By Xiaoxin Melody Xing
Introduction
The past three decades of globalization are generally regarded as a period of widespread liberalization and high growth in the world economy. Across broad measures, this era has seen rapid globalization of businesses and the lifting of large numbers of the world’s poorest people out of poverty, especially in large emerging markets such as China and India (Enderwick, 2011). While the benefits of globalization are widely recognized as increasing economic growth rates and allowing more countries to participate in international business activities, globalization has always been criticized. Although the rise of globalization has lifted large numbers of people out of poverty, after globalization reached its peak in 2012, product supply chains became more domestic than global (Miroudot & Nordström, 2020). Many people question whether the statement of world manufacturing has its authenticity because it is not so much world manufactory as it is Asian manufactory or regional manufacturing. Many world-class companies choose to take advantage of the lower rent, resources, and labor in Asia to build factories, and then assemble their products and sell them to European and American countries. In this process, the Asian engineering responsible for manufacturing did not get the maximum profit. Therefore, the rise of protectionism has emerged as a phenomenon to protect the interests of their countries. This protectionism was first observed in the G20 economies through the more frequent use of non-tariff measures and trade remedies and evolved into a trade war after 2018. The decline of trade barriers, after the establishment of the WTO and the information technology revolution, brought about falling communication costs and were major drivers of the rise of global value chains in the 1990s. While new technological advances in the digital age can still reduce trade costs, protectionism can offset gains from foreign sourcing and encourage firms to source locally or in closer countries—thus triggering “deglobalization” (Miroudot & Nordström, 2020). However, protectionism does not necessarily protect the country’s trade development. It is more likely to lead to a series of long-term problems such as a decline in economic level, a reduction in investment, or a threat to the economic development of other countries. When protectionism is in place, trade barriers reduce trade flows by making it more expensive or difficult for domestic businesses and consumers to buy goods from abroad. These barriers usually take the form of tariffs, which raise the price of imported goods relative to domestically produced goods at a given exchange rate. Non-tariff measures, including import quotas or changes in regulatory standards, can also create barriers to trade (In Focus – Trade Protectionism and the Global Outlook, 2019). The trade war between China and the United States in 2018 is an important case of rising protectionism, and perhaps the reason for it is not just to protect the country’s trade and development. But the final turn of events did have a fundamental impact on global business confidence. Indicators of trade and economic policy uncertainty increased sharply in 2019 (In Focus – Trade Protectionism and the Global Outlook, 2019). Now, in order to avoid the trade loss caused by the rise of protectionism, countries have begun to make remedies, try regional development, or try alliances and cooperation to seek a larger and more stable market, so as to avoid the uncertainties brought about by the rise of protectionism loss.
Discussion (Case Analysis)
In recent decades, China has achieved the fastest economic growth by opening up its economy and emphasizing trade and has now become the second largest economy surpassing Japan. The widening U.S. trade deficit with China has heightened tensions between the world’s two largest economies (Sukar & Ahmed, 2019). China started a market-oriented transformation process in 1979. The transformation started from the agricultural sector and gradually shifted to enterprises, services, banking, trade, and investment. And China’s trade policy has also changed from the initial non-openness to gradual opening and comprehensive development. The government’s open policy encourages the opening of the Chinese economy and promotes imports and exports. Foreign investment has been promoted through the opening of different special economic zones, such as the famous “Shenzhen Special Economic Zone” where foreign investors can set up factories there to take advantage of cheap skilled labor (Sukar & Ahmed, 2019).
Such economic policies attracted the United States, the largest economy in the world at the time, and American companies came to China for cheaper labor and costs. China’s share of total U.S. imports rose from 8.2% in 2001 to 21.6% in 2017 ( U.S. Department of Commerce). The importance of China as a source of U.S. imports rose sharply from eighth in 1990 to first in 2017 (Sukar & Ahmed, 2019).
