What Drives Countries To Utilize Trade Measures As Instruments Of Protectionism?

Protectionism is the ideology of shielding domestic industries from foreign competition through the implementation of governmental measures such as tariffs, quotas, subsidies, or regulations. In today's rapidly globalizing international trading system, trade protectionism appears as a recurring theme in the economic policies of numerous nations. Whilst advocates of protectionism contend that governmental intervention is vital to ensure the protection of national interests, detractors argue that such trade restrictive measures detrimentally effect global economic growth. This article will provide a comprehensive understanding of the contentious nature surrounding protectionism by critically analysing why nations are incentivised to implement trade measures as instruments of protectionism and what consequential effects such measures may incur.

Protectionist measures offer numerous incentives for their implementation. Proponents claim that governmental intervention is necessary to safeguard domestic industries, especially those in their infancy as they may struggle to survive amidst well establish foreign competition. By limiting the influx of exports countries can ensure a favourable balance of payments, consequently eliminating trade deficits. This in turn raises the demand for domestic goods and services, thereby sustaining domestic employment levels which could otherwise be susceptible to outsourcing. Trade protectionism can be used to uphold labour, safety, and environmental standards by preventing a race to the bottom where these standards are compensated to increase competitiveness.¹ Such measures play a crucial role in ensuring national security by preventing nations from being heavily reliant on foreign sources. This is particularly significant in protecting vital sectors such as defence, energy, and critical infrastructure, fostering a level of self-sufficiency which can be crucial in times of geopolitical instability.² Protectionist measures also act as a legitimate response to unfair trade practices such as dumping or foreign subsidies further encouraging fair competition. Another reason why countries may use trade measures as instruments of protectionism is due to the political reactions prompted by vulnerable national interests. Governments facing threats to their domestic sectors are inclined to show immediate and positive reactions. This often results in nations implementing trade restrictive measures to provide immediate and essential relief rather than long term support measures that require painful relocation.³ The aforementioned advantages of protectionism have induced numerous nations to use trade restrictive measures for the benefit of their own interests.

Although trade protectionism can safeguard national interests by limiting a free flow of trade, it can cause detrimental effects on global economic integration.⁴ In recent decades Trade liberalization has been the driving force behind economic growth. Protectionist policies hinder such growth leading to inefficiencies and reduced competition. By shielding domestic sectors from the threat foreign competition these industries become complacent, resulting in reduced innovation and productivity. This negatively effects consumers by lowering their purchasing power due to increased prices and limited variety of goods and services. Protectionist measures also impede upon the principle of comparative advantage, wherein nations focus on producing goods where the hold a cost advantage.⁵ By restricting trade, countries could miss out on the benefits of specialization due to an inefficient allocation of resources. Such consequences are why the economics profession widely accepts the belief that protectionism is an evil which must be fought any time, any place. ⁶

Trade protectionism, whether overt or covert, has clear consequences on the use of resources and income distribution in the countries that practice it as well as in the countries it is directed against.⁷ This is evident in the US - Steel and Aluminium Products⁸ dispute where President Trump imposed tariffs on steel and aluminium products claiming that cheap imports had diminished domestic industries, and these protectionist measures were aimed at reviving them. Although early estimates predicted an increase in domestic steel and aluminium employment, the Trade Partnership Worldwide found that for every one job gained more than five jobs were lost.⁹ The tariffs also increased the cost of steel and aluminium which harmed domestic industries reliant on these materials to create products. The rise in business costs raised prices for consumers which in turn reduced their purchasing power. Consumers who pulled back on other spending such as recreation would negatively impact those sectors causing further harm to domestic industries. Such consequences were only the beginning as numerous countries imposed retaliatory tariffs on US products.

A major concern in implementing protectionist measures is the risk of retaliation and in extreme cases initiating trade wars. Previously numerous disputes¹⁰ have displayed the harsh effects of trade wars wherein they strain international relations, distort global market dynamics, and ultimately cause more harm than benefit. In US - Tariff Measures (China)¹¹ the US imposed tariffs on $34 billion worth of Chinese products triggering a back-and-forth battle of trade restrictive measures. By 2019 the US had imposed over $350 billion of tariffs against Chinese goods which was retaliated with over a $100 billion of restrictions on American exports.¹² This trade war highlights the severe risks of protectionist measures by not only hindering international cooperation causing global economic instability, but also harming the very industries and consumers it aimed to protect.

The modern debate regarding trade protectionism goes beyond simply concluding whether such measures are right or wrong. Instead, it concerns the extent to which trade restrictive measures can be justified. International organizations like the WTO play a crucial role in mediating a balanced approach which ensures that these measures are implemented only when absolutely necessary to safeguard legitimate national interests. The Most Favourable Nation¹³ and National Treatment¹⁴ obligation are fundamental principles of the WTO which encourage equitable and transparent trade policies promoting equal opportunities of trade. While these trade liberalistic principles inherently oppose the application of trade protectionism, the WTO's treaties acknowledge specific circumstances where 'necessary' measures are permitted to protect national interests such as public security, public health, and environmental concerns.

