Definition of beggar my neighbour policy: This is an economic policy that seeks to promote a country’s economy at the expense of another country.
It assumes that economics is a zero-sum game. In other words, if you want more income, you have to take it from other countries.
It should be noted that most economists argue we do not live in a zero-sum world – importing goods benefits both the country exporting and the country importing.
Examples of beggar my neighbour policies
1. Trade barriers
A country may place a tariff on imports to help promote local domestic industry. Due to tariffs, we will import fewer goods and buy more domestic products. This may help local unemployment, but, it at the expense of the other country’s export sector, who will be able to export less.
Also, tariff barriers lead to a net economic welfare loss (consumers pay higher prices), and it is only a small sector which benefits. See: Trade creation.
Also, if one country places higher tariffs on imports, it generally leads to retaliation and so there is only a temporary advantage from higher import tariffs.
2. Currency depreciation
Beggar my neighbour policy could also be used with regard to exchange rates. For example, the US has, in the past, criticised China for having an artificially low exchange rate.
By keeping the Chinese currency undervalued, Chinese exports are more competitive, leading to higher export demand. But, this is at cost of US industry who sees lower demand for US goods as consumers prefer cheaper Chinese goods.
They argue this increases Chinese growth at the expense of a US trade deficit.
3. Cutting corporation tax rates
A country may seek to cut corporation tax rates to attract inward investment from countries with higher tax rates. Lower corporation tax doesn’t increase overall investment; it just diverts investment from high tax countries to low tax. It can also encourage tax competition – where there is a race to the bottom with countries seeking to have lower corporation tax rates to get most investment.