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MBA Perspectives: Rebirth of Protectionism?

My Pre-MBA view

My knowledge and understanding of the term “Protect” or “Protectionism” before starting my MBA was very simple in nature. I had always synonymously related this idea with the protection I get from my loved ones like my mom, in what I perceive to be a universal practice across cultures.

An astonishing discovery

As I am from an engineering background, I didn’t know a great deal about economics before starting my MBA. All I really knew about was the supply and demand relationship.

However, in one of our lectures, the academic described how “protectionism is rising due to COVID-19”. I was a bit astonished to firstly hear the connection being made between protectionism and economics, and secondly, stunned to hear it being linked further to COVID-19.

This led me to do some detailed research on protectionism, from which I inferred that economic or political protectionism is again synonymous with mother’s protection! Although the ‘protectors’ in this case are not moms, but rather governments being protective of their states and citizens.

Political protectionism in the face of Covid-19

In simple terms, protectionism focuses on creating rules and regulations, particularly in trade, to favour one’s own country’s products/services in the local market, by adopting higher tariffs for products/services from other countries i.e. trade restrictions.

To get more clarity, I delved into the area of globalization (this time a known area for me).  Globalization enables all of us to live in what could be termed a ‘global village’. With the rapid advancement of technology, almost everything is accessible across the world. For example, Japanese cars are widely available in many countries.

However, as well as the benefits created by globalization, it also has its pitfalls. One such pitfall is how globalization has unfortunately facilitated the spread of Covid-19.

Thus, many countries have had to close borders, not only to restrict movement of travel, but also to restrict trade as a precautionary measure to reduce the outflow of money to another country during a unique crisis. The subsequent reactions to the effects of Covid-19 show that many countries are becoming more protectionist in nature, leading to a global rise in protectionism.

Global governance and the integrated economy

When researching back to the mid-twentieth century, following the Second World War, I read about the emergence of the Bretton Woods institutions.  The primary motive of this system of institutions was to create global governance for the political economy.

This system of institutions resulted in the creation of the 3 pillars of global economic governance:

These three institutions combined have transformed the global economy and created trade regulations for countries to exchange goods.  In simple terms, they have worked largely to create a global atmosphere that is conducive to an integrated economy rather than an independent economy.

Is the return to increased protectionism a good idea?

There will always be a negligible amount of protectionism exhibited by countries, but when it remains below the threshold, it will not impact global integration.

However, since the emergence of Covid, there is evidence of many countries evading the regulations set by the institutions, and instead imposing excessive tariffs, hoarding essentials, and reducing the amount of medical supplies and equipment being shared, despite several countries primarily depending on these essential supplies.

To my surprise, this was not done by just one country – rather, more than 75 countries imposed some form of protective measures.  After the invention of the Covid vaccines, protectionism took a different dimension, this time with countries restricting or blocking the transportation of vaccines.

Is this healthy behaviour?  An individual with increasing alignment towards nationalism and populism could argue that it is not wrong to practice protectionism since it benefits their political agenda.

However, the reality is that not all resources are available within any one country.  Most countries have some resources in excess and some in deficit. As soon as we delve into resource distribution, it is evident that natural resources vary by country: oil rigs, diamond mines, tea or coffee plantations or more.

Impact of increased protectionism

If one country practices protectionism, then it instigates another country to practice protectionism and so on, which results in a chain reaction.  If this continues, it could result in a situation where Middle Eastern oil cannot be accessed by someone in India, or Indian cotton cannot be accessed by someone in Europe, or Indian medicinal plants cannot be accessed for Biotech research.  The consequent effect is that this would create a global economy with increasing alignment towards non-inclusive behaviour.

On the whole, a rise in protectionism not only hampers integrative nature (the kernel of global governance), but it will also negatively affect a country’s economy if practised to excess, since it will impact upon the healthy exchange of resources and affect the Global Value Chain.

Why ‘rebirth’ and not ‘birth’ of protectionism?

In the mid to late twentieth century, not all countries were open towards the integrated approach, since they were under the illusion that protectionism was the best policy. This was evidenced by Imperialism, wars which hampered the integrative approach, and a tendency for all countries to exhibit protectionism in some form (China joined the WTO only two decades ago).

Since then, the world transformed largely from a protectionist nature towards an integrated nature, courtesy of the global governance institutions.

However, Covid-19 has catalysed countries to revert once again to protectionism.

Where next?

Since every government works for its people, I consider it the imperative responsibility of every individual to adopt an integrative mindset. Through voting and lobbying, individuals and groups can focus effort on encouraging their governments to return to a more integrative approach over time, as the Covid-19 pandemic is brought under control. This will help to increase healthy transactional exchanges between countries and strengthen the Global Value Chain.

Read more of my MBA Perspectives

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