The Pros and Cons of Protectionism in Manufacturing

 

 

With the global economy experiencing severe socio-political economic disruptions over the past few years — such as the COVID-19 pandemic, the U.S.–China trade war, and the instability in the UK due to Brexit — government-imposed trade protectionist policies and theories have been causing manufacturers to scramble to amend their supply chain strategies. Global manufacturing supply chains may need to succumb to economic nationalism as they face the end of globalization.

Although these policies have technically been designed to protect the economy from the dangers of international trading, a lot of people believe protectionism in manufacturing is problematic for the U.S. manufacturing industry.

Trade protectionism was designed to boost domestic manufacturing by restricting trade, thereby improving the job market. Some of its policies, however, include eyebrow-raising aspects such as import tariffs, import quotas, import and export licenses, domestic subsidies, localization requirements, administrative trade policies and barriers, antidumping policies, exchange rate controls, and even a trade war and retaliation among nations. For example, the U.S. and Japan have long put up tariffs and administrative trade policies against each other, costing billions of dollars in increased costs and less consumer choice.

Protectionism in Manufacturing: The Pros

There are some people, however, who feel protectionism could be a good thing. They say there is a need to protect local domestic manufacturing jobs from cheaper products coming into the market from competitors. They feel that the policies included in protectionism restrict trade between countries in order to promote fair competition and to strengthen the domestic manufacturing industry by making it more competitive, creating additional domestic manufacturing jobs, helping the nation recover from an economic slump, and protecting its economic interests like its key industries, commodities, and employment rates.

Another pro of protectionism is protecting consumers from unsafe imported products coming in from countries who do not have the same high standard of production requirements and government-imposed safety regulations for manufacturers that America does.

In addition, some economists believe that mobility of capital around the globe gives us less of an advantage since it can just move to wherever costs are lowest. They also purport that almost all of the developed countries in the world have successful protectionist programs. The U.S. auto industry, for example, has benefited from protectionism for decades and is still thriving, despite cheaper competition from other mega car manufacturing countries such as Germany or Japan. Some may argue, however, that this success is not due to protectionism but to the American car industry’s better quality and top-notch marketing.

Protectionism in Manufacturing: The Cons

Although there are arguments on both sides, most people seem to agree that protectionism is harmful, outdated, and the biggest threat to global supply chains. Indeed most argue that the cons far outweigh the pros in the long run. Years of economical and empirical studies and theories show that free trade is better than protectionism, and, in 2009, the G20 countries committed to rejecting protectionism.

Free trade stimulates economic growth and wealth creation. The benefits include a higher level of domestic goods consumption and more efficient use of natural, human, and economic resources. In contrast, the effects of trade protectionism include limited choice for goods and services, not to mention higher prices. Limited choice means that consumers will either settle for lower quality, pay more for a product, or decide to buy less of that product — or to not buy at all.

Rising tariffs on raw materials needed for production make companies less competitive domestically since they will have to substantially raise prices in order to survive. Some companies — such as Harley Davidson and Mid Continent Nail Corp — have felt that they have been forced to move their businesses, or parts of them, out of the U.S. so that they won’t have to deal with the protectionist trade policy’s possible impacts.

Protectionism in Manufacturing: Challenge Accepted

Many companies are already in damage control mode, opting not to wait until the effects of protectionism are felt, such as loss of time and revenue, reduced performance, and a lag in global competitiveness. They’ve already starting thinking of the best ways around protectionism in order to keep their companies afloat.

Solutions include looking into 3D printing, which allows companies to be flexible in localized production. They’ve also started building local supply chains that can also help local domestic businesses. Logistics options such as supply chain design software and programs that simulate disruptions and provide cost-effective solutions, strategies, and contingency plans to worst-case what-if scenarios can also help to combat the economic effects of protectionism.

Image Credit: whiteMocca / Shutterstock.com

SOURCE:   Thomas Insights

Related posts

Leave a Comment