Essay # 3 ~ Analyse the effects of global protectionist policies on the global economy and the Australian economy. (20 marks) (approx 1400 words) (60 minutes to write) (A-Range)

Introduction

Protectionism refers to the implementation of government policies that restrict international trade, providing domestic industries with an artificial advantage over foreign competition. Common protectionist measures include tariffs (taxes on imports), import quotas (quantitative restrictions), subsidies (government cash payments to local producers), and import bans. These policies are often used to protect domestic industries, the current account, employment, and respond to perceived unfair trading practices. However, such policies distort global trade flows and result in a misallocation of society's scarce resources, thereby reducing the efficiency gains from international specialisation.

Recent Trends

Since 2024, there has been a resurgence in global protectionist policies among major global economies, driven by ongoing geopolitical tensions, supply chain vulnerabilities, and rising economic nationalism. High-income nations of advanced economies, such as the United States, raised their average tariff rate to 6.5%, including new tariffs of up to 25% on Chinese electric vehicles, solar panels, and minerals such as lithium. While emerging lower-income nations, such as China, have maintained an average tariff rate of 7.5%, they have also increased non-tariff barriers, including subsidies in strategic sectors like artificial intelligence, solar energy, and green hydrogen. The European Union, with an average tariff rate of 5.1%, introduced carbon adjustment mechanisms and launched anti-subsidy investigations into China’s green technologies. India’s protectionist stance intensified, raising its average tariff rate to 18.1% ~, the highest among G20 nations ~ targeting imports such as electronics, steel, and agricultural goods. The global shift toward protectionism is reshaping trade relationships and posing critical challenges for open economies like Australia.

Impact on Global Trade

The resurgence of protectionist policies has led to a fragmentation of global trade. For instance, the United States' implementation of a 10% global tariff in 2025 resulted in a significant decrease in imports from China, dropping by 43% over the last 12 months. Such measures have caused inefficiencies in global trade by disrupting established supply chains, lowering the variety of goods and services for consumers, whilst increasing the average price of goods. David Ricardo’s theory of comparative advantage suggests that countries benefit from specialising in the production of goods where they have a relative efficiency; however, protectionism undermines this principle, as it distorts market signals by encouraging production in less efficient domestic industries, preventing countries from specialising based on comparative advantage. This leads to a misallocation of resources. Consequently, global trade volumes have stagnated, with the World Trade Organisation forecasting a modest 3.3% growth in 2024, below the early 2000s trend and downgrading the 2025 forecast from 2.7% to a 0.2% decline in global merchandise trade. This shift indicates a move towards deglobalisation, where countries prioritise domestic industries over international trade cooperation. 

Impact on Global Growth 

Economic theories suggest that open markets promote efficiency and innovation by allowing resources to flow to society’s most productive uses and encouraging competition. Protectionism, by contrast, can lead to dampened global economic growth. According to the United Nations Conference on Trade and Development (UNCTAD), global foreign direct investment (FDI) declined for the 2nd consecutive year in 2024, dropping by 11%. The International Monetary Fund (IMF) revised its global growth forecast for 2025 downward to 2.8% GWP, a significant drop from the 3.3% projection made in January and the global economy’s long term trend of 3.8% GWP. This downgrade reflects escalating trade tensions, including the United States' implementation of new tariffs, which have prompted retaliatory measures from trading partners. The OECD highlights that protectionist measures reduce access to international markets and capital could disrupt global trade and investment flows, particularly harming emerging markets like Brazil, India, and South Africa, which are significant players in the global economy that rely heavily on global economic integration for economic stability. As a result, protectionism has raised uncertainty in the global market, discouraging investment and slowing global growth. 

Impact on the Australian Economy 

Australia, with its open economy and reliance on exports, is particularly vulnerable to global protectionist trends. The imposition of tariffs by major trading partners can lead to decreased demand for Australian exports, particularly affecting commodities like iron ore (22% of total exports) and LNG (approximately 19% of total exports in 2025). For instance, U.S. tariffs have raised concerns about increased competition in key markets for Australian commodities, potentially dampening demand in Australia's largest industries. Major exporting industries, such as agriculture and mining, may face challenges due to these shifts, as protectionist measures can disrupt established trade relationships and introduce market uncertainties. 

However, some regions, like Queensland, may gain due to opportunities to boost beef and export vanadium (for large-scale storage batteries) and cobalt, the key component in lithium-ion batteries for electric vehicles, leveraging the changing global trade demands. Overall, while certain sectors may find new opportunities, the broader impact of global protectionism poses risks to Australia's trade balance and economic growth, potentially leading to a "two-speed" economy where some regions or industries thrive while others lag. Reflecting these challenges, the International Monetary Fund (IMF) downgraded Australia's GDP growth forecast for 2025 from 2.1% to 1.6% GDP, while the Organisation for Economic Co-operation and Development (OECD) projects a modest growth of 1.8% GDP in 2025. 

Impact on Australian Government Economic Policies

In response to rising global protectionism, the Australian government has adopted policies to strengthen domestic industries and reduce reliance on international supply chains. The Future Made in Australia initiative, announced in April 2024, aims to promote Australian manufacturing in sustainable energy, with a $22.7 billion investment over a decade. This policy reflects a strategic shift towards economic resilience and self-sufficiency. 

Beyond this initiative, the Federal government has introduced several measures to bolster domestic capabilities. A 10% production tax credit for critical minerals processing and renewable hydrogen production is set to commence in 2027, incentivising local value-adding in these sectors. Additionally, the $1 billion Solar Sunshot program supports domestic solar panel manufacturing, aiming to reduce dependence on imports. To assist exporters negatively affected by global tariffs, a $1 billion zero-interest loan program has been established, encouraging diversification into alternative markets. Furthermore, the government is considering implementing quotas to prioritise Australian steel in renewable energy infrastructure projects, reinforcing support for local industries. 

While such measures can bolster domestic industries, they also signify a move towards strategic protectionism, balancing the need for global engagement with national economic security. This approach aligns with the broader global trend of countries reassessing their economic policies in light of increasing protectionist pressures. 

Conclusion

The resurgence of protectionism since 2024 has led to significant shifts in global trade, economic growth, and domestic government policies. While intended to protect domestic industries, these measures have disrupted trade flows, introduced inefficiencies, and, as a result, misallocated resources ~ slowing economic growth. For Australia, the challenge is in navigating these global trends while maintaining economic resilience and competitiveness. Strategic government policies aimed at strengthening domestic industries and diversifying trade partnerships will be crucial in mitigating the adverse effects of global protectionism in the future.