International Business

Management

Protectionism and its impact

on Developing Countries
Submitted to: Dr. P. R. Bhatt

Ankit Kumar || Mayank Choudhary || Shanya Rastogi || Abhinav Kamani

 INDEX
S.No Topic Page No.
1 Protectionism and its impact on developing countries 2-7

2 Sequence in protectionism 7-8

3 Economic aspects of globalization 8-10

4 Factors for the success and failure of globalization 10-12

5 M & A as an effective tool of globalization 12-13

6 Global environmental issues, safety norms, rules and 13

regulation
7 References 14

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 Protectionism and its impact on Developing Countries

Protectionism, in simple words, is a step or a series of steps where one country takes action
to reserve/preserve the resources for their own people and barring other countries to utilize
it. Resources can be in terms of land, human resource, human skills, and trade activities,
basically everything that belongs to them.
In political terms, protectionism is usually referred as trade protectionism. It is defined as a
nation, or sometimes a group of nations working in conjunction as a trade bloc, creating trade
barriers with the specific goal of protecting its economy from the possible perils of
international trading. This is opposite of free trade in which a government allows its citizens
to purchase goods and services from other countries or to sell their goods and services to
other markets without any governmental restrictions, interference, or hindrances. The
objective of trade protectionism is to protect a nation’s vital economic interests such as its
key industries, commodities, and employment of workers.

Various Methods of Protectionism

There are various methods of trade protectionism whose goal is to protect a nation’s
economic well-being. These include:
Tariffs which are a tax on imports from other countries and foreign markets. Here, the
government imposing the tariff is looking to restrict imports of foreign goods and services,
protect its own industries and companies manufacturing such items and raise tax revenues.
Tariffs could be specific in which there is a fixed tax rate or fee for each unit of a product or
commodity brought into a nation. There are also ad valorem tariffs which are set as a
proportion of the value of the imported product.
Quotas are a direct restriction on the number of certain goods, products, and commodities
that may be permitted to be imported into a nation.
Subsidies are government payments to domestic producers. This can come in the form of
cash payments, low-to-no interest loans, tax breaks, and government ownership of common
stock in domestic companies. Subsidies help domestic producers by having extra cash

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available for production of goods thereby lowering manufacturing costs and allowing these
same companies to gain foreign markets.
Local content requirements may be imposed by a nation seeking to decrease imports by
setting a manufacturing requirement in which a stated part or parts of a product must be
made domestically. This occurs by having a percent of a product manufactured domestically
or that in value terms, such as 85 percent of its value, must be made locally.
Administrative trade policies consist of bureaucratic rules, laws, and regulations
designed to create serious difficulties for an importer of goods or commodities into a
particular nation. Formal trade barriers can come in the form of onerous rules, regulations,
administrative requirements, and paperwork to be completed. Informal trade barriers include
the inspection of every product, good, and commodity entering a nation in order to check for
disease or suspicious content. This can take time, effort, and may often severely damage the
item being inspected. Administrative policies can also involve setting high-level health and
safety standards and difficult-to-obtain import licenses for foreign producers.

Antidumping policies are enacted by a nation in order to prevent the selling of goods in a
foreign market at a price far below their production costs in order to gain a substantial share
of that nation’s market. Anti-dumping rules can also include regulations prohibiting the sale
of goods, products, or commodities below its fair market value.
Exchange rate controls can be used to make a nation’s product cheaper abroad by
lowering the value of its currency in the foreign exchange markets. The premise is that a
nation can sell its currency in foreign exchange markets to the point where its loses value
against other currencies. This will cause the price of imports to rise while lowering the cost of
its exports. This will help a nation, whether developed or developing, increase the opportunity
to sell its products and goods in foreign markets.

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 Quotas

Exchange
Rate Subsidies
Controls

Tariffs

Local
Antidumpi Content
ng policies Requirem
Administr ent
ative
Trade
Policies

Why Protectionism Occurs?

