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Will the Wave of Protectionism Make International Trade Great Again?

Blog, Global Trade, ONESOURCE March 31, 2017

Unquestionably, international trade flows have exploded throughout the century.  Countries have been using the global transaction of goods as a main source to obtain foreign exchange. A main objective for countries is to maintain a favorable trade balance. To achieve this objective, most countries take the position to export as much as possible and import as least as possible; unless the lower priced imports are directly consumed for the exported products. To achieve such an objective, governments often subsidize their manufacturers and exporters, but as a consequence this approach can lead to inefficiencies by distorting domestic production (WTO rules generally prohibit export subsidies and permit importing countries to impose countervailing duties in response).

Notwithstanding, to succeed in the international arena, governments are constantly seeking new partnerships by signing free trade agreements (FTAs); by looking for new strategies to increase commercialization in new markets; and by expanding in existing markets.

However, as globalization has been increasing, those who stand against globalization have been also emerging.  As a result, we’ve seen a combination of political, economic and financial entities creating an inverse movement against globalization, potentially threatening the world economy in opposing established programs.

Protectionism Measures and its Effects

Those opposed to globalization cite years of slow economic growth and stagnant wage levels as evidence against globalization. Also, the rise in income inequality, wealth inequality and poverty has negatively impacted developing countries that claim to suffer unfair competition with larger countries, foreign companies and immigrant workers.

These claims of inequity have created fear among companies that new trade barriers between borders will emerge in the coming years.  For example, the US withdrawal from the TPP will not have an impact on the US economy, and in my opinion this was mostly a symbolic move. However, the countries that were not involved in the negotiation have secretly celebrated the withdrawal of the US. For instance, Brazil (a non-member of TPP) had the potential to lose markets with participating TPP countries for soy, sugar, orange, beef and chicken mainly in Japan, Australia and New Zealand. That is no longer the case, as a result of the US withdrawal.

As TPP was intended to increase US influence in Asia, the withdrawal has clearly eliminated the years of negotiations, but not necessarily the groundwork, as the new US president has stated he is interested in bi-lateral agreements. For countries not already in an agreement with the US, it would appear the work done would make for a smoother negotiation if the US pursues an agreement.

However, as a consequence of the US withdrawal, the act would appear to “cede to China the role of defining regional trade rules, and would be a body blow to US standing and the US economy,” as warned by former Republican foreign and security officials.

Additionally, an alternative of the TPP could put US businesses at a disadvantage. The Regional Comprehensive Economic Partnership (RCEP) that does not include the US and also might not be as friendly to American businesses involves lower standards for labor rights and intellectual property protection than the TPP did; this potentially leaves US businesses at a competitive disadvantage in Asia.

The RCEP is conducive to the economic benefit of Asian and Pacific countries. As a trade agreement negotiation with the most members in East Asia and the largest scale, the RCEP covers 16 Asian and Pacific countries, with almost half the world’s population (3.435 billion in 2013). In 2013, the gross value of production reached US$ 21 trillion, with exports exceeding US$ 5 trillion, accounting for about 30% of the world’s economy and total exports. After its completion, the RCEP will be the only regional free trade agreement plan in the Asia-Pacific region that is equivalent to the TPP, and it will be higher than the TPP in terms of economic effect. According to estimates by experts, once the RCEP is completed, the eradication of tariff and non-tariff barriers alone would raise the GDP of the Asia-Pacific region by 2.1% and that of the world by 1.4%. The completion of the TPP would have raised the GDP of the Asia-Pacific region and the world by 1.2% and 0.6%, respectively.

The mega-regionalist tendency probably will affect current agreements in force. A strong example of this is the announcement from the US to look into renegotiating the North America Free Trade Agreement (NAFTA).

Despite unknowns surrounding the course of the renegotiation, one of the questions hovering over the subject is whether the deal can be killed. According to Article 2205, a participant of the three countries can withdraw from the agreement six months after giving notice. However, there is great speculation that it could not occur, as it would appear that the economic effect could be catastrophic.

Nonetheless, it does not detract from the fact that the agreement will most likely be renegotiated, even if it could take several years.

Setting aside the political environment, the antitrade rhetoric around the world is being supplemented by a rise in the introduction of protectionist measures. The strong trend of trade protection is contributing to persistent slow growth in the global economy. Trade protection is the deliberate attempt to limit imports or promote exports by putting up barriers to trade. Despite the arguments in favor of free trade and increasing trade openness, protectionism is still widely practiced.

The latest report published by WTO shows that its members introduced 182 new trade-restrictive measures during the period of mid-October 2015 to mid-October 2016, an average of just over 15 measures per month. While this represents a decline compared to the average 20 measures per month introduced during 2015, the number of new trade-restrictive measures being introduced remains worryingly high, according to WTO opinion.

Additionally, the report notes that of the 2,978 trade-restrictive measures put in place by WTO members since 2008, only 740 (25%) were removed by mid-October 2016.

Hope for Globalization

In the midst of this uncertainty and the persistent challenges faced by the international economy, countries might be advised to work together to resist protectionist pressures. The best safeguard to be applied against protectionism is a strong multilateral trading system.

At the World Economic Forum in Davos in January of this year, Chinese President Xi Jinping was applauded when he said, “We must remain committed to free trade and investment. We must promote trade and investment liberalization… No one will emerge as a winner in a trade war.”

In defense of free trade, the Chinese president made an analogy: “Pursuing protectionism is just like locking oneself in a dark room. Wind and rain might be kept outside but so are light and air.”

While the voices of protectionism and globalization make themselves heard, it will be interesting to see how things play out. Though the world struggles to live with globalization, still it does not know how to live without it.

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[1] WTO rules generally prohibit export subsidies and permit importing countries to impose countervailing duties in response.