What Donald Trump started with the trade war, Joe Biden extended and even deepened, and the rumors about extremely high tariffs or even devaluation of the dollar after D. Trump became the president of the USA again would be quite a natural continuation of such a policy.
Protectionism, of course, will mean slower global trade and higher prices for consumers. From an efficiency point of view, this is clearly a harmful policy. However, pushing for industry to play a bigger role in the economy may make sense from a security or supply chain resilience perspective.
This can create a lot of jobs, especially in less affluent regions. Although it should be emphasized that modern industry is capital intensive, not labor intensive. Ultimately, it would be a loss for all consumers in the world.
Protectionist policy in the US is not new
It is certainly not the first time that the USA has turned to the path of protectionism. In truth, the success of the US economy began with protectionism. Fans of musicals have probably heard of Alexander Hamilton, the first US Treasury Secretary. Although better known for his monetary and fiscal reforms, he was also one of the architects of US industrial policy.
After the United States declared independence, the economic interests of the northern and southern states differed greatly. The southern states relied on highly profitable agriculture, which, thanks to the exploitation of slaves, was highly competitive in world markets. The South represented by Jefferson sought as free trade as possible because they wanted to trade without interference with the British, French and other empires.
The North did not have such a competitive advantage and realized that their chance was in manufacturing. However, British industrialists had more capital, cheaper raw materials coming from the colonies, better technology, so there were few chances to hold back in the competitive struggle.
The North won the trade policy debate, very high tariffs were applied (on technology stolen and copied from the British), and eventually the US was able to industrialize very successfully. Later in the 19th century The German Empire, Japan successfully copied the industrialization model of the United States, which is based on international trade restrictions combined with extremely fierce domestic market competition.
Later, as the local industrial sector grows and becomes competitive, industrialized countries begin to want free trade again. Therefore, we often see that the world economic structure oscillates between free trade and protectionism.
Industrial policy is often a fiasco
Industrial policy can be an essential tool to modernize and industrialize your economy. A large number of today’s successful economies have successfully adopted it at one stage or another of their development. On the other hand, there are not so many success stories – it is not for nothing that the development of the economies of Korea, China or Japan are often called “growth miracles”. Effective implementation of industrial policy is the exception rather than the rule.
Industrial policy has a bad reputation for good reason. Protectionism often creates so-called “national champions” – large and sluggish business organizations that are more concerned with absorbing subsidies than creating efficient business. Almost all South American countries applied industrial policies unsuccessfully in the 20th century. and thus did great damage to the welfare of that continent.
Another well-known example is the Soviet Union. The planned economy is an example of an extreme industrial policy that was a hideous waste of resources and failed to create competitive industries.
Protectionism is certainly no silver bullet, but it can be a tool for creating a competitive advantage when used judiciously.
Difficult questions for Europe
The European Union was founded at a time when the ideas of free trade were completely dominant. The principles of free trade and free capital are written directly into the EU’s DNA. Therefore, the new rising wave of protectionism is particularly threatening for Europe. The EU is the most open economic bloc for trade, the ratio of imports and exports compared to the product created here exceeds 100%. GDP. At that time, the openness of the US economy was less than 30%. The European economic model has long relied on external demand and exports, so any trade restrictions are extremely dangerous for Europe.
China has long been applying various measures that artificially increase the competitiveness of its exporters, the US is also turning away from free trade – intensively subsidizing the development of high-tech industry, and these protectionist tendencies will only strengthen.
The EU is currently debating what to do with the changed trade environment. Tariffs are set at the EU level and although they can protect against external competition, they make production more expensive and cause damage in the long run.
Industrial subsidies are a country-specific issue. In Europe, this is avoided because countries have very different conditions for promoting their industry and this can completely distort the functioning of the single market. Lithuania is too small to implement a successful industrial policy unilaterally.
We can hardly compete with subsidies, so we should get involved in European discussions and thus shape the common trade policy in a more favorable direction.
It will be extremely difficult for Europe to compete with China and the USA in terms of trade leverage, so it would make the most sense to look for new growth engines – to rely more on domestic investment and consumption, rather than exports. This would require greater public investment in economic transformation and defense, deeper integration of financial markets and mobilization of private capital, and well-earning and financially strong consumers to drive consumption growth. The European growth model will not work in the face of restrictions on free trade in the world, so it is time to think about how we can adapt to it.
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2024-07-26 18:41:02
