Questions Science and Education

How did economic nationalism affect trade in the world?

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Swati Jobin

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Economic nationalism is referred to the ideology which opts for state intervention over other forms of market mechanisms like with policies regarding domestic economic control, capital formation, labor and such. The ideology informs that these policies are chosen even at the cost of the imposition of tariffs and other such restrictions which affect the movement of goods, labor, and capital. This idea is thought to be a doctrine of mercantilism and favors protectionism. 

Some Examples of this are: 

  • Japan's system of picking winners and losers using the MITI system.
  • China's very controlled Yuan exchange.
  • Argentina's policy of devaluation and tariffs during the 2001 financial crisis.
  • The US's imposition of tariffs to protect domestic steel production. 

Internal effects of economic nationalism

Consumers who prefer local goods gives local producers a monopoly power which gives them the ability to increase prices to get more profits. Firms which produce these locally manufactured goods charge a premium for that. In the end, it is the consumers who end up being exploited by the profit-seeking local producers. An example is when America placed tariffs on foreign-made cars, which have local producers like GM and Ford market power to raise prices of their cars. This negatively affected American consumers who have fewer choices, but had to pay high prices for getting the choices they had. 

Effects on world trade

Even with all their problems, trade brings prosperity, encourages specialization and allocates money more efficiently than local ones can. This economic cooperations encourage security and enhance confidence. Economic nationalism is at its base, an urge to keep capital and jobs at home. It, in turn, changes the economic crisis into a very political one which threatens the world with depression and dire consequences. Some of the effects of economic nationalism are: 

  • Banking gets affected with cash being lent at home, and that leads to banks reducing overall lending, which leads to repatriating cash. This hurts the whole economy. 
  • This leads to world trade shrinking. 
  • Net private sector capital flows fall. 

Countries try to save themselves by monitoring domestic bank lending or prop up their banks, which often leads to deposits being sucked out of other countries, like what happened with Ireland and Britain. This leads to endangering each other. 

Coordination and forbearance are needed so that the stimulus plans are built around common base principles, even if they do differ in details. Embracing open markets is a necessity in these times. But along with this multilateralism is also needed and IMF along with development banks should step in to meet the shortfalls of the emerging markets. Such collaboration can save the world economy from a crisis. 

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