Such trade development has caused the trade deficit between China and the United States to increase in the past two decades, and finally triggered the Sino-US trade war in 2018. The trade war between China and the United States since mid-2018 has introduced many trade barriers, the most important of which is higher tariffs on bilateral trade between the United States and China. Rising protectionism is contributing to slower global growth, both through direct effects on trade flows, supply chains, and import costs, and through broader indirect effects on global business sentiment, uncertainty, and investment (In Focus – Trade Protectionism and the Global Outlook, 2019). After the trade war, the slowdown in China’s growth has made global investors more cautious and careful about the direction of investment. This uncertainty may reduce business investment and reduce the global capital accumulation rate, thereby reducing supply growth. Countries not directly affected by increased trade barriers may feel some impact from trade barriers imposed elsewhere. Certain countries may benefit from positive “trade diversion” effects if they produce products that are similar to those supplied by those countries subject to tariffs (3). Falling business confidence and heightened uncertainty could also lead to spillover effects. The introduction of trade barriers may make companies more uncertain about the potential markets for their products and services, and the increase in the cost of imported goods caused by tariffs will reduce real income, which in turn will drag down domestic demand growth. Some domestic production that uses imports as inputs may also be constrained if trade barriers disrupt supply chains. Thus influencing further protectionist policies to follow.
Conclusion
Domestically, lower trade reduces productivity growth because firms are less exposed to global competition and new ideas, cannot specialize to exploit comparative advantage, and cannot benefit from economies of scale. A globally coordinated removal of tariff commitments from all existing bilateral/regional trade agreements as well as unilateral preferential schemes, combined with increased trade service costs, would result in an estimated annual global real income loss of 0.3% or $211 billion relative to the baseline over three years. Much of these losses are likely to be concentrated in regions such as East Asia and the Pacific and Latin America and the Caribbean, which together account for nearly one-third of the decline in global welfare. Highlighting the importance of preferences, the impact on global trade is estimated to be more pronounced, falling by 2 per year. If these barriers are maintained for three years, that would be a 1% increase relative to the baseline or more than $606 billion. Secondly, a worldwide increase in tariffs to the legally permitted bound rate, combined with an increase in the cost of traded services, would translate into an annual global real income loss relative to the baseline of 0.8% or more than $634 billion three years later (Kutlina-Dimitrova & Lakatos, 2017). Such economic losses will be directly reflected in people’s living standards, leading to poverty or more livelihood problems. If corrections are not made in time, the consequences are likely to limit the life and development of local people. However, the trade war brings more than just monetary losses to the country. A further escalation of trade tensions may have a huge negative impact. Uncertainty related to protectionism is weighing on economic sentiment and could lift it further, potentially undermining confidence and affecting the euro area and global economy more significantly (European Central Bank, 2019).
References
Enderwick, P. (2011). Understanding the rise of global protectionism. Thunderbird International Business Review, 53(3), 325–336. https://doi.org/10.1002/tie.20410
European Central Bank. (2019, April 24). The economic implications of rising protectionism: a euro area and global perspective. Retrieved March 18, 2023, from https://www.ecb.europa.eu/pub/economic-bulletin/articles/2019/html/ecb.ebart201903_01~e589a502e5.en.html
In focus – Trade protectionism and the global outlook. (2019, November 7). Bank of England. Retrieved March 18, 2023, from https://www.bankofengland.co.uk/monetary-policy-report/2019/november-2019/in-focus-trade-protectionism-and-the-global-outlook
Kutlina-Dimitrova, Z., & Lakatos, C. (2017). The Global Costs of Protectionism. Social Science Research Network. https://doi.org/10.1596/1813-9450-8277
Miroudot, S., & Nordström, H. (2020). Made in the World? Global Value Chains in the Midst of Rising Protectionism. Review of Industrial Organization, 57(2), 195–222. https://doi.org/10.1007/s11151-020-09781-z
Sukar, A., & Ahmed, S. H. (2019). Rise of trade protectionism: the case of US-Sino trade war. Transnational Corporations Review, 11(4), 279–289. https://doi.org/10.1080/19186444.2019.1684133
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