Why in the News?
In 2025, the United States’ imposition of a 25% tariff on imports from Canada and Mexico, along with a 10% tariff on Chinese goods, exemplifies modern beggar-thy-neighbour policies.
What is Beggar-Thy-Neighbor Policy?
- Beggar-thy-neighbor policies refer to protectionist economic policies in which economic strategies are adopted by a country to improve its own economic situation at the expense of other nations.
- These policies often involve protectionist measures such as tariffs, quotas, or currency devaluation, which can lead to negative repercussions for trading partners. For example, recently the USA imposed tariffs on China.
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What are the positive implications of this policy?
- Domestic Economic Boost: Proponents argue that these policies can stimulate the domestic economy by protecting local industries and jobs. For example, tariffs on imports can encourage consumers to buy domestic products, potentially reducing unemployment in key sectors.
- National Security: Supporters often cite national security concerns, suggesting that certain industries need protection from foreign competition to maintain a robust domestic economy.
- Encouragement of Exports: By depreciating the national currency, a country can make its exports cheaper and more competitive in international markets, which is believed to enhance demand for domestic goods abroad.
What do the critics say?
- Global Economic Decline – The U.S.-China Trade War (2018-Present) illustrates how protectionist policies can escalate into retaliatory actions.
- The U.S. imposed tariffs on Chinese goods, prompting China to retaliate with its own tariffs, disrupting global supply chains and reducing international trade volumes.
- Higher Consumer Prices – The U.S. Tariffs on Steel and Aluminum (2018) under Section 232 increased production costs for American industries relying on these metals, such as automobile and construction sectors.
- A study by the Federal Reserve found that these tariffs cost U.S. consumers and businesses over $1.4 billion per month.
- Historical Warnings – The Smoot-Hawley Tariff Act (1930) in the U.S. significantly raised tariffs on imports, leading to retaliation from trading partners like Canada and European nations.
- This contributed to a sharp decline in global trade and worsened the Great Depression. Global exports fell by nearly two-thirds between 1929 and 1934, demonstrating the adverse effects of widespread protectionism.
- Reduced Innovation and Efficiency – India’s License Raj (1947–1991) is a prime example of how excessive protectionism stifled innovation. The heavily regulated economy limited foreign competition, leading to inefficiencies, outdated technology, and slow economic growth.
- Post-1991 economic liberalization, which reduced trade barriers, spurred competition, efficiency, and innovation across various industries.
Which countries use this policy?
- U.S. Tariffs and Trade War – Under the “America First” policy, the U.S. imposed tariffs on $250 billion worth of Chinese goods in 2018 to shield domestic industries. In response, China introduced retaliatory tariffs on U.S. products, escalating a trade war that disrupted global markets.
- China’s Currency Policies – China has been accused of currency manipulation to maintain trade advantages. In 2019, the U.S. Treasury labeled China a currency manipulator after the People’s Bank of China allowed the yuan to depreciate, making Chinese exports cheaper and imports more expensive.
- Japan’s Currency Interventions – To boost exports during economic stagnation, Japan’s central bank has weakened the yen through market interventions. While this makes Japanese exports more competitive, it raises import costs for domestic consumers and affects trading partners negatively.
- Germany’s Eurozone Trade Advantage – Germany’s strong export-driven economy, supported by fiscal discipline and manufacturing strength, has been seen as creating imbalances within the Eurozone. During financial crises, weaker European economies struggle to compete, intensifying economic disparities.
Does India use this policy?
In recent times, India has indeed engaged in practices that can be characterized as beggar-thy-neighbor policies, particularly in the context of trade and economic strategy.
- Tariffs on Imports: India has imposed tariffs on various goods to protect its domestic industries.
- For instance, in 2018, India raised import duties on a range of products, including electronics and agricultural goods, to encourage local manufacturing and reduce reliance on foreign imports. Such measures can be seen as attempts to bolster India’s economy at the expense of exporting countries.
- Restrictions on Chinese Imports: Following geopolitical tensions, India has implemented stricter regulations and tariffs on imports from China.
- This includes bans on several Chinese apps (like tiktok) and increased scrutiny of Chinese investments.
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Way forward:
- Balanced Trade Policies: Countries should adopt a mix of strategic protectionism and open trade to safeguard domestic industries while preventing trade wars.
- Strengthening WTO mechanisms and engaging in fair trade negotiations can ensure economic stability.
- Focus on Competitiveness: Instead of relying on protectionist measures, nations should invest in innovation, skill development, and infrastructure to enhance global competitiveness, ensuring sustainable economic growth without harming trading partners.
Mains PYQ:
Q What are the key areas of reform if the WTO has to survive in the present context of ‘Trade War’, especially keeping in mind the interest of India? (UPSC IAS/2018)
