Macroeconomics Essay Final

Running head: MACROECONOMICS: PROTECTIONIST ECONOMIC POLICIES 1

Macroeconomics: Protectionist Economic Policies

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MACROECONOMICS: PROTECTIONIST ECONOMIC POLICIES 2

Macroeconomics: Protectionist Economic Policies

Recession is a period in the economy of a country when there is a general decline in

economic activity reminiscent in a rampant decrease in spending power of the populace due to

unemployment. The 2007 Great US Recession resulted in 4.3 percent and ten percent decline in

GDP and growth of unemployment respectively (Hetzel, 2012). Several macroeconomic

indicators monitor the health of an economy. Examples of such indicators include Gross

Domestic Product (GDP), unemployment, industrial production, and trade, amongst others. Since

the great recession in the US, there have been interventions, also called protectionist measures, to

mitigate any possible recurrence (World Bank, 2011). A good example is the decision by the US

to no longer import goods and services from other countries but instead boost industrial

production at home to create employment and bolster export trade while encouraging patriotic

consumerism. These interventions, a precise policy mix, forestall recession but not without some

international trade, as well as diplomatic and economic repercussions. This paper seeks to, first,

discuss the types of protectionist measures such as tariffs, quotas, and ending of import trades

and how these will affect the reputation of the US to the world. Second, the paper will assess the

pros as well as cons of the above policy mix with an emphasis on its effect on GDP,

unemployment, and inflation. Finally, the paper shall consider a possible improvement on the

policy mix and how effective such a development will be in restoring employment.

The US uses protectionist measures such as tariffs, quotas, and ending of import trades to

improve the economy and prevent a recession (Mankiw, 2014). These interventions have so far

been successful with the economy remaining stagnant but with no recession witnessed.

Protective tariffs are taxes, fees, or dues imposed on international products as a way of growing

local industries. Tariffs raise prices of international products, which is then passed on to the

MACROECONOMICS: PROTECTIONIST ECONOMIC POLICIES 3

consumer. This way, the local products remain cheaper, hence attractive to consumers. Quotas,

on the other hand, are government-imposed restrictions on the number of specific products, such

as sugar, that can be imported within a specific period of time. This is the case so as to avoid

over importation that may kill the local industry. Quotas may lead to eventual ending of import

trades on some products. This is especially so if the local industry has the capacity to produce

enough of these products for local consumption and the resultant surplus meets export

thresholds. The three protectionist measures above serve to boost industrial production, and by

extension improve GDP and decrease inflation at home which, will, in turn, create employment,

thus improving the US economy (Söderbom, Teal, Eberhardt, Quinn, & Zeitlin, 2014). On the

flipside, such measures have hitherto seen the US reputation to the world considered selfish and

self-seeking. International trade has always flourished in a free and mutual respect environment.

China is the greatest trade partner of the US and recent protectionist moves by the US have seen

similar retaliatory moves by China. These protectionist moves by these two countries have

greatly threatened their trade and diplomatic relationships.

Second, the policy mix mentioned above will undoubtedly lead to improved or

strengthened US economy owing to its impact on GDP, inflation, and unemployment rates. The

ending of import trade tends to boost local production. It also bolsters demand for locally

produced products, making the private sector players grow and expand as a way of building

capacity to meet the ever-growing demand. This growth and expansion of the local industry have

a duality effect of increasing the GDP, lowering inflation, and lowering unemployment rates

(Mankiw, 2014). Moreover, labeling of locally produced products as “made in the USA”, serves

to instill patriotic consumerism. Patriotic consumerism increases demand for the locally

manufactured products, and lowers unemployment rates. However, untethered use of the policy

MACROECONOMICS: PROTECTIONIST ECONOMIC POLICIES 4

mix above may prove counterproductive since some of the economic processes are reversible.

For instance, quotas and tariffs raise prices, which may lead to inflation and hence reduced GDP.

Similarly, stopping import trade may result in loss of employment since this industry creates

employment to a substantial number of US citizens.

Finally, the policy mix mentioned above will undoubtedly create a positive impact on the

US economy, especially on some macroeconomic indicators such as GDP, inflation, industrial

production, and international trade. An improvement in the policy mix is suggested, especially in

the ending of import trade on products and services aspect. It is not practical to end all import

business on products and services as a way of bolstering local industrial production. This is

because the import business is one of the employment creating sectors whose scrapping will add

a number to the unemployment rates. In addition, there are some essential products and services

that are either not being produced in the US or are produced below the commercial scales. Such

products and services, therefore, demand the need for importation. Also, international trade, as

mentioned earlier, has always flourished in a free and mutual respect environment. If for

instance, the US stops all importation from China, China may also stop importing from the US

(Moosa, 2012). If the importation of all products and services were stopped, local industrial

production would be boosted, thus achieving increased GDP, reduced inflation, reduced

unemployment rates, and improved export business. However, there would be no country to

export to since the US is not importing from them. Therefore, it is important not to stop import

business altogether but rather impose tariff and quota measures that are fair and borrow clearly

from free-market tenets (Weiss, 2011). Sometimes, countries affected by the imposed tariffs and

quotas reiterate. Even when they do, US will still have achieved its goal of boosting local

MACROECONOMICS: PROTECTIONIST ECONOMIC POLICIES 5

industrial production. The US will, however keep the trade partners through negotiated tariffs

and quotas that are market-driven as opposed to losing the trade partners altogether

In conclusion, as the US economy grows, there is a need for protectionist measures. The

use of tariffs, quotas, and controlled import trade is necessary to keep the economy in check such

that it does not slide back into. The above policy mix serves well to achieve this goal but needs

to be moderated, especially on the part of import trade because each county needs trade partners

at the end of the day.

MACROECONOMICS: PROTECTIONIST ECONOMIC POLICIES 6

References

Hetzel, R. L. (2012). The great Recession: Market failure or policy failure? Cambridge

University Press.

Mankiw, N. G. (2014). Principles of economics. Cengage Learning.

Moosa, I. (2012). The US-China trade dispute: Facts, figures and myths. Edward Elgar

Publishing.

Söderbom, M. Teal, F. Eberhardt, M. Quinn, S. & Zeitlin, A. (2014). Empirical development

economics. Routledge Publishers.

Weiss, K. D. (2011). Building an import / export business. John Wiley & Sons Publishing.

World Bank. (2011). The Great Recession and import protection: The role of temporary trade

barriers. World Bank.

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