The controversial compatibility of protectionist measures with the WTO treaties is evident when determining what qualifies as 'necessary' under Article XX of the GATT.¹⁵ In Thailand Cigarettes,16 the panel considered that a trade restrictive measure is 'necessary' only if an alternative measure which is consistent with the GATT provisions is not available. Similarly, in Korea-Beef¹⁷ the panel characterized a necessary measure as essentially being indispensable. Numerous disputes¹⁸ determined necessity by exploring alternative measures which may be less trade restricting. This illustrates the GATT's preference for free trade rules over protectionist policies.¹⁹ While the presence of exceptions signifies the importance of trade protectionism in certain circumstances, the limited range of application underscores the severe risks posed by protectionist policies on global economic integration. The WTO's focus on trade liberalization whilst balancing measuring concerning protectionism ensures that global trade flows as smoothly, predictably, and freely as possible.

The contentious nature surrounding trade protectionism is a testament to the complexities of global economic integration. Whilst trade restrictive measures entice nations due to the essential relief they can provide for vulnerable domestic sectors, these measures consequently harm global supply chains slowing down economic growth. Such balancing of pros and cons underpins the need for rules which mitigate the consequential effects of trade protectionism. The WTO acts as a crucial mediator by navigating the balance between necessary protectionist measures from those which effect the broader economy and international relations. The fundamental principles of the WTO and their exceptions illustrate the fine line nations must adhere to when implementing necessary protectionist measures to safeguard legitimate national interests. Striking the right balance requires a comprehensive consideration of the economic, social, and geopolitical implications, as well as commitment to fostering an environment where industries can thrive competitively on the global stage.

Footnotes

1 Artuso M and McLarney C, "A Race to the Top: Should Labour Standards be Included in Trade Agreements?" (2015) 40 (1) Vikalpa 1; Burtless G "Workers' Rights: Labour standards and global trade" (Bookings, 1^st September 2001) <https://www.brookings.edu/articles/workers-rights-labor-standards-and-global-trade/> accessed 12^th March 2024

9 Francois J and Baughman L "Does Import Protection Save Jobs? The Estimated Impacts of Proposed Tariffs on Imports of U.S. Steel and Aluminum" (The Trade Partnership Worldwide, 5^th March 2018) (https://tradepartnership.com/reports/does-import-protection-save-jobs-the-estimated-impacts-of-proposed-tariffs-on-imports-of-u-s-steel-and-aluminum-2018) accessed on 15^th March 2024

10 WTO, Panel Report, United states – Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products. WT/DS38/R, adopted on 15^th September 2011; WTO, Panel Report, United States – Subsidies on Upland Cotton, WT/DS267/R, adopted 8^th September 2004; WTO, Appellate Body Report, EC Measures Concerning Meat and Meat Products (Hormones), WT/DS26/DS48/AB/R, adopted on 13^th February 1998; WTO, Appellate Body Report, Australia – Measures Affecting Importation of Salmon, WT/DS18?AB/R adopted 6^th November 1998.

11 WTO, Panel Report, United States – Tariff Measures on Certain Goods from China, WT/DS543/R, adopted 15^th September 2020

12 Fajgelbaum P and Khandelwal A, 'The Economic Impacts of the US–China Trade War' (2022) 14, Annual Review of Economics; Zhang. Y 'The US–China Trade War: A Political and Economic Analysis.' (2018) 31 (1/2) Indian Journal of Asian Affairs

13 General Agreement on Trades and Tariffs 1994, Art I; General Agreement on Trades in Services 1994, Art. II; Agreement on trade Related aspects of Intellectual Property Rights 1994, Art. IV.

14 General Agreement on Trades and Tariffs 1994, Art III; General Agreement on Trades in Services 1994, Art. XVII; Agreement on trade Related aspects of Intellectual Property Rights 1994, Art. III.

15 General Agreement on Trades and Tariffs 1994, Art XX

16 WTO, Panel Report, Thailand – Restrictions on the importation of and internal taxes on Cigarettes (Thailand Cigarettes), DS10/R-37S/200, adopted 7^th November 1990, pp 20, para 74

17 WTO, Panel Report and Appellate Body Report, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R, adopted 10^th January 2001, pp. 49, para. 161

18 WTO, Panel Report and Appellate Body Report, Brazil - Measures Affecting Imports of Retreaded Tyres (Brazil Retreaded Tyres) WT/DS332/19, adopted 17^th December 2007; WTO, Panel Report and Appellate Body Report, China — Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/19, adopted 19^th January 2010; WTO, Panel Report and Appellate Body Report, United States — Measures Affecting the Cross-Border Supply of Gambling and Betting Services (US Gambling) WT/DS285/26, adopted 20^th April 2005

19 Hyo Won Lee, Johann Park, 'Free Trade and the Environment under the GATT/WTO: Negative or Compatible Relationship?' (2021) Vol. 28, Iss. 1, JIAS, pp. 121

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