Opinion Based Blog

Rising Trade Protectionism and Trade Nationalism in Global Trade

Author: Syed Alwaz Asif, first year law student at Dr. Ram Manohar Lohiya National Law University, Lucknow. 

With COVID-19 pandemic engulfing the entire world and number of cases continuously rising, this has spurred the debate on rising protectionism and nationalism in global trade. Trade protectionism and nationalism are synonymous terms, it happens when countries around the world in order to protect some of their domestic industries, incessantly start raising import tariffs to make an imported product costlier in their countries as compared to a domestic product. COVID-19 is a global health crisis which has triggered demand and supply shock and has ravaged the world economy with the most severe downturn since Great Depression. This has also spurred demand to shun globalization and instead promote domestic industries. For a moment this seems to be a logical argument, but if we dive deeper into the interconnectivity of trade around the world and benefits which we derive from it, the consequences of shunning globalization are grave.

Protectionism has been a matter of populist movement. In recent times we have seen a surge in populist movement around the world, even in western countries, which for an eon of time, have been the flag-bearers of globalization, trade nationalism has seen a new and drastic upsurge, of which Donald Trump is at paradigm. American geopolitical hostilities have influenced trade policies, notable punitive tariff and trade sanctions. This has been predominantly noticed during the US-China trade wars. Both countries were imposing counter tariffs on each other’s goods without caring for the devastating effects it would have on domestic businesses in both the countries. Later on they arrived at a limited trade agreement, this deal marked a pause in the tariff war and addressed some non-tariff barriers on FDI & intellectual properties, but it left an intact core of Chinese industrial policies and kept US duties on $360 billion worth Chinese products. China’s massive purchase commitments were unattainable by the severe economic downturn in China because of COVID-19, thus rendering the deal not as beneficial as they considered it to be.

Trade with China has always been beneficial for US companies. They have had derived gargantuan competitive advantages among their rivals around the globe through cheap and skilled labour, affordable and better quality products, etc. But reversing trade integration may put at risk the economic gains that it generated.

Trade protectionism has also been on the rise in India, which is severely affecting FDI in the country, and has been serving as a hindrance in our growth. Rising import tariffs and taxes have affected the growth of automobile industry. India being the third largest market for automotive, still the industry couldn’t reach its maximum potential. ‘Harley Davidson’, a luxurious bike company, has recently exited the Indian market. Harley Davidson (HD) entered India in 2007 via a trade agreement by which India’s mango industry got access to US market. Tariff as high as 100% were imposed on bikes imported from US which lead to the closure of all units of Harley-Davidson, including its manufacturing unit. Whereas if we compare this situation with China, HD has geared up to open more manufacturing units in China, which in turn increases employment opportunities over there and raises the FDI quantum that it can attract. Due to high tariffs, automotive industry is not able to tap the growth potential of Indian market.

As India is shifting towards renewable energy, so to achieve its Nationally Determined Contributions (NDCs) under the Paris Agreement, it has to shun trade protectionism as it will hamper its growth. With Tesla entering the Indian market by 2021 and NITI Aayog’s vision to change the face of Indian automobile industry with electric and driverless cars by 2030, there is a need for massive investment in the renewable energy sector to efficiently run these cars. India can only achieve these aspirations if it keeps its borders open for companies around the world to invest and develop the renewable energy sector in India. Rising import tariffs on solar cells from china would also affect the growth of domestic industry as it cannot develop economies of scale without importing cheaper equipments to realize profits from electrical automobile segment. The reason electrical cars aren’t hitting Indian roads is the paucity of charging stations in the country. To ensure wider adoption of electrical cars, the country needs to have enormous electrical charging stations to bring down the cost of recharging of vehicle. We can achieve this by opening borders without restrictions to all the countries who have gained expertise in developing renewable energy sector, including China.

Trade protectionism can sometimes lead to a drastic situation, as seen in the pharmaceutical industry. In March when the pandemic was spreading rapidly, there was a panic amongst pharma companies because of an announcement to close domestic borders in order to stop the spread of virus in India. Pharma companies need Active Pharmaceutical Ingredients or APIs to manufacture various medicines. China, being a major exporter of APIs, imported these to the Indian pharma companies. Sudden announcement of closure of domestic borders sent chills among the pharma companies after much political lobbying they were able to import a sizeable chunk of APIs to meet domestic needs amid the pandemic.

Rising number of cases because of COVID-19 has also led to a shortage of oxygen cylinders in various hospitals across India. This shows reliance on domestic supply sometimes is too risky. Diversification of supply, redundancies in manufacturing chain, and stock-piling programs have proven to be better alternatives. In this endeavor, global supply chain is part of the solution, not the problem.

Globalization resulted in greater connectivity among markets around the world and has increased communication and awareness about business opportunities throughout the globe. By unraveling the long-term benefits of closer trade and investment links, reverting to protectionism also has potential to unsettle global financial markets. According to a thorough analysis by Everett & Fritz, three-quarter of G20 exports are affected by the restrictions, ten times more than what WTO admits.

There are few flaws in globalization, which need to be addressed with exigency. With China investing aggressively in strategic sectors of different countries and making those nations’ victims of its debt trap. This was seen in a recent takeover of Electricity Distribution Company of Thailand by a Chinese firm since they could not pay its debt. The pandemic has only exacerbated the concern that weak companies in strategic sectors are at a risk of hostile takeovers by a foreign institution. This issue can be sorted by encouraging World Trade Organization role as an arbitrator instead of debunking it. But from December 2019, the Appellate Body of WTO ceased to function due to US blocking new appointments citing judicial overreach. US is also gearing up for fundamental assault on WTO: a tariff reset through which US can unilaterally abandon its commitments on bound tariffs and apply larger duties to force other countries to open their market. Encouraging WTO’s fundamental multilateralism with few changes in its rules is the only way forward and the solution to overcome such issues. 

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