How beggar-thy-neighbour policies can make global trade come to a standstill

For representative purposes.
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Beggar-thy-neighbour policies refer to protectionist economic policies adopted by governments that are aimed at benefiting a country’s economy at the expense of other countries. A trade war in which a government imposes heavy tariffs and strict quotas on the import of foreign goods into the country is the most common example of beggar-thy-neighbour policies. Central banks of countries can also engage in beggar-thy-neighbour policies through currency wars wherein they depreciate the value of their domestic currencies against foreign currencies in an attempt to boost their domestic exports and to discourage the import of foreign goods.

Origins of the idea

The term is attributed to Scottish economist Adam Smith who first used it in his well-known 1776 book The Wealth of Nations. He coined the term to criticise mercantilists of his time who advocated protectionist policies such as the imposition of tariffs and other forms of trade barriers in order to achieve a trade surplus with other countries. The mercantilists believed that a country can grow its wealth through international trade but at the cost of impoverishing other nations. Mr. Smith, on the other hand, believed that free trade in the long-run enriches all nations engaged in such trade.

Supporters of beggar-thy-neighbour policies argue that these policies help boost a country’s domestic economy by aiding certain important industries and protecting jobs. They usually point out that countries need to protect certain industries due to national security reasons and also in order to help protect them from foreign competition during their nascent development stages. Central banks engaged in beggar-thy-neighbour policies, on the other hand, argue that depreciating the national currency will make the country’s exports look cheaper to foreigners, thus boosting exports. They also argue that a depreciation in the value of a nation’s currency will make it more expensive for domestic citizens to purchase foreign goods, thus discouraging imports. Higher exports and lower imports, in turn, are expected to lead to a trade surplus which is said to be good for the domestic economy. It should be noted that supporters of beggar-thy-neighbour policies see exports as a good thing because exports are seen as boosting demand for the goods manufactured by domestic firms. At the same time, imports are considered bad because they are seen as boosting demand for foreign firms.

Opposing voices

Critics, however, argue that beggar-thy-neighbour policies can make all countries poorer, particularly when countries begin to retaliate against each other by imposing tit-for-tat tariffs and currency devaluations. Such tit-for-tat policies were implemented most notably during the interim period between the two major World Wars. Retaliatory tariffs and competitive currency devaluations during the period led to a significant drop in global trade and investment. In fact, economic historians consider such protectionist policies to be one of the major reasons behind the Great Depression that affected countries across the globe. In recent decades, countries such as China and Japan have been accused of devaluing their currencies to help their exporters, and to achieve a trade surplus with other major economies such as the United States. The rise of populist movements in recent years, particularly in the United States under Donald Trump’s presidency, has led to renewed fears that we could see the return of tit-for-tat economic policies that caused global trade to come to a standstill.

It should be noted that beggar-thy-neighbour policies are generally targeted at benefiting domestic producers and their workers who possess significant political influence rather than consumers, who are in fact severely harmed by such policies. For example, U.S. President Trump’s latest tariffs this week against Chinese imports are expected to help American producers who may now likely face lesser competition from Chinese firms. However, the same tariffs and other trade barriers are expected to affect American consumers who will now likely have to pay higher prices for goods due to reduced foreign supplies. Similarly, when a central bank depreciates the exchange value of its currency by flooding the forex market with its currency, it puts more domestic currency in the hands of foreigners, thus reducing the purchasing power of domestic consumers who will now be able to purchase fewer domestic goods.

Some critics of beggar-thy-neighbour policies also argue that countries should not retaliate when a foreign country imposes tariffs or other trade barriers on their exporters or devalues its currency in order to favour its own domestic exporters. They believe that countries that adopt unilateral free trade can avoid the damage caused by retaliatory tariffs, and in fact even benefit from the protectionist policies of other countries. Take the case of a country like China that is hit by tariffs imposed by the United States. While U.S. tariffs would make life hard for Chinese producers, imposing retaliatory tariffs against U.S. goods will only make things worse for China because Chinese consumers will then have to pay more for goods and services imported from the U.S. Retaliatory tariffs can thus turn out to be a double whammy for China. Similarly, according to this view, if the U.S. Federal Reserve depreciates its currency to boost its exports, it would be best for the Chinese central bank to avoid competitive devaluation because the U.S. Federal Reserve is actually subsidising Chinese consumers.