Chapter 2: The Rise of Protectionism and Its Consequences for Globalisation
“The world is too connected to cut itself off from others.”
— Kofi Annan, Former UN Secretary-General
In recent years, protectionism has made a dramatic return to global trade policies, challenging the principles of globalisation that have shaped international business for decades. The resurgence of protectionist policies, which include tariffs, import quotas, and subsidies, has raised significant questions about the future of free trade. This chapter explores the factors contributing to the rise of protectionism, its impact on global markets, and the subsequent consequences for international business strategies.
The Growth of Protectionism: Causes and Drivers
To understand the resurgence of protectionism, we must look back at the economic upheavals that led to its rise. Following the 2008 financial crisis, many countries found themselves grappling with economic stagnation, rising unemployment, and increased social inequality. As businesses and workers struggled, governments turned to protectionist measures to shield domestic industries from foreign competition. Protectionism was framed as a way to safeguard jobs, industries, and national economies from the global market’s volatility.
The election of Donald Trump in the United States in 2016 marked a turning point. Trump’s “America First” rhetoric encapsulated the growing sentiment against globalisation, which he claimed had led to the loss of American jobs, particularly in manufacturing. By imposing tariffs on foreign goods – particularly those from China – Trump sought to reduce the trade deficit, protect U.S. industries, and create more domestic employment opportunities. This rhetoric resonated with many working-class Americans who felt their jobs had been outsourced to lower-cost countries.
Similarly, other regions also embraced protectionism, including the U.K., which voted to leave the European Union (EU) in 2016, reflecting a desire to regain control over trade and immigration policies. Protectionism is no longer just a policy of one nation but a widespread global trend where countries like Brazil, India, and Russia have all adopted similar measures, heightening tensions within the international community.
As economist Dani Rodrik once said, “Globalisation can bring substantial benefits, but it is only sustainable if it is fair, and if its gains are distributed more equitably.” In many ways, protectionism is a response to the inequality that has become more apparent in the globalised world. While large corporations and high-income individuals have benefitted from globalisation, many blue-collar workers in advanced economies feel they have been left behind. Protectionism, therefore, serves as a way to address these disparities by focusing on domestic industries and job protection.
The Consequences of Protectionism for Global Business
The rise of protectionism has profound consequences for international business. One of the most direct effects is the increased cost of doing business. As tariffs and non-tariff barriers are imposed, businesses face higher costs for imports and exports. For multinational corporations that rely on global supply chains, these costs are not easily absorbed and often have to be passed on to consumers. According to the World Bank (2019), the U.S.-China trade war, for example, led to a 2.5% increase in the prices of goods globally, which disproportionately affected low-income households.
This video explains on how the EU retaliates against Trump’s steel and aluminum tariffs with €26 billion in countermeasures. President Von der Leyen denounces the “unjustified trade restrictions” imposed by the Trump administration, sparking a transatlantic trade war.
In addition to price hikes, protectionism also disrupts the flow of goods and services between countries. The imposition of tariffs creates uncertainty, forcing businesses to reconsider their international strategies. As companies like Ford, General Motors, and Toyota, which have a significant presence in both the U.S. and Europe, are finding out, protectionism makes it harder to move products freely across borders. Trade restrictions have led to higher operational costs, complicated supply chains, and delays in product delivery – especially in industries that rely on Just-in-Time (JIT) production systems.
A prime example of the impact of protectionism on supply chains is the automotive industry. In 2018, President Trump threatened to impose tariffs on European-made cars, citing national security concerns. The mere threat of tariffs caused a significant drop in the stock prices of major European carmakers, such as Volkswagen and BMW. This demonstrated how volatile global trade policies can destabilise entire industries. As the European Automobile Manufacturers Association (2020) highlighted, protectionist policies will lead to lower economic growth and lost employment opportunities, particularly in the automotive sector, which employs millions of workers globally.
