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Beggar-thy-Neighbour Policy
Context:
Donald Trump’s Protectionist Policy in the 2nd Term has brought the focus back on thy-neighbour policy used by the government and Central Bank.
About Begger Thy Neighbour Policy
- Beggar-thy-neighbour policies are protectionist measures undertaken by governments and central banks.
- These policies are designed to bolster a nation’s domestic economy often at the expense of its trading partners.
- The objective is to generate a trade surplus by increasing exports and reducing imports.
Origin Of The Idea
- The term “beggar-thy-neighbour” is attributed to Adam Smith in his seminal work, The Wealth of Nations (1776).
- It originally criticised mercantilist practices that promoted protectionism at the expense of other nations.
Tools Used for Beggar-Thy-Neighbour Policy
- Import Tariffs: Taxes imposed on imported goods to protect domestic industries.
- Import Quotas: Limits on the volume of specific imports.
- Currency Depreciation: Deliberate lowering of the national currency value to make exports cheaper.
- Corporation Tax Cuts: Incentives aimed at attracting foreign investments by lowering tax burdens.
Reasons For Using The Policy
- Economic Protection: Shielding domestic industries from foreign competition to safeguard jobs.
- National Security: Protecting strategic sectors deemed vital for national security.
- Geopolitical Leverage: Using economic measures to exert diplomatic pressure or counter foreign policies.
- Boosting Exports: Enhancing the competitiveness of domestic products in the global market.
- Trade Imbalance Correction: Attempting to reduce trade deficits by curtailing import.
Examples Of Begger -Thy -Neighbour Policy
- Trade Barriers: Imposition of high tariffs and strict quotas as seen in recent U.S. policies.
- Currency Wars: Instances where countries devalue their currencies competitively, such as accusations against China and Japan.
- Tax Competition: Reduction in corporate tax rates to lure investment from countries with higher tax regimes.
Past Instances of Begger Thy Neighbour Policy
- Historical Trade Wars: Prominent during the period between the two World Wars, contributing to the Great Depression.
- Post-World War II: Japan’s protectionist measures to rebuild its economy.
- Modern Era: Recent U.S. tariffs under the “America First” doctrine.
- India’s Experience: India has intermittently adopted protectionist measures to safeguard its infant industries and to counter global market volatility.
Pros Of Beggar -Thy -Neighbour Policy
- Short-Term Economic Boost: Provides immediate relief to targeted domestic sectors.
- Job Protection: Can help in preserving employment in vulnerable industries.
- Revenue Generation: Tariffs can add to government revenues.
- National Security Assurance: Ensures that critical sectors are protected from global supply chain disruptions.
Cons Of Begger -Thy -Neighbour Policy
- Global Trade Disruption: This may lead to a trade war with reciprocal measures from trading partners.
- Consumer Harm: Leads to higher prices for imported goods affecting domestic consumers.
- Economic Retaliation: This can trigger tit-for-tat tariffs and further currency devaluations.
- Long-Term Economic Inefficiency: Distorts market dynamics and hampers global economic growth.
- Political Tensions: Increases the likelihood of geopolitical conflicts and strained international relations.
Critical Evaluation – Is It a Good Policy?
- Short-Term Benefits vs. Long-Term Costs: While these policies may yield immediate advantages, they often result in long-term inefficiencies and global economic slowdown.
- Zero-Sum Assumption: The policies operate on the assumption that one nation’s gain is another’s loss, which contradicts the modern understanding of mutual economic benefits through free trade.
- Overall Impact: Most economists agree that while beggar-thy-neighbour policies might serve certain political objectives, they are generally not conducive to sustained global economic prosperity.
Way Forward
Rather than Using the protectionist policy in the name of Beggar-Thy-Neighbour other balanced policies can be used which include:
- Friend-shoring: Emphasises relocating supply chains to politically allied or friendly nations to mitigate geopolitical risks.
- On-shoring: Focuses on bringing production back to domestic soil to reduce dependency on foreign suppliers.