There are numerous reasons why a nation would adopt a trade protectionist policy. They are
generally regarded as government intervention since it is a government that has control over
its borders and the flow of goods, products, and commodities in and out of a country.
They include:
Protecting jobs and industries is a political argument for trade protectionism from the
viewpoint that protecting worker’s livelihood and the industries and the firms that employ
them are vital to a nation’s economic growth and well-being. The premise is that without
trade protectionism a nation could lose long-established industries and companies that first
made a product in a particular nation. This will eventually result in the loss of jobs, rising
unemployment, and eventual decrease of a nation’s gross domestic product (GDP).
National security is used for trade protectionist policies since the industries involved
include defense-related companies, high-tech firms, and food producers. The argument here
is that industries such as aerospace, advanced electronics, and semi-conductors are vital
components of national defense policy and that relying on foreign manufacturers would
seriously affect a nation’s defense in time of war. By having manufacturing for defense items
protected from foreign competition, trade protectionism is necessary for a nation’s existence.

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Protecting consumers is an argument used by policymakers to protect consumers from
unsafe imported products. Consumer advocates, domestic manufacturers, and certain
policymakers claim that foreign-made goods may fail to follow requirements for product
safety in the manufacturing and distribution process. This could result in serious illness,
unsafe products, and even possibly death of the consumer. Domestic manufacturers argue
that if they must follow government-imposed safety and production requirements then
foreign producers must also do so.
The infant industry argument states that new manufacturers have an extremely difficult
time competing against well-established, well-funded, extremely profitable companies in
developed countries. New manufacturers in developing nations may not have the economic
and financial resources, as well as the technology, physical equipment, and research and
development expertise to compete against older, established firms. In order that infant
industries and new companies gain market-share and a competitive edge against well-
established firms, governments must put into place short-term support mechanisms for these
infant industries until they have reached a level so they can compete with foreign companies.
It can also be argued that a developing nation in attempting to diversify its economy, must
protect its infant industries. Government intervention of an infant industry may come in the
form of tariffs, subsidies, administrative trade policies, or quotas.

Protecting Growing
National Protecting
Jobs and Infant
Security Consumers
industries Industry

Effects of Protectionism

Protectionism has certain long and short-term effects on a nation’s macro-economy and often
the global economy. These effects include:

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Consumers’ limited choice and pay more for goods and services. A key effect of trade
protectionism is that consumers will have a limited choice of products and goods since there
may be quotas on how much may be imported. Due to these quotas, consumers will have a
very limited choice as to the quantity, quality, and type of product that would otherwise be
available to them without trade protectionism.
Settle for poor quality: Protectionist policies that intended to safeguard industries,
companies, and jobs actually mean that consumers are limited in the availability of products
and goods and may have to settle for poor quality instead.
Causing Inflation: Another problem that consumers will face is that they will have to
pay more for the limited quantity of goods and products, thus causing inflation to possibly
greatly increase.
Cost transfer to the consumers: If consumers have a limited choice, must settle for
lower quality, and pay more for a particular product, then they may either pay that amount,
purchase less of that product, or not make a purchase at all. Domestic firms may also be hurt
financially since they may have to purchase parts to make their products and then pass the
increased cost on to the consumer.
Exchange rate controls that causes long-term inflation since the domestic nation has kept
the value of its currency low. By having its currency decrease in value so that it can sell its
products and goods at cheaper prices in foreign markets, any foreign products sold in its
market will actually see prices increase. Consumers will be forced to pay higher prices for
goods, products, and commodities they need to survive. The problem is that a nation may
have a good intention of helping its industries be competitive abroad while its citizens pay
higher prices at home.
Infant industries may never grow up due to government trade protection policies. A nation
can use the policy of protecting its infant industry, but for how long is a key concern. The
protection of an infant industry may actually end up costing a government significant amount
of money and financial resources in order to protect its infant industry. This may actually
promote inefficiencies by the infant industry and have no incentive to make efficient,
intelligent, long-term investments by borrowing funds or issuing common stock from the
domestic international capital markets. This type of protectionism may hinder the growing
pains and maturation process that are vital for an infant industry to experience in the short

