Uncertainty, protectionism, and resilience

In the wake of the pandemic, and the fast-unfolding of the climate change crisis has basically brought into focus the cracks in the supply chains globally. Such cracks have been created at the back of neoliberal policy, which made a comeback over the last four decades or so.

Previously, similar policies were being practiced before the Bretton Woods system, and the New Deal policies, as so-called ‘sound economics’.

Under both ‘sound economics’ and neoliberal policies, division of labour, and comparative advantage have been practiced by the powerful countries to unduly gain the advantage of trade in their favour.

In doing so, they have made the world firstly divided into the ‘first world’, and the rest, not to mention the particular coming into being of the ‘third world’, which was non-existent before the era of colonization, since countries in terms of per capita income were not significantly different from each other as such. To maintain this order after colonization, neoliberal policies were introduced, although after some delay caused by New Deal policies.

Hence, policies were sugar-coated in a way that efficiency was increasing in global trade, while lack of regulation of markets under neoliberal policies meant rising inequalities, since higher living standards were only for the rich few. That stoked uncertainty over the years, especially under largely free movement of capital that played havoc with any long-term planning for increasing resilience, as it mostly worked on the principle of short-term profit signals.

Moreover, lack of any deep domestic industrial base, including import substituting industry in developing countries in particular, meant that increasing frequency of financial crises – which was a rarity before the perpetuation of the neoliberal-minded globalization, and domestic policy, which favoured largely unregulated capital – and the existential threat of climate change crisis, and the associated ‘Pandemicene’ phenomenon lay bare the fragility of global supply chains in a world of polycrisis and highly sub-optimal preparedness of countries during these times, as was highlighted amply during the Covid pandemic.

From agricultural commodities to medical equipment to vaccines, the neoliberal model of globalization came down crashing, especially as the application of ‘disaster capitalism’ saw price gouging. Hence, neoliberalism has increased uncertainty, both on account of lack of market creation that had a lot more profit fairness, and one that internalized the need for creating resilience, and not just mainly follow profit signals.

In addition, practice of ultra-nationalism, for instance, as evidenced from deep practice of ‘vaccine nationalism’, has exposed the underlying fragile nature of globalization that propounded division of labour, and comparative advantage as the most important principle to be upheld.

Hence, practice of neoliberal policies as a miscalculation at best – although economic history of the last few centuries glaringly brings out intentional practice of these so called ‘sound economics’ policies to make a few countries, and some vested groups within countries rich while the rest were pushed to sub-optimal economic development – has continued to perpetuate uncertainty.

While it is important as a sufficient condition to shift domestic policy focus away from Neoliberalism, it is necessary to create some reasonable level of protectionism by countries to bring down uncertainty, especially in these times of polycrisis, and also to safeguard against the lopsided practice of globalization that makes it difficult for the ‘third world’ to decrease the distance between countries in terms of per capita income on one hand, and also to create much-needed greater sustainable macroeconomic stability, and economic growth, by reducing the impact of external shocks.

Hence, the recent drastic steps of US President Donald Trump with regard to increasing tariffs could have been taken in terms of nuanced, and much more focused policy, which were more in line with the tariff enhancement related policies of the Biden administration.

Barring the pace and scope of application of greater tariffs to build local industry this, in turn, highlights a virtual across-the-board consensus in US political parties – that is both on the left, and right – for the need to have more protectionist policies.

An April 10, ‘The Boston Globe’ published article ‘Tariffs are dumb… right?’ pointed out in this regard the following: ‘One of the most important developments in American politics over the last decade – easy to forget amid all the outrage over Trump’s trade war – is the bipartisan turn to protectionism.The last president, Democrat Joe Biden, made substantial use of tariffs.

And while he wasn’t out to remake the global economic order – his levies were far more targeted than what we’re seeing now – he did share Trump’s desire to revive American industry.It’s a desire that animates much of Washington. And it would be a mistake to discount its staying power.’

Moreover, the same article rightly pointed out a much-needed case in favour of practice of carefully planned, well-targeted protectionism, which should all the more be a reference point of the developing countries, given the colonizers, the developed world of today, has already drawn a lot of advantage in terms of economic development by protectionism on steroids, and lopsidedness by mainly unilaterally adopting protectionism for themselves, and principles of so-called ‘sound economics’ for the colonies.

There is a need to bring in sensible level of protectionism, one that allows creating a much more sustainable environment for domestic production, labour conditions, and reaping the advantages of trade for everyone globally.

The article highlighted in this regard: ’Tariffs may look ill-advised today. But they could very well be with us tomorrow.The question is: Can they be deployed intelligently – or are they always a bad idea?…First, you levy tariffs on imports from the Americans and the Brits in a bid to carve out a domestic market for your own burgeoning automakers and steel mills. Then you subsidize these up-and-coming firms in the hope of turning them into genuine competitors on the world stage.

To American policy makers, this sort of meddling in the free market long felt unfair — artificial support, they said, for foreign competitors aiming to grab some of our global market share.But in recent years, they’ve started to see a place for industrial policy right here in the United States. …The pandemic demonstrated how fragile global supply chains can be. And with climate change upon us, large-scale disruptions will only be more frequent. Building up some industrial muscle is an important hedge against instability.’

Also, there is a lot more hue and cry being raised at the negative consequences of tariffs on trade volumes and economic growth, which are not well-founded, as it is important to correct the basis for trade and growth, by putting them on more resilient, and equality creating tendencies for the world, especially in a world of polycrisis.

This, in turn, will lower the level of uncertainty, which apart from addressing economic issues in both developing and developed world, will also help check the rising tendency of ‘economic migrants’ in developed countries, and not by whipping up Xenophobia by ultra-nationalist parties in developed countries, which leads to hate mongering, and also wrongly mainstreams fringe political parties, lowering, in turn, the overall level of democracy.

