An economy goes through three stages as it develops. Broadly defined and used, these are: 1. Protectionism, 2. “Know-how” and 3. “Export it all”.
Not all economies pass through the three phases, and each have their different growth stimulators in which the three phases are most apparent. It must be noted here that, considering the different economy components, a given economy could be in any of the three phases, regardless of whether or not the economy is that of a developing nation or a developed one.
To further explain this, I will start with a very recent example from the US. The US has just hiked tariffs on imported steel from China. Does that mean that the US economy is in its infancy?
Of course not. However, its steel industry might be.
So why impose higher tariffs against Chinese steel? Or why does a country attempt to protect one of its economic sectors? Well, the main purpose is to protect its domestic industry.
In harsher words, a country sacrifices its consumers’ interests. Consumers that purchase and use steel in the US-China example, to promote the interests of its steel producers via the higher domestic prices that result from protectionism. Japan applied protectionism for some time when it was establishing it key industries, and so did South Korea. And China is now to a certain extent.
Turkey had its own protectionist policies when it was encouraging economic growth in the 20th century. The result normally is huge government owned or semi-government companies in niche sectors — niche here is in reference to that given country.
The know-how phase is the phase through which the country opens up its economy by receiving foreign investments or investing abroad. The main purpose is for the country to acquire the specific know-how that it aims to acquire and apply in the sectors that it wants to grow.
In China, the current manufacturing of chips and semiconductors will be the guarantor of China becoming a key player in that industry in the near future, if not the only key player. This is of course subject to how high living standards would go, and hence manufacturing costs.
Moreover, it is important to note that the know-how can drive future exports, and being part of it in fact. The South Korean consortium constructing the UAE’s nuclear reactors is an example of getting so good at doing something very efficiently that you end up exporting that know-how.
So a mature, well-established and efficient sector would, hopefully, for that country, make it a net exporter in that specific sector. And that tilts the balance of its net trade towards a surplus given that the country is generally a net exporter. That results in GDP growth, and with it an infusion of foreign currencies into the country’s balance-sheets, which can of course be used for government spending or investments domestically and abroad.
The above is a generalisation, yes, but a precise one. And if you analyse different economies, you will more or less see any of those phases apparent in at least one sector in whatever country you chose to look at.
The UAE, for instance, is not only a touristic destination but also has companies that contribute to tourism sectors worldwide such as the Jumeirah Group. The UAE is not only a promoter of trade — and is a leader in its region when it comes to that — but also has DP World operating “77 marine and inland terminals across six continents”.
The case is different for different countries. The South Koreans are good in construction and associated know-how while other East Asian countries are good at producing different food staples. To promote growth, a country must explore its options and be picky — yes, picky — in what sectors it wants to specialise in and eventually turn into net exporting sectors.
The last thought that I want to leave you with: is protectionism bad for the respective country?
The writer is a UAE-based economist. You can follow him on Twitter at @aj_alshaali.