Anatomy of the Global Economy and Its Implications for Protectionism

By Sa’idu Sulaiman

Can protectionism, a major component of mercantilism which was practiced in Europe from 16th to 18th century, be well-suited with the global economy in the era of globalisation? This discourse examines the framework of the global economy in the context of advanced globalisation by citing relevant literature and then explains its implications for protectionism. It shows that the global economy is, among others, characterised by interdependence among nations which does not go well with protectionism, and concludes that the adoption of positive globalism and supplementing macroeconomic policies with globoeconomic policies could be more useful to the global economy.

 

Introduction

The global economy is the sum total of the economies of individuals, corporations and all nations in existence today. It is influencing the economies of individual nations and at the same time being influenced by macroeconomic policies of the individual nations and the economic policies of world bodies like the World Trade Organization, World Bank, International Monetary Fund, etc. Protectionism, a significant component of the 16th mercantilist economist system that emerged in Europe, is still being pursued to protect national economies from the perceived and real threats of globalism and international competition. It has repercussions for the global economy. The global economy too, as product of the forces of globalisation, has acquired certain features and components which define its anatomy and strengthens its influence on or reactions to protectionist policies. The goals of this article are examining the anatomy of the global economy in the era of globalisation and explaining its implications for protectionism.

 

Protectionism as an Essential Component of Mercantilism

To understand why protectionism is an essential component of mercantilism or economic nationalism, one needs to know the history mercantilism and its main characteristics and goals. Mercantilism became popular in Europe during the 1500s. It replaced the older, feudal economic system in Western Europe, especially in Netherlands, France and England. In England, the first large-scale and integrative approach to mercantilism was started during the Elizabethan Era (1558-1603). The most notable people in establishing the English mercantilist system include Gerard de Malynes and Thomas Mun, who first articulated the Elizabethan system which was developed further by Josiah Child. Mercantilism was the economic version of warfare that used economics as a means for warfare. It was a form of economic nationalism.1

Laura LaHaye, an Adjunct Professor at the Illinois Institute of Technology and former research economist with the General Agreement on Tariffs and Trade, writes that the means of achieving the goals of mercantilism include, among others, imposing high tariffs on the importation of finished goods that competed with local manufacturers, and low or no taxes on the importation of raw materials or exotic products. Other goals are imposing low or no taxes on the export of finished goods, and high taxes on the exportation of raw materials. The mercantile system, she adds, “served the interests of merchants and producers such as the British East India Company, whose activities were protected or encouraged by the state”.2 Mercantilism has advantages and disadvantages. It had a positive impact on Britain helping it to turn into the world’s dominant trader and global power. The Italian city-state of Venice, which monopolised the Mediterranean pilgrim and spice trades, prohibited the importation of finished products and forced all Venetian naval traffic to make a stop in Venice regardless of the cargoes final destination. This ensured additional economic activities within Venice and enriched it at its consumers’ expense.3

The first school of economic thought to completely reject mercantilism was that of the physiocrats, a group of French scholars led by François Quesnay (1694-1774).4 As advocates of laissez-faire, the physiocrats saw no distinction between domestic and foreign trade and believed that all trade was beneficial both to the trader and the public, in contrast to the mercantilists who perceived trade as a zero-sum game. Adams Smith, who is considered to be greatest critic of mercantilism, regarded the mercantile system as a gigantic conspiracy by manufacturers and merchants against consumers. He demonstrated that trade, when freely initiated, benefitted both parties and that specialisation in production allowed for economies of scale which improved efficiency and growth. He also pointed out that the collusive relationship between government and industry was harmful to the general population.5

A study that involved respondents from 33 countries across five continents investigated how the different characteristics of both individuals and countries determine peoples’ support for protectionism. Part of the results indicate that support for protectionism increases when inflation pressures become high despite the fact that trade liberalisation would rationally push prices down. The researchers’ conclusions, among others, are that the best way to overcome the pessimistic view about free trade is to increase peoples’ skills; more educated people are more likely to support free trade wherever they reside; and finally, supply of transparent information about trade restrictions, trade composition and the significance of export sectors and foreign markets might also reduce peoples’ support for protectionism.6

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The Anatomy of the Global Economy

As it has been rightly stated, the global economy is, presently, a very complex system that links people in different nations through trade and flow of goods, services and information. One of its features is interdependence.