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and long-term if it is to be successful and competitive in global markets and eventually have
a comparative advantage.
A trade war among nations. A serious problem with trade protectionism is that nations will
take reciprocal action if there are trade protection policies put into effect. The problem here
is that nations will retaliate if they cannot sell their goods and products in markets where they
normally could. No matter if those nations are political and military allies, nations will impose
countervailing tariffs, quotas, subsidies, and exchange rate controls, to name a few, in order
to deal with another nation’s actions. For example, the United States and Japan, long-time
allies, both politically and militarily since the end of World War II, have invoked tariffs and
administrative trade policies against each other. This has ended up costing the consumers of
the respective countries billions of dollars in increased costs and limited consumer choices. A
trade war will ultimately mean increased import costs as manufacturers and producers must
pay more for equipment, commodities, and intermediate products from foreign markets.
While some economists and policymakers feel that trade protectionism will help a nation’s
economy, many others feel the damage could be severe. For example, Willem Buiter, chief
economist at Citi stated that trade protection policies could cause a global trade war “which
could easily trigger a global recession.”

Sequence in Protectionism
Protectionism comes into picture when a financial crisis is experienced. Trends show that
after 2008 financial crisis worrying indications of protectionism is on the rise. We can see that
Agricultural support to the OECD economies, FDI and Services supplied through local
establishment appear to be moving in a positive direction, Tariff liberalization is getting
stringent. Trends have shown that protectionism vary widely between the international
institutions and independent analysts. Protectionism has two cores
1. Discrimination of foreign economic operators.
2. Trade Restriction.
Protectionism has been rising through the following measures.
Trade Negotiations effect on Tariff: In the 21st Century economies maintain tariffs in order to
use them as bargaining chips in ongoing and future trade negotiations. As the trade
negotiations take long time it’s prevents tariff liberalization. It also seems that bilateral and
regional trade negotiations also done have any significant effect on tariffs.

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Increasing Non-Tariff Barriers: In the recent years Non-Tariff Barriers have shown increase in
protectionism. Economies resort to such barriers because they are easy to get away with.
Developments with respect to subsidies, domestic content requirements and public
procurement are particularly worrisome from this perspective.
Currency Manipulation: Devaluing of the currency has been major reasons for protectionism.
Suspected currency manipulation has been seen in US-China trade relations for some time.
Barriers to data flow: Rising Barriers in data flow threatens the fragmented global digital
economy and raise the cost of goods and services that depends on Data Flow. More and more
restrictions are put to place. Due to these restrictions trade is being affected in a negative
way.
Global Value Chain Perspective of Protectionism: Protectionism affects in the flow off goods,
services, investment, manpower and data. Increasing trend in protectionism has resulted
growth in barriers for trade which resulting in accumulating cost for firms and influencing
their decision about doing an investment in that market or not. In recent years, however a
more realistic perception of business reality and trade has emerged i.e. being faced by the
trade community.
Barriers in flow of Knowledge. The spread of knowledge and technology is potentially the
most important force of economic development. But, the barriers in the cross-border flow of
knowledge and technology could prevent the economic progress. As we can flow of data has
also been cause for the Increasing barrier in the flow of knowledge.
In the above barriers we have seen that increasing trend in protectionism. The rise in
protectionism had caused a major hindrance in the economic growth. The countries that are
majorly part of this rise in protectionism is the G-20 countries, the major players are China
and U.S. which are increasing its barriers for trade.

Economic aspects of globalization

Globalization is a process of global, economic, political and cultural integration. It has made
the world become a small village; the borders have been broken down into countries. Thus
the aspect of globalization on economy is as follows: -
Boosted output in the economy-
1-Enabled firms to specialize, to increase the intensity of R&D, innovation and capital in
their output.
2-Fresh competition in terms of new companies to start competing with old incumbents.

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3-Increase in employment
Increase in household income-
1-Reduced inflation rates in western economies.
2-Increase in real wages by lowering the cost of consumption
3-Increase in affordability of products like mobile phones which is now common in most
households.
New opportunity to people and economies-
1-Spread of new technology that helps in making economies more productive.
2-Reducing gender wage discrimination and giving new opportunities to women.
3-Improved the quality of management in firms and the working conditions for people.
Now, however there is a new anxiety running through western societies that challenges
previous perceptions about freer trade as a win-win for every country. There is rather a
suspicion that globalization may have been great for some countries but not for others.

