What is Protectionism, and How Will It Affect Your Wallet?

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Protectionism will make the prices of goods in Singapore skyrocket.

Pacific Rim leaders have called for a rejection of “protectionism”, and this is something that would resonate with Singapore: our goals in the (likely doomed) Trans-Pacific Partnership (TPP) may be blocked by America’s new President. But what is protectionism, and how does it affect your wallet?

What is Protectionism?

The term “protectionism” refers to trade policies that protect local businesses from foreign competition. Protectionism can take different forms:

Import tariffs – These are additional costs placed on imported items, to make domestic businesses more attractive to buyers.

For example, say your country has a lot of shoe factories. However, locals have begun buying shoes made in China instead, as the prices are a lot lower. A protectionist government would impose tariffs (effectively an added tax) on Chinese shoe distributors who want to sell in the country, thus making local shoes cheaper and more competitive.

Import quotas – An import quota restricts the total number of imports allowable, over a set period. In the above example, a country might restrict the import of shoes from China to 200,000 pairs per year, after which further imports are not allowed.

Import quotas ensure that demand cannot be fully met by foreign goods, so locals are forced to buy from domestic producers.

Trade embargoes – Some imported products are banned altogether. It is rare for trade embargoes to be imposed on consumer items; it is generally imposed on products such as firearms, drugs, or foodstuffs that are considered dangerous.

Governments dislike imposing trade embargoes on consumer goods, as it is politically unappealing (this practice is equated with despotic regimes, such as North Korea). Furthermore, trade embargoes can create a black market within the country, in which smugglers and assorted criminals profit from illegal imports.

Local subsidies – This is when a government does not impose restrictions on imports. Instead, the government provides subsidies to domestic companies to give them a competitive edge.

In the aforementioned example, the country might not ban shoes from China, but it might give out subsidies to domestic shoe companies. The subsidies reduce the prices of locally made shoes, to a level that matches the Chinese imports.

So Why is Protectionism Bad?

Protectionism often delivers short-term gains, while causing significant long-term damage. While protectionism may seem to benefit a country’s citizens, the real effect is economic inequality: some citizens will benefit much more from protectionism than others.

One historical example of this is the Smoot-Hawley Act, passed by the American government in 1930. The act imposed high tariffs on 20,000 different types of imports, and is considered to be a factor in the worst depression in American history (the Great Depression that lasted until 1933).

Some of the problems with protectionism are:

1. Over a Prolonged Period, Protectionism Makes Local Businesses Unproductive

In a free market economy, a business that makes lousy products, or is poorly managed, will die off. As such, every business is inclined to be productive, make good products, reduce spending, and so forth.

Protectionism, however, interferes with this process. Consider what would happen if Singapore were to ban all imported electronic devices: all our phones, tablets, computers, and so forth would have to be made locally.

Domestic companies would no longer need to compete with Samsung, Apple, Microsoft, Sony, or any of the best global brands. They could get away with making subpar products, and not bother improving them. After all, Singaporeans wouldn’t have the option to buy the better foreign brands, so their sales wouldn’t be affected despite having worse products.

In this situation, protectionism would benefit some Singaporean citizens (those who own the protected companies, for example). But it does little to help other Singaporeans, and the benefits are thus unequal.

In reality, most governments will be protectionist toward domestic companies for a fixed time. If the car industry is brand new in a country (as Proton once was in Malaysia), the government might take a protectionist stance to allow that industry to develop. However, if the government allows protectionism to go on for too long, it will create an economic problem.

When domestic businesses have been uncompetitive for too long, it becomes very difficult to reverse protectionist policies. In the above example, if Singapore’s electronics companies get used to having no competition, and then the government suddenly allows foreign imports, our domestic companies would probably be crushed (thus resulting in issues such as massive unemployment).

Once a protectionist measure has been in place for some time, few politicians want to be the one to lift it. Consumers will be forced to subsidise the waste and inefficiency of domestic companies.

2. Other Countries Impose Retaliatory Tariffs

Other countries don’t just sit by when tariffs are raised against their companies. If they cannot sell to your country, they will ensure that your country cannot sell to them either. This is called a retaliatory tariff.

Economists often fear that this will lead to a “tariffs race”, in which countries respond to tariffs by raising tariffs, which in turn prompts more tariffs, until international trade becomes deadlocked. Such a situation would be especially damaging to economies like Singapore, as we depend on international freight (especially via shipping) to make money.

3. Companies That Need to Export are Damaged By Protectionism

Some industries don’t rely on the domestic market. For example, some countries have large agricultural sectors. These agricultural sectors produce more than enough food to feed their own countries. In order to generate further profits, they need to export the food to other countries that need it.

But consider what happens if their own country has raised high tariffs: other countries would have raised equal retaliatory tariffs, which prevent them from selling abroad. The protectionism which was meant to help domestic companies instead becomes a threat to them.

In every country, there are some companies that depend on export trade (selling to foreigners instead of the local population). These companies are not helped by a protectionist stance.

Singaporean Wallets Could Be the First in Asia to be Affected

Countries that depend on servicing trade, via ports or airports, will suffer the most when trade barriers between nations go up. Singapore is definitely in that category. As such, our government is always dead set against the growth of protectionist mentalities.

Read This Next:

Why is a Low Inflation Rate Bad for Singapore?
What To Do If You Lose Your Job and Have No Savings


Ryan
By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.


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