The global economy has parts or causes that give it a form or structure; in other words, it has an anatomy or framework that characterises its form, direction and essence. As it has been rightly stated, the global economy is, presently, a very complex system that links people in different nations through trade and flow of goods, services and information. One of its features is interdependence. As national economies are increasingly being integrated through global trade, the economic growth of a given nation is also increasingly dependent on the economic welfare of its trade partners.7

In the current phase of globalisation, changes in policy and technology has brought vertical disintegration  of production in several industries while structural change in the global economy is increasingly connected to functional and spatial fragmentation  of production and consumption as well as their reintegration through trade. So trade in intermediate goods has grown faster than trade in final goods, leading to a higher degree in interdependence among national production systems and higher exposure to external shocks as depicted by the 2009 global crisis.8

The contemporary world, as D Keet explains, conceives the global economy in four different ways:

1. It is seen as an international economic system within which economies of individual nations rapidly being absorbed and disappearing because the economic system is characterised by porous borders and limited policy options that are losing viability and relevance.

2. It is seen as the sum of complex interactions between national economies.

3. The global economy is conceived as a complex combination of national economies or national economies within regional economies, upon which transnational economic agents and international institutions and regulations operate.

4. It is viewed as a dynamic combination of a distinctive supra-national global economy manifested by the independent operations of transnational economic agencies and actors which act upon and interact with the economies of individual nations and with regional economies.9

A good example of the interdependence among nations, which is salient in the anatomy of the global economy, comes from the production of the Boeing 787 Dreamliner which is creating significant new employment in a number of nations. The wings of the aircraft are made in Japan, the engines in the United Kingdom and the United States, the flaps and ailerons in Canada and Australia, while the fuselage is made in Japan, Italy and the United States. The horizontal stabilisers are made in Italy, the landing gear in France while the doors are produced in Sweden and France. The production of this aircraft involves 43 suppliers spread over 135 sites around the world collaborating and cooperating with one another for their mutual benefit.10

From what has been said, it is clear that economies of individual nations are now being absorbed into the global economy. It is further indicated that national economies are losing viability and relevance. The global economy, as depicted above, is characterised by interdependence and complex interactions between national economies and the global economy. The economy of France, for instance, interacts and is acted upon by the European economy, which is a regional economy and by the global economy and the international economic institutions such as the World Bank and the I.M.F. Macroeconomic policy in France could be less effective without the consideration of the influences of the European economy and the global economy.

The world will become more united in confronting poverty, illiteracy, malnutrition, global warming, terror and violation of human rights if it accepts positive globalism and shuns negative globalism which often serves as the basis for protectionism.

With the ever increasing forces of globalisation, achieving macroeconomic policy objectives by any single nation is becoming increasingly ineffective. Nations need to fashion out mutually beneficial globoeconomic policies that will also promote peace and understanding among them.  Globoeconomics is defined as the study of macro-economic variables and policies of a nation, region or the entire globe as they influence or are influenced by macroeconomic variables and policies of other nations or regions as a result of globalisation.11

Globalisation has been in existence for a long time though being manifested in different forms. It will never cease to exist. It will continue to influence economies of the world in both positive and negative ways. The global economy will prosper when world leaders and policy makers prefer positive globalism to nationalism. The world will become more united in confronting poverty, illiteracy, malnutrition, global warming, terror and violation of human rights if it accepts positive globalism and shuns negative globalism which often serves as the basis for protectionism. Positive globalism means showing love and concern for humanity in general and taking lawful measures to promote its wellbeing without any form of discrimination, while  negative globalism means surrendering the sovereignty of individual nations to an amalgam of a domineering authority or organisation seeking to control them through biased laws and regulations, evil plotting and machinations.12

 

The Implications

One of the main implications of the anatomy of the global economy for protectionism in era of globalisation is that there are little chances for protectionism to yield positive results to individual nations that that adopt it as trade policy, and to their trading partners in the global arena. Another implication is that the global economy, as it is now, is incompatible with protectionist policies because by restricting competition in production of goods and services, protectionism can be counterproductive and by reducing consumer satisfaction and standard of living. It can have negative repercussions on the quality of peoples’ lives.

Nations with infant and weak industries facing strong competition coming foreign firms should endeavour to deal with this obstacle through provision of facilities and capacity building for meeting the challenges that are inherent in free trade.