According to U.S President Donald J Trump,” other countries have taken advantage of
America” so these types of opinion has created an atmosphere of doubt about globalization
delivering better living standards to people in western economies. Similar arguments arise
in case of China’s remarkably fast trade growth since the late 1990s and it concludes that it
has raised living standards in China during the period from then to now but it hollowed out
the manufacturing sector in Europe and North America. For some that is also the main
source of political anger in the West. Recent revolts in European and American elections
have been the way for “the losers of free trade” to avenge the faults of the “pro-
globalization establishment”.

There are deep flaws in this view of Globalization-First the economic pattern do not support
skepticism about the benefits of trade and cross border investment while open economies
are always subject to new competition and structural changes that affects firms and jobs the
flip side of the coin is that the same economic processes create a lot of new jobs and
business opportunities, and ultimately improve the living standards. Moreover, the new jobs
that are created tend to be better rewarded and come with better working conditions. New
output is often greener and thrive on new technology, leading to positive change also
outside the economy.

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The main conclusion is that fast increase in global trade in the three decades before the financial
crisis has improved Western economies and the living standards of their citizens. Globalization was a
great force of spreading new technologies and providing new economic opportunity to labour in
both developed and developing economies. Contrary to much commentary, it helped to put a higher
premium on human capital and giving firms new chances to employ the staff they need to compete
successfully.

Since the crisis, however, globalization has stalled – and global trade has become a casualty
of increasing protectionism around the world and the weak macro-economic performance
of the West.

Factors for the success and failure of globalization

As protectionism is rising the world over there are there are three keys that need to be understood
for successful globalization apart from the obvious benefits like open trade, capital flows to
developing countries, movement of people and spread of knowledge and technology:

Start with Strategy, not Tactics

Any decision to go global must start with developing a long-term action plan that aligns corporate
vision, mission, and activities and leverages corporate strengths while identifying opportunities in
desirable and compatible markets. It’s about strategy, not tactics. Unfortunately, due to a lack of
international experience, business executives gravitate toward what they are most comfortable
with: tactics - actions in a vacuum without a well-conceived conceptual framework. In this case, the
lack of strategic direction led to a market choice based on bad assumptions. Latin America is not a
homogeneous continent and Venezuela, for example, has little to no similarity with Mexico. Latin
America is a conglomeration of vastly different countries, each with diverse markets that offer
unique opportunities that must be understood at a local level before any tactical issues can be
properly addressed.

Understanding the culture

A clear understanding of the target market is required in order to achieve success in globalization
such as relating to actual consumers, their culture, needs and buying habits. Questions like who is
the target audience? Was it the younger generation, the aging professionals or the affluent? Need to
be considered. The lack of an identified target audience is important to create a persuasive sales
pitch and communicate with future consumers. Also, without identifying a target audience, key

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decisions that deal with the competition, marketing and pricing were made in a vacuum with no
basis in facts or circumstances.

Identify your competitive edge

By definition, a competitive advantage refers to the manner in which a company distinguishes itself
to gain market share and establish both a niche and a customer base. A competitive advantage is
achieved when a business markets a product or service in a manner that allows it to truly connect
with customers and outperform its competitors. Without a competitive advantage, businesses
struggle to gain traction, and they often resort to selling their products or services based solely on
price. This approach ultimately leads to slashing costs and other non-value-added measures

Failure of globalization-
Since the global financial crisis and the Eurozone crisis there has been closing of borders both to
trade and to immigration. The crisis of confidence in the benefits of globalization and multilateralism
likely will persist as long as rates of social and economic inequality remain stubbornly high.

