Third Eye

Protectionist economy is suicidal for the country

Tuesday, November 3rd, 2020 00:00 |
World Trade Organisation headquarters. Photo/Courtesy

Paul Ekuru  

Protectionism, simply put, is a practice undertaken by states to shield domestic industries from foreign competition. They do so primarily by taxing imports.

World Trade Organisation (WTO), however, frowns upon exaggerated tariffs.

Although WTO binds tariff thresholds, countries that believe in protectionism have continued to apply far higher tariffs than recommended. 

WTO 2020 tariff profiles show for instance, the US applied a 7.4 per cent tariff in 2019, exceeding its 6.1 per cent bound tariff; South Korea has 8.7 per cent against 7.2 per cent and China a 3.2 per cent against 2.9 per cent.

Mercantilist thinking— minimising imports and maximising exports to achieve a reasonable trade surplus— drives these states. 

Protectionist countries go to any lengths – they offer subsidies to domestic producers, manipulate their currencies, promote nationalistic consumption, and engineer solidarity economy.

This, however, turns out to be destructive to the very economy they seek to protect in the long term. Kenya should shrewdly shy from protectionist approaches. 

In 1815, the UK passed laws allowing imposition of tariffs and trade restrictions on grain imports such as oats, wheat and barley; ‘Corn Laws’ they were called.

About 30 years later, domestic manufacturers and consumers were feeling the long-term adverse effects.

It turns out the protectionist laws only benefited rich landowners as domestic prices of grain shot up due to ‘monopolised’ local production. 

Local manufacturers suffered lack of expansion due to low domestic purchasing power.

Citizens, industrialists and some lawmakers begun to protest these laws and by 1846, UK couldn’t sustain the long-term negative impact of the Corn Laws and repealed them.

Did the local producer– other than landowners - really benefit from the protectionist policy? Nay.

Did the local consumer pay more? Certainly. Did protectionism work for the country in the long run? Certainly not. 

In the US, Senator Reed Smoot and Representative Willis Hawley successfully sponsored the Tariff Act of 1930 that got President Herbert Hoover’s approval.

The law, which came to be known as Smoot-Hawley Act, greatly advanced protectionist trade polices in the US, which imposed tariffs on over 20,000 goods at that time.

US trading partners: France, Canada and Germany retaliated by imposing tariffs on US goods.

Canada for instance, raised import duty on 16 commodities that accounted for about 30 per cent of US exports to Canada.

World economists almost unanimously agree that Smoot-Hawley protectionism worsened the great depression. 

President Uhuru Kenyatta declared a ban on fish imports from China following an outcry from local fish traders in October 2018.

This, however, worsened already constrained local supply of fish. Kenya’s annual fish demand is estimated at 500,000 tonnes against an annual local production of just about 135,000 tonnes.

With a 27 per cent deficit, a protectionist policy that bans importation might seem enticing to local producers, but real economic challenge lies in substantial supply deficit, thus high prices on domestic fish, discouraging its consumption. 

In fact, the ban was unsustainable. It barely lasted three months before it was lifted in January 2019 for two main reasons; first, to address supply deficit and second, to fix a possible trade war between Kenya and China.

Local media reported China’s chargé d’affaires to Kenya, Li Xuhang viewed the ban as a threat to trade relations between the two countries.

So, would Kenya have really attained economic advantage from banning ‘Chinese fish’? You be the judge. 

Lastly, it is becoming clear President Donald Trump’s current ‘America first’ protectionist approach is hurting Americans more.

By placing a 10 per cent tariff on Chinese imports in February 2018, he made Americans pay $34 billion by August 2019 in retaliatory taxes, according to the International Monetary Fund.

This is nearly the total annual gross domestic product of half the countries in the world.

International trade dynamics are more sophisticated that relying on protectionist economic policies is almost suicidal for Kenya in the long term.

Instead, Kenya should boost her economy without putting domestic manufacturers, consumers, and farmers at risk.

Such approaches should include creating policies that address root cause of trade deficit in domestic manufacturing, pursuing competitive advantage in manufacturing but remaining open minded to alternative solutions and, actively filing anti-dumping complaints to WTO  to impose counterveilling duties to offending countries. The writer is a Media & Communications Strategist, an Obama Leadership Fellow — [email protected]

More on World