Yet, all the above seems to have been missed by multilateral institution like International Monetary Fund (IMF), when in its most recent April edition of its flagship report ‘World Economic Outlook’ (WEO), its economic counsellor, Pierre-Olivier Gourinchas in the foreword to the Report – although same message overall flows throughout the Report –apparently does not see on one hand the positive role a focused level of protectionism can play in reducing uncertainty and in enhancing resilience in countries, and, on the other hand, that the neoliberal-minded economic context has been unravelled by sub-optimal outcomes it has produced in creating frequent boom-bust cycles in developing countries in particular, and justified disgruntlement of labour almost everywhere, more specifically.

Also missed is the likely positive impact of focused practice of protectionism in reducing inequality, both within and among countries, and the further advantageous consequence it can have in reducing economic migration, and Xenophobia, and in overall strengthening democracy.

Sadly, the thought process of the economic counsellor is something which is in line with the thinking of the multilateral institutions in general, including the IMF, not to mention the ‘Chicago boys’-styled policymakers in many countries, who also uphold the same thinking.

In this regard, the economic counsellor indicated in the foreword to the Report that ’Shortly after the January 2025 WEO Update, the United States announced multiple waves of tariffs on major trading partners and critical sectors, culminating on April 2 with a set of nearly universal tariffs. While many of the scheduled tariff increases are on hold for now, the combination of measures and countermeasures has hiked US and global tariff rates to centennial highs.

However, the context for such increases is very different. Unlike in the previous century, the global economy is now characterized by a high degree of economic and financial integration, with supply chains and financial flows crisscrossing the world, whose potential unwinding could constitute a major source of economic upheaval.

The common denominator, however, is that tariffs are a negative supply shock for the economy imposing them, as resources are reallocated toward the production of noncompetitive goods, with a resulting loss of aggregate productivity, lower activity, and higher production costs and prices.

Moreover, in the medium term, by reducing competition, tariffs increase the market power of domestic producers, decrease incentives to innovate, and create multiple opportunities for rent seeking. For trading partners, tariffs constitute mostly a negative external demand shock, driving foreign customers away from their products, even if some countries could benefit from the rerouting of trade flows. These effects are magnified in the presence of modern complex global supply chains. Most traded goods are intermediate inputs that traverse countries multiple times before their transformation into final products.

Sectoral disruptions could propagate up and down the global input-output network in ways with potentially large multiplier effects, just as we saw during the pandemic.’

Hence, it can be seen that the thinking above is virtually reflective of that of an ostrich mentality – head in the sand, as for instance can be seen through the poor and rigid contextualization, and very limited understanding of protectionism, not to mention lack of internalization of an otherwise increasingly negative fallout of neoliberal policies during the last few decades, especially in the wake of Global Financial Crisis 2007-08, and the Covid pandemic.

This is because instead of increasing competition, upholding principles of comparative advantage, division of labour, efficiency, and market fundamentalism have virtually out-competed developing countries, and not allowed them to close the gap of economic development with developed countries, and has kept supply chains fragile, suffering also from sub-optimal allocation efficiencies; for instance, more investments went into face creams and the likes, instead of needed investments going into making vaccines during the last two decades before the pandemic, during which time coronavirus reappeared a number of times as an epidemic.

Also, frequent balance of payments issues – at the back of mainly developing countries suffering from an environment of increasing external shocks due to practice of neoliberal economics that upheld market fundamentalism, and unwarranted extent of neoliberal-minded globalization – have been witnessed by developing countries, which has also contributed to significantly increasing global debt, along with greater economic migration from developing countries to developed countries in search of better working conditions.

All this has increased uncertainty and diminished resilience, not to mention stoking ultra-nationalism in developed countries in particular.

Also, what good is the rule-based system of world trade when it is not creating a balanced environment, since the underlying rules are sub-optimal to start with, favouring supply chains for instance, which are very fragile in the shape of highly spread out production process globally, is not much mindful of working conditions, and is not ready for a world of polycrisis, especially given such crises include existential threats of climate change, and related ‘Pandemicene’ phenomenon.

Moreover, it needs to be understood by developed countries and multilateral institutions that relying on developing countries to continue to produce labour-intensive intermediaries for developed countries primarily – to overall achieve so-called efficiency but at the cost of paying labour cheaply, and in getting production for low-level labour working conditions, especially as the existential threat of climate change crisis continues to unfold rather quickly in a dramatic sense in terms of more frequency and greater intensity of climate disasters – is increasingly becoming unreliable.

This is because, developing countries having a low share in overall global trade, and being stuck with neoliberal policies – under the influence of ‘Chicago boys’-styled domestic policymakers, and brow-beating multilateral institutions through their loan/programme conditionalities – their economies are becoming all the more vulnerable, given their low level of economic institutional quality traditionally, overall low level of climate financing, and neoliberal-minded global trade policy.

Also, this has further lowered the overall working conditions of labour, and which has become one of the main reasons behind increase in ‘economic migrants’ in developed countries, as more and more of the labour force heads for developed countries for better working conditions. While they bridge the gaps in the labour force of developed countries, where domestic labour is mostly into service sectors, this nonetheless creates disgruntlement among domestic labour, which generally are crowded out in the face of more efficient migrating labour.

There is no fault of the migrating labour, but rather it has to do with the neoliberal institutional design, being perpetuated by the already rich and powerful that have oriented domestic, and global economy only for greater profits.

In that sense, shifting away from neoliberal policies, including bringing back reasonable level of protectionism is needed for reducing uncertainty, for instance by creating greater manufacturing at home that absorbs local labour in both developed and developing countries and, in turn, also helps create greater resilience in the face of external shocks, especially in a world of polycrisis.

Copyright Business Recorder, 2025