Geoffrey Garrett recently argues that free trade, which one can see as the opposite of protectionism, improves the living standards  of people because it lowers the cost of goods and services and produces economic winners and losers, and that compensating the losers, who are  few, concentrated workers that lost their jobs to foreigners, can be away of offsetting its negative effects. He further observes that rapid technological change coupled with economic stagnation in Middle America had caused more pain than free trade. So the biggest challenges for the Trump administration are increasing America’s growth rate and helping more Americans to benefit from the revolution in information technology.13

Protectionism can also spur misunderstanding and fan the embers of hatred among members of the international community. Nations with infant and weak industries facing strong competition coming foreign firms should endeavour to deal with this obstacle through provision of facilities and capacity building for meeting the challenges that are inherent in free trade.

 

Conclusion

Protectionism has been an essential component of the 16th century mercantilism which had been receiving support and criticisms since that time. The global economy is presently characterised increased interdependence among nations and by complex interactions between national economies and the global economy. With the features it has acquired due to the forces of globalisation, the global economy does not go well with protectionism. Nowadays the adoption of positive globalism and supplementing macroeconomic policies with globoeconomic policies could be more useful to the global economy than the adoption of protectionism or economic nationalism.

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About the Author

Sa’idu Sulaiman is a Chief Lecturer of Economics at the Sa’adatu Rimi College of Education, Kano, Nigeria. He is also an author of books such as 12 Facts about Protectionism and the Global Economy, 9 Requirements for Quality Research and Academic Papers, Unforgettable Experiences in Abuja, Manchester and London, two recent novels, The Desperate Migrant and What Matters Most.

 

References

1. Mercantilism. Retrieved on February 12, 2017 from https://en.m.wikipedia.org/wiki/Mercantilism
2. Laura LaHay (2008) Mercantilism. Liberty Fund, Inc. Retrieved on February 16, 2017 from http://www.econlib.org/library/Enc/Mercantilism.html
3. Mercantilism. Retrieved on February 13, from https://en.m.wikipedia.org/wiki/Mercantilism
4. Sulaiman, Sa’idu (2012) The Making of Economics: an Introduction to the History of Economic Thought. Kano: Samarib Publishers.
5. Mercantilism. Retrieved on February 12, 2017 from https://en.m.wikipedia.org/wiki/Mercantilism and Laura LaHay (2008 ) Mercantilism. Liberty Fund, Inc Retrieved on February 16, 2017 from    http://www.econlib.org/library/Enc/Mercantilism.html
6. Melgar, Natalia; Milgram-Baleix, Juliette and Rossi1, Máximo (2013) “Explaining Protectionism Support: The Role of Economic Factors” International Scholarly Research Notices (ISRN) Economics.Volume 2013 (2013),  14 pages. Accessed  of September 12, 2017 from https://www.hindawi.com/journals/isrn/2013/954071/
7. AAG Centre for Global Geography Education (undated) Global Economy Module: Conceptual Framework. Retrieved on September 11, 2017
8. Memedovic, Olga and Lapadare, Lelio (2009) Structural Change in the World in the World Economy: Main Features and Trends, Research and Statistics Branch Working Paper 24/2009. United Nations Industrial Development Organization. Retrieved on September 11, 2017 from    http://www.unido.org>Pub_free>Structrural_change_in-the_world_economy.pdf
9. Keet, D. 1999, Globalization and Regionalization: Contradictory Tendencies, Counteractive Tactics or Strategic Possibilities. (Braamfontein: The Foundation for Global Dialogue)
10. Organisation for Economic Co-operation and Development (2017) Why open markets matter OECD Direct. Retrieved on September 12, 2017 from http://www.oecd.org/trade/whyopenmarketsmatter.htm
11. Sulaiman, Sa’idu (2004) The Impact of Globalization on Macroeconomic Policies of Nations and the Need for the Adoption of Globoeconomics, unpublished paper.
12. See Sulaiman, Sa’idu (2017) 12 Facts about Protectionism and the Global Economy. Available at https://www.amazon.com/Facts-About-Protectionism-Global-Economy/dp/1544739036
13. For details, see Wharton School of the University of Pennsylvania (2017) Do Trade Agreements Lead to Income Inequality? Retrieved on February 6, 2017 from http://knowledge.wharton.upenn.edu/article/do-trade-agreements-lead-to-income-inequality/