GLOBAL FINANCIAL CRISIS 4
Indeveloping countries, the call for protectionism is greater duringeconomic contractions compared to economic expansions. Protectionismentails the use of tariffs to control the amount of imports. Suchtariffs entail increasing the tax on imports to increase the price ofproducts or by placing other restrictive laws stipulating importrequirements and lengthy procedures. Such strategies act as disincentives and barriers to entry of foreign products. The strategyis used to protect the young and inefficient industries in developingcountries from external competition. Developing countries postulatethat the importation of cheaper products from developed countriesposes the risk of failure to their industries and the loss ofemployment opportunities to citizens (Hill, 2015).
However,the strategy of protectionism seems ineffective since developingcountries encourage inefficiencies in their industries by reducingcompetition. Such inefficiencies result into the exploitation oflocal buyers who would prefer lower prices during the economiccrisis. Consequently, the strategies contribute to persistentdepressions such as the great depression that occurred in 1930’s(Hill, 2015).
Incontrast, developed countries do not raise trade barriers duringeconomic slowdowns. Instead, they provide subsidies to theirproducers and enable them to lower the costs of production.Consequently, developed countries protect their producers fromfailure and safeguard the employment of their nationals. Owing to thereduced cost of production, factories from developed countriesimprove their production efficiency. Therefore, they can maintain thecompetitiveness of their products in the international markets (Hill,2015).
Thetreaties formed by the World Trade Organization (WTO) caused themodest increase in protectionism during the sharp economiccontraction in 2008-2009. The agreements restricted the ability ofgovernments to increase the barriers to international trade in theeffort of protecting their domestic markets. However, the behavior ofseveral countries during the economic contraction indicated that theydeveloped indirect barriers to international trade (Hill, 2015).
TheWorld Bank found evidence indicating that during the recessionaryperiod, several countries played around the imperfect nature of WTOrules to restrict the importation of products into their markets.First, Ecuador raised its tariffs on the importation of 600 products.Similarly, Russia increased the import duties on used cars. The caseof Indonesia best indicated a good example of an indirect tariff. Thecountry made deliberate rules that restricted the importation ofcertain commodities through specific ports. Since the selected portscould only handle a limited capacity of the specified goods, the lawsindirectly limited the ability of foreign companies to sell theirproducts in the Indonesian markets (Hill, 2015).
Similarly,Argentina placed flexible rules that laid down the importation andsale of goods into their markets. Besides, the government controlledthe issuing of licenses and strictly ruled that people withoutlicenses could not sell in the Argentinian market. Some of the goodsaffected by the law included cars, televisions and textiles. Chinarestricted the importation of drinks and food products from Europebased on environmental concerns. India, on the other hand, decidedto ban the importation of goods from China and based the action onsafety reasons (Hill, 2015).
Thevarious measures adopted by countries served as indirect tariffs torestrict the importation of certain goods during the recessionperiod. It is worth noting that the various protectionism measuresdecreased after the global economy recovered in 2010. In contrast,developed nations such as Canada, Italy, France, Britain, U.S.A, andGermany concentrated on subsidizing their local industries andincreasing their efficiencies (Hill, 2015).
Hill,C. W. (2015). Internationalbusiness: competing in the global marketplace (10th ed.).:New York, NY: McGraw Hill Education.