What is global protectionism?
Global protectionism is the implementation by governments of tariffs, quotas or regulatory standards on goods imported into the country with a view to protecting domestic trade and industry. In other words, making imported goods more expensive to buy in a bid to make goods produced in the domestic market better alternatives to buy. Whether they are better alternatives in terms of performance as well as cost will ultimately be determined by the market through purchasing behaviours.
Historical trend
Historically, and certainly during my lifetime, there has been a trend away from protectionism with global trade and reduced barriers being favoured by governments. In other words, more trade liberalisation, with average global tariffs falling from 8.5% in 1994 to 2.5 by 2017. Over the same period, the world trade to GDP ratio has improved1, suggesting that liberalisation may be a facilitator for global trade and wealth creation.
Impact on economy
Whilst protectionist measures are put in place with a view to protecting domestic trade and industry, the impact is not necessarily that straight forward, especially when there are other factors in play such as inflation, poverty and a real pressure on household incomes known as the cost-of-living crisis.
Governments need to give careful consideration to the type of industry being offered protection and the impact of tariffs and therefore increased costs across the domestic supply chain. Not only might the impact be felt on businesses margins, it will be felt on the purse of the consumer, placing further strain on household incomes and therefore inflation.
Cross Boarder Impact
Not only is the impact felt in domestic markets, it may also spill over into other countries if they supply inputs to the domestic market because of a reduction in demand for their products. Other countries may benefit from a positive effect however, if they supply suitable substitute goods.
Recent Trends
Over recent years there has been an increase in protectionist measures being put in place between the likes of the US and China and more recently the EU and China. This increase in barriers to trade is thought to be eroding the global economy which can not be a good thing for anyone.
Uncertainty
One of the key drivers of an economy is certainty. When an economy benefits from stability in its leadership and in its infrastructure, for example its banking system or regulatory environment, investors and markets will view it with more certainty and it is therefore more likely to grow.
The other side of that is that with greater uncertainty comes less confidence from markets and therefore less likelihood of investment and growth. It is why having leadership that delivers confidence and a steady ship is so important for wealth creation. The new UK government has a number of challenges ahead of it.
What it means for business
Being in business is a challenge and I have enormous respect for all the entrepreneurs and business leaders out there that work tirelessly to innovate, turn a profit, protect their workforce and contribute to UK plc’s growth and success. When working so hard and fielding all of the extra life admin and challenges, it can be difficult to keep abreast of what is happening in the rest of the world and relating it back to everyday life, but considering the impact of what is happening elsewhere in the world is important for businesses to be able to react effectively should it be necessary.
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