech products, can hamper technological progress in these countries.
Without access to the latest technologies, developing nations struggle to modernise their industries, improve productivity, and remain competitive on the global stage. Protectionism that hinders the flow of knowledge and technology also makes it more difficult for developing countries to meet their Sustainable Development Goals (SDGs), particularly those related to innovation, infrastructure, and economic growth.
The road ahead: adapting to protectionism
While protectionism presents significant challenges for developing countries, it is not an insurmountable barrier. These countries can pursue several strategies to mitigate the impacts of rising protectionism:
Diversification of trade partners: Developing countries should look to diversify their trade relationships beyond traditional markets. By establishing trade agreements with emerging economies and participating in regional trade blocs, they can reduce their dependence on protectionist countries.
Improving domestic industries
Developing nations should invest in upgrading their local industries through education, infrastructure development, and the adoption of new technologies. This can reduce their vulnerability to external trade restrictions by enhancing domestic production capacities.
Engagement with multilateral organisations: Developing countries can advocate for their interests through multilateral organisations such as the WTO. By pushing for the reduction of trade barriers and ensuring that global trade rules are fair and inclusive, they can help protect their interests in the face of protectionism. Sri Lanka needs to plan out its development strategies, in particular her strategies for promoting exports and FDI, amid ongoing global uncertainties and rising protectionism. Given her debt repayment obligations starting from 2028, Sri Lanka has to navigate this trouble water carefully.
The writer is an economics professor at the University of Colombo.
