The Seen V/S the Unseen

– This article was originally published by Ankshita Chaudhary in the Himalayan Times on the March 03, 2019.

In the face of concerns over the surging imports, increasing trade deficit and flow of alleged substandard foreign products in the domestic market, the GoN is coming into terms to implement protectionist policies and measures as a way of ‘saving’ domestic jobs and enterprises. It is set to curb the import of goods, in a move to rein in cheaper imports and to guard the domestic players from unfair trade subsidies, by introducing anti-dumping and countervailing measures for contingency trade remedies.

The most common reasoning posed in favor of protectionism is the displacement of domestic industry. The premise is that without trade protectionism, the country could lose its existent industries against long-established, well-funded companies from developed countries. This incidence will eventually result in the loss of jobs and a subsequent rise in unemployment. Likewise, it is held that infant industries need some protection from the power of already established competitors to be able to grow and to achieve economies of scale.

Moreover, the tariff duty is expected to correct Nepal’s ever-widening trade deficit. According to Nepal Rastra Bank’s current macroeconomic report, the country’s trade deficit has increased 32.1 percent to Rs. 678.53 billion in a span of six months. The country’s import bill surged 30.5 percent to Rs. 723.94 billion over the period. Another strong argument used by policymakers is to protect consumers from unsafe imported products as the foreign exporters may fail to comply with the requirements for product safety in the manufacturing and distribution process.

These typical arguments for protectionism are accurate in that they identify interests of those who gain from the protectionist policies but they do so while ignoring those who lose. These policies may do good for a handful of industries at the cost of welfare of 30 million Nepalese. Though protectionism may benefit (at least in the short run) domestic industries by reducing competition from abroad, the economic harm done by it is nonetheless real and identifiable.In economic terms, the problem is that of the seen and the unseen. There is only one winner from protectionism- the domestic industry- while the losers are many.

The Nepalese Consumer

These protectionist policies envision to safeguard industries, companies and jobs but essentially, hurt the consumers as these measures limit the availability of commodity choice and in some case, force the consumers to settle for poor quality instead. Also, consumers may be coerced to pay more, purchase less of that product or not make a purchase altogether. Therefore, these protectionist measures come out to be a tax on all those consumers who purchase a product manufactured by the protected industry.

Export Industries

Protectionism will harm Nepal’s exporting industries because of the possibility of retaliation from other countries. If Nepal applies tariffs to its exporting partners, there is no guarantee that the same countries will not reciprocate such counter-intuitive forces. The recent US-China trade war is an example where the Chinese government retaliated against the hefty tariffs levied by the American government which not only affected these two giant economies but also led to global repercussions.

Import-related and Import-using Industries

Similarly, protectionism drives up the cost of production for industries that use imported products. A reduction in the supply of those imported products will ultimately escalate the cost that the manufacturers must pay for the same equipment, commodities and intermediate products in the domestic market that could otherwise have been imported at a lower cost.

Unspecifiable losses to the economy

Due to protectionism, consumers are left with less purchasing power. For instance, if the tariffs on steel and aluminum increase, the consumers will have to pay more for automobiles and homes. This means that the consumers’ overall market basket of goods will be smaller and they will have less to spend elsewhere in the economy. These are the truly hidden cost of protectionism that reduce the living standards for nearly everyone, except those who have invested in, or work for the protected steel and aluminum industry. Moreover, the overall productivity of the economy will decrease as the home industries will exploit greater resources while the same resources could be utilized to build Nepal’s comparative advantage in another sector.

We often hear and see that the domestic market is displaced due to ‘unfair’ competition from abroad. However, we fail to hear from and see the new job or business created by injecting the amount that is effectively saved from the low-cost foreign product in the economy. Countries that institute protectionist policies lose the economic gains achieved through a combination of comparative advantage, specialized learning, and economies of scale.Therefore, the Nepal government should resist calls for protectionism and instead pursue further trade liberalization.