Another consequence of protectionism is the shift in global investment patterns. Foreign direct investment (FDI) has historically been a driver of economic growth and development. However, protectionist policies discourage cross-border investments by increasing uncertainty and risk. Companies that might have considered expanding operations abroad are now hesitant due to the fear of tariff impositions or trade restrictions. This reduction in FDI limits access to new markets and slows down technological innovation and knowledge transfer, further isolating nations from the global economy.
The Counter-Movement: Resurgence of Free Trade Agreements
Despite the rise of protectionism, a counter-movement has emerged in the form of free trade agreements (FTAs) and regional trade partnerships. These agreements seek to reduce barriers to trade and promote economic cooperation among countries. For instance, the EU has been instrumental in promoting free trade within its member states, and it has also signed several trade agreements with non-EU countries to expand its influence globally. Similarly, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a trade pact involving 11 Pacific Rim countries, was signed in 2018 to foster economic integration and combat the growing protectionist sentiment.
“Press Conference for Countries Adopting an Anti-Protectionism Pledge at the WTO Ministerial Conference” by Eric Bridiers is licensed under CC BY 2.0.
The United States, under the Biden administration, has re-engaged in trade agreements such as the United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA). While the agreement retained some protectionist measures, it also aimed to modernise trade relations and promote fair competition between the three countries.
As the International Monetary Fund (2020) suggests, the future of global trade lies in multilateral cooperation. While protectionism might provide short-term relief, it is free trade agreements that enable nations to tackle common global challenges—such as climate change, digital transformation, and labour standards—while fostering economic growth. These agreements demonstrate that even amid rising nationalism, countries continue to find ways to collaborate and create mutually beneficial trade relationships.
Strategic Responses to Protectionism
In light of rising protectionism, businesses must develop adaptive strategies to remain competitive in the global marketplace. Market diversification is one key strategy. By expanding into new, untapped markets, companies can mitigate the risks associated with over-reliance on any one country or region. For instance, many U.S. manufacturers are increasingly turning to Mexico and Southeast Asia as alternatives to China for their supply chain needs. Vietnam, in particular, has become a popular destination for companies seeking to reduce their exposure to U.S.-China trade tensions.
Reshoring, or bringing manufacturing back to home countries, is another response to protectionist pressures. Companies like General Electric (GE) and Apple are investing in domestic manufacturing facilities to reduce dependence on foreign markets. However, reshoring comes with its own set of challenges, including higher labour costs and the need for skilled labour. Despite these challenges, reshoring is becoming an attractive option for businesses that want to minimise supply chain risks and strengthen their ties with local economies.
Technological innovation also plays a crucial role in helping businesses navigate protectionist barriers. Automation, artificial intelligence (AI), and blockchain technology can streamline operations, reduce costs, and improve efficiency, allowing companies to absorb the financial impact of tariffs and other trade restrictions. For instance, companies are increasingly utilising AI-powered analytics to manage supply chains more effectively, making it easier to predict disruptions and adapt quickly.
In conclusion, the rise of protectionism poses significant challenges for global business, but it also forces companies to rethink their strategies. While trade wars and tariff impositions threaten the foundations of globalisation, businesses that adapt by diversifying markets, reshoring production, and embracing technology can remain resilient in an increasingly fragmented global economy. The future of international trade will depend on how companies and governments respond to the growing tide of protectionism and whether free trade agreements can continue to foster international cooperation and economic growth.
References:
- Rodrik, D. (2017). The Globalisation Paradox: Democracy and the Future of the World Economy. W.W. Norton & Company.
- The European Automobile Manufacturers Association. (2020). “Trade Wars and the Impact on the Automotive Sector.” EAMA Report.
- IMF. (2020). “The State of Global Trade and Protectionism.” International Monetary Fund.
- Irwin, D. A. (2015). Against the Tide: An Intellectual History of Free Trade. Princeton University Press.
- Bown, C. P. (2018). The WTO and the US-China Trade War. World Economy, 41(12), 1-24.
