Both China and the United States have been gradually increasing the tariffs imposed on each other's exports as their trade dispute continues - Edexcel - A-Level Economics A - Question 7 - 2022 - Paper 2

An increase in protectionism, particularly through higher tariffs, can lead to several significant impacts on the global economy:

Higher Prices for Consumers

Due to the imposition of tariffs, prices for consumers are likely to rise. When tariffs are placed on imported goods, the cost incurred by domestic producers might lead them to increase their prices. For example, in the UK, the price of goods that cannot be produced domestically, like bananas, is expected to increase, contributing to overall inflation.

Reduced Competition

As domestic firms face less competition from abroad due to tariffs, they may increase prices further, limiting choices for consumers. This scenario can particularly disadvantage consumers who depend on imported goods.

Export Dynamics

With increased tariffs, a number of firms may reconsider their export strategies. Increased bureaucracy and compliance costs can dissuade firms from exporting, thereby reducing global economic activity and consequently impacting global GDP negatively.

Comparative Advantage and Productivity Reduction

Protectionism can reduce countries' comparative advantages. This may lead to lower productivity as countries might focus on domestic production instead of specializing based on their strengths. Ultimately, this shift can negatively affect economic output and efficiency on a global scale.

Variability based on Tariff Levels

The impact varies based on the actual levels of tariffs implemented. For some countries, the effects might be temporary trade barriers leading to short-term trade disruption without long-lasting negative consequences. In contrast, others might experience more profound impacts depending on their reliance on global trade.

Role of Global Institutions

International organizations, such as the WTO, often play a crucial role in mitigating the adverse effects of protectionism, encouraging countries to abide by international trade agreements that ensure fair trade practices.

Conclusion

In conclusion, while primary intentions behind protectionist policies include safeguarding domestic industries and jobs, the overarching effect results in increased prices, limited consumer choices, reduced global trade activity, and a decline in overall economic productivity. The complex interdependence of global economies means that the repercussions of heightened protectionism will likely reverberate across national borders, influencing global economic dynamics.