How beggar-Thy-Neighbour Policies a threat to Global Trade

Sub : Eco

Sec: External policy

Why in News?

The term “Beggar-Thy-Neighbour” has gained renewed relevance amid growing trade tensions and currency devaluations, particularly between major economies like U.S. and China.

Context:

Beggar-thy-neighbour policies refer to protectionist economic measures that benefit one country’s economy at the expense of others.
Such policies can include high tariffs, strict import quotas, and currency devaluations.
Critics argue that global trade wars, often fueled by these policies, can cripple international commerce, leading to economic downturns like the Great Depression.

Economic Mechanism

These policies are adopted to protect domestic industries but often result in economic retaliation from other countries.
The most common examples include:
- Trade Barriers: Imposing high tariffs and import quotas on foreign goods.
- Currency Wars: Central banks depreciate domestic currencies to boost exports and discourage imports.

Historical Origins

The term was first introduced by Scottish economist Adam Smith in 1776 in his book The Wealth of Nations.
Smith criticized mercantilist policies, arguing that free trade benefits all nations, while protectionism only leads to economic decline.

Supporters’ Arguments

Protecting Domestic Industries & Jobs:
- Some industries require government protection for national security or to survive in their nascent stage.
Boosting Exports via Currency Depreciation:
- A weaker domestic currency makes exports cheaper and more competitive globally.
- Higher exports & lower imports can lead to a trade surplus, benefiting the domestic economy.

Critics’ Concerns & Global Impact

Risk of Trade Wars & Economic Retaliation
Tit-for-tat tariffs and devaluations often lead to a cycle of retaliation, reducing global trade.
The interwar period (1918-1939) saw widespread trade barriers and currency devaluations, worsening the Great Depression.
Recent Examples:
- China & Japan have faced accusations of currency devaluation to maintain trade surpluses.
- U.S.-China Trade War (2018-2020) saw heavy tariffs imposed by both countries, impacting global markets.

Impact on Consumers

Higher tariffs may protect domestic producers but increase prices for consumers.

Example: U.S. tariffs on Chinese goods helped American manufacturers but raised costs for U.S. consumers.

Currency devaluations can reduce purchasing power, making domestic goods more expensive.

Alternative Approach: Unilateral Free Trade

Some economists argue that retaliatory tariffs hurt the imposing country’s consumers.

Example: If the U.S. imposes tariffs on Chinese goods, China retaliating with tariffs on U.S. goods will further harm its own consumers.

Free trade proponents believe that avoiding retaliatory tariffs can allow one country to benefit from another’s protectionist mistakes.