Also rising Protectionism can have a siren-like appeal. So a better course of action could be to learn
from the experience

 From a U.S. standpoint, we should work to reduce remaining foreign trade restrictions that
impair our ability to capitalize on our comparative advantages. For example, market access
restrictions can mean that certain U.S. industries cannot realize their full potential. Similarly,
weaknesses in the protection of intellectual property rights limit the ability of U.S. producers
to realize the full returns from their investments. This lowers profits and diminishes
incentives to grow the business and employ more workers.
 To enhance the benefits of free trade and better manage its costs, it is critical to strengthen
the global rules-based system. WTO’s recent Trade Facilitation Agreement, which addresses
customs procedures and could reduce global trade costs by almost 15 percent. But, at a
broader level, the momentum behind global trade reform has clearly waned in recent
years.
 Maintaining information in unnecessary jurisdictions creates a barrier to entry for many
smaller firms and slows innovation by way of machine learning with the ability to transform
fields like financial inclusion which are central to reducing inequality. A major hurdle to
reducing data localization is formulating a global framework for managing data privacy
issues. The EU–US Privacy Shield is already providing a structure for the United States and

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 Europe, but officials need to focus on building a framework that includes far more of the
global economy.
 The IMF can and should do more to hold countries accountable. A multilateral approach to
addressing imbalances will be far more effective and less draconian than any unilateral or
regional solution. And additional reforms to the international trading system are needed,
including faster resolution of disputes between countries, increased transparency, and
improved technical assistance to developing countries

To conclude Protectionism and a retreat from international cooperation is clearly not

the answer, but policy makers minimize the underlying mistrust of globalization and
multilateralism at their peril. In order to promote sustainable and inclusive growth,
policymakers must focus on tangible changes that are responsive to the challenges we face.

M&A as an effective tool of globalization

Developing countries are highly weaved into global value chains, at the top of which are
firms from developed nations and, increasingly, from emerging economies. With the ambition
of enhancing the cost-effectiveness and improving productivity, large and medium-sized
companies have increasingly been specializing production processes since the 1990s. In order
to participate in global trade, companies from developing countries must split the generalized
work into individual tasks within global supply chains instead of attempting to produce entire
products themselves. Hence, an upward spiral in tariffs between the United States, the EU or
China would have a net negative impact on developing countries, injected through the supply
chains. This is because products manufactured by European and Chinese firms that can no
longer be sold on the US market also contain intermediate products from developing
countries like Mexico, India, Vietnam or Brazil.

Further, companies will need to display flexibility and fluidness to cash in on opportunistic
deals arising from emerging economic and political events like “Brexit”, the recent US
election, and the referendum in Italy. While it is too soon to estimate and/or quantify the
impact on M&A form such events, there is no doubt that the status quo of global companies
will be questioned to a significant degree.

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Below are the three common themes in M&A:
 Stronger appetite for cross-border M&A in key deal corridors is primarily driven by
revenue growth and access to new products and channels.
 Commercial and operational diligence, along with a thorough understanding of tax,
regulatory, and political risks, are imperative to cross-border deal success.
 Early and focused integration planning has an outsize impact on overall deal success.
Below are the top strategic deal objectives why a company uses cross-border M&A
 Portfolio Diversification: 50%
 Favourable Regulatory Environment: 40%
 Cost Synergies: 35%
 Scale efficiencies: 29%
 Acquiring Intellectual Property: 27%
 Access to new talent: 25%
 Adding Distribution Networks: 25%
 Adding Production Capacity: 25%

Global environmental issues, safety norms, rules and regulations

Since the Paris climate deal in 2016, emerging economies have also been focusing on reducing
emissions. Protectionism would lead towards escalated trade wars which in turn hinder the
progress of developing economies in carbon reduction. Protectionism would only delay the
transfer of advanced technology in production processes. For instance, Indian companies use
10MW of energy to produce certain amount of cement. To produce the same amount of
cement, German companies use 4-5 MW of energy thus making them environmentally
sustainable. Trade wars would result in the delay of transfer of such useful technologies.

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References-

Link1-https://www.theguardian.com/commentisfree/2017/apr/21/protectionism-is-
rising-the-world-over-our-best-defense-is-fighting-inequality

Link2-https://www.industryweek.com/global-economy/3-keys-successful-globalization

Link 3-https://www.newyorkfed.org/newsevents/speeches/2017/dud170511

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