One miracle weapon for the government: Protectionism

Adhiraj Regmi

September 29, 2019

Reading Time: 5 minutes

One miracle weapon for the government: Protectionism
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The need for economic transformation is swinging all over the heads of Nepalese and we are still wondering when and how? Here I have proposed one idea, one important string of the whole guitar that can actually help the government produce some good music to its citizen.

The theory or practice of shielding a country’s domestic industries from foreign competition by taxing imports is referred to as protectionism.

People often argue that protectionism limits consumers’ choice and increases the cost of goods but we need to understand how protectionism for a certain time can benefit the whole country and change the dynamics of the economy.

The first British Prime Minister is arguably the pioneer of protectionism when he proposed two things for a country to move towards a manufacturing revolution. The first doctrine he puts forward is to identify the strategic industries of the country.

Their goods and services became competitive in the foreign ground and they could compete against any foreign products that were produced under their strategic industries.

Now, strategic industry for a country here means identifying the means and resources easily available within the territory, identifying the skills of the people and understanding the areas of specialization the country has.

The next doctrine he provides is providing subsidies to the producers of such strategic industries and imposing protectionist policies for foreign products. This was one major step that the British back in 1700-1800 called it a revolution that could manifest in some big changes and transformation.

This revolutionary step helped Britain to gain industrial supremacy and be the exporters to the world. Their goods and services became competitive in the foreign ground and they could compete against any foreign products that were produced under their strategic industries.

Once they could achieve this competitiveness in goods and services, protectionism was not necessary and hence they could easily adopt free trade. Here what they did is, they understood that homegrown products could not fight the foreign competition and understood the need of identifying certain strategic industry, build an immunity against the foreign competition and then go back for free competition through free trade, if required.

Another example in defense of protectionism is the biggest economy of the world, the USA. A country now known for the likes of liberalism and free trade back then was one of the spearheads of protectionism.

The first minister in charge of the USA, Alexander Hamilton, proposed a report to the then Congress that an economically distressed country should first protect and nurture ‘industries in their infancy’ against all the heavy competition and kept this forward as the infant industry argument.

In the initial phases, a lot of arguments certainly came to this proposal. People countered Hamilton’s view as they questioned why anyone would buy a local inferior product if they could import better and cheaper from Europe.

However, this circumventive attitude of the opposition did not last long with many citizens of America agreeing with Hamilton that a country without a manufacturing revolution cannot prosper and also that a revolution in the manufacturing industry is possible through tariffs and government intervention.

And now with strong protectionist policy, by 1830, the country had the highest average industrial tariff in the world. In contrast, countries like Germany or say Japan had the lowest tariffs in those times. In today’s era, Germany and Japan are the countries who associate themselves with protectionism.

The same countries who prospered or say embarked the journey towards prosperity in the backing of protectionism are now advocating for free trade and even trying to impose it around.

The term of liberalism that came back in the 1800s was actually the most illiberal times if used for economics.

Now that those countries can compete all around, they started using various unequal treaties through gunboat diplomacy and deprived the weak countries to enjoy the fruits of protectionism. In the Nanking or say the Nanjing Treaty, China was forced to sign in after their loss in the Opium war.

The treaty forced the Chinese government such that the trade be subjected to fixed tariffs which meant the British would obviously propose a lower tariff and that the Chinese government would not be able to protect its infant industries.

Hence such issues plaguing the protection of the infant industry are a big reason for the economic retrogression in Asia and also one of the causes why the region had to experience negative per capita income growth. The term of liberalism that came back in the 1800s was actually the most illiberal times if used for economics.

After the conclusion of the Civil War, capitalism thrived in the US and in western Europe. The countries initiated to sign the free trade agreement, however, the European countries in the west did not renew the agreement after the expiry and consequently involved in increasing the protectionism.

The Latin American countries who were in the unequal treaties (for their independency), also imposed higher protectionism right after the expiry of the treaty. The golden liberal age which we refer to 1870-1913, were not so liberal in practice as the capitalist countries were illiberal both while drafting domestic and international policies.

On the contrary, the forced liberalization was imposed upon the less powerful countries. Because even the most liberal countries believed that protectionism actually is required to prosper and they did not want everyone to be prosperous.

After independence, a lot of the countries ignored the free market and free trade and concentrated in import substitution industrialization. That is how we can see China with that strategy in the later phase could now be the second-largest economy of the world. (which was not even in the top 10 in the 1900s).

Now saying that protectionism will only boost the domestic product is not the point. Having prospered the domestic industries will also create more jobs, bring our flown youths back to the country and increases the economic activities in whole.

Nepal recorded a trade deficit of NRs 103,928.80 million in March of 2019, and the Balance of Trade in Nepal averaged NRs 35037.73 million from 2001 until 2019. This is a horrifying figure for the country and with this, we cannot see ourselves reaching anywhere.

But again, having said the figure is large, we might be wondering why would it really matter? Yes, living in the capital city and talking about trade deficit is easy, but isn’t it high time to look on its impact that is making the producers? It is actually affecting lives and directly touching to the daily life of the people.

The country should be able to solve all those through economic diplomacy and put a strong stance in the world forum to face any kind of discriminations or even a sanction by such unipolarity.

Let’s take an example of a sugarcane industry. Sugar producers in Nepal have been in the search of finding lower prices are importing sugarcanes from India. But have we actually pondered upon how this sugar comes at such a low price?

India being a large economy has a large production. When an overproduction happens in the Indian economy, they dump it to Nepal for a lower price. Now it’s the Nepali farmers who suffer from this act. The immediate effect of this has seen a reduction in sugarcane farmers by almost half. This is just one example of a large bucket.

Now we can just imagine, if there was so much enforcement on various treaties back then in the 1800s and 1900s, it is such a big challenge for a country to beat the unipolar global hegemony the world is saddled with today. The country should be able to solve all those through economic diplomacy and put a strong stance in the world forum to face any kind of discriminations or even a sanction by such unipolarity.

We have been saying and also been listening that Nepal has an abundance of resources and prospects. But is having resources enough?

We should be able to convert the resources to manufactured goods and sell it all around. For that, initial days might be very troubling. The producers will experience gruesome days to find an appropriate market and that is why their products should be protected.

Having said about all those ‘abundant resources’ and ‘unlimited potentialities’, it is high time that our government identified the so-called ‘strategic industries’ and brought some protectionist policies to let the infant industry grow (scale).

(Adhiraj Regmi is a youth politician associated with the Nepal Communist Party (NCP)

Views expressed in this article are the author’s own and do not necessarily reflect the stance of Khabarhub.

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