Economics Protectionism Essay

Classical liberal economic theory widely recognises and portrays the benefits of free trade. The maximum benefits can be gained from the markets only when barriers to trade are open and the state does not pose limitations to trade. A lot has been written to defend this position, and economists have even aspired to explain it in scientific terms, through such theories as the law of comparative advantage. So widespread is the theoretical support for free and open trade, that economists face somewhat of an embarrassing paradox when they analyse the reality around them. It is safe to say that no state in the world has eliminated all of its trade barriers, and a wide variety of protectionist measures are adopted throughout nation-states and regions of the world [1]. This essay looks at why, despite being so strongly and lengthily criticized as sub-optimal, protectionism is widely adopted. It looks at the reasons for which a state might pursue protectionist policies, and at the effects that these policies have. The effects are both the expected effects (those that are desired when implementing the policy), and the unexpected ones (the side-effects in a way), and are seen both as strictly economic effects (which largely correspond to the criticisms of the neo-liberals), and as more widely social and political. The causes are grouped under two main domains: the more strictly mercantilist causes, and the liberal/ public choice theory causes, which incorporate domestic political and group interests, and collective action reasoning. The effects are partly included in the discussion of the causes (mainly the intended, expected effects), and partly addressed separately. It is concluded that the two sets of causes reinforce each other through a common focus on political factors.

The Marvels of Free Trade

When trade faces no barriers, it increases the size of the market. There are thus gains because of declining per unit production costs, and consequential economies of scale as production becomes ‘international’. Overall economic activity grows, and this increases economic growth. Open trade also reduces the monopoly power of some producers at the domestic level because of increased competition. This drives prices down and increases product variety, both of which are beneficial for consumers. Another benefit of open trade is the diffusion of technology, which is brought to developing countries by firms and transnational corporations (TNCs) and allows them to by-pass stages of development which would require them to acquire those technologies. While these benefits are debatable on theoretical terms, in particular because of the assumptions on which they rest, this is not dealt with here. It is important here simply to note how much theoretical support there is for open trade. In what has been arguably the biggest contribution to the idea of free trade between nations, David Ricardo developed the theory of comparative advantage, in which he demonstrated that two nations (or any two economic actors, for that matter) who have different relative costs in the production of the same goods benefit from trade, having specialized in the production of the good for which they have the greatest comparative advantage [2]. Crucially, this applies even if one nation has the absolute advantage in the production of both goods. Even though more recent views of the concept of comparative advantage regard it not as fixed but as the result of corporate and state policies [3] and of the historic use of wealth and power [4], much of the (widespread) contemporary support for free trade in policy circles has its roots in this argument.

Protectionism is Costly

The effects of protectionism, for economic theory, are clear and multiple. Protectionism requires resources (e.g. tax revenue) which are taken away from other industries, the output of which consequently falls. It also takes resources away from individuals and households, who face higher prices for the protected goods: as a consequence both their consumption of that good and their overall consumption fall, in the latter case because of reduced purchasing power. Output in the competitors’ states is also reduced as a result of the reduction of sales in the protected country. More generally, uncertainty in trade policies undermines growth in itself, for firms are unsure about how much to invest and when in case of higher future barriers. Many studies have shown the (high) costs of protectionism [5]. Some also have found that increased imports do not cause higher unemployment [6] and that trade restrictions do not create greater employment [7]. It is even possible that a reduction in imports, by reducing foreign incomes, reduces demand for exports and thus in turn reduces the domestic incomes of the protectionist country. Others have shown that the costs of protecting local jobs and firms through tariffs and quotas are greater than the cost of retraining workers and relocating jobs. Similarly, the costs of subsidies are likely to be higher than the costs of shifting production to more competitive industries [8]. It is not clear whether these calculations include also the ‘hidden’ costs of losing jobs (in terms of the psychology and self-esteem of the workers, the effects on their families) and of changing the structure of the economy, but they are nonetheless of great importance to the debate.Tariffs, quotas and subsidies are also believed to discourage innovation and advancement in domestic industries, which do not face the incentives of competition to lower their costs and improve the efficiency of their production process.

Some Causes of Protectionism

Why then is there protectionism? The literature stresses the size of the contradiction. From the moderate Rodrik, who writes “Adam Smith and his followers have won the intellectual battle, but the facts on the ground tell a more ambiguous story” [9], to the harsher Milner, who describes protectionism as “one of the most visible theoretical gaps [in economic theory]” [10].

The first set of causes are mainly mercantilist, and include the infant industry argument, spillover effects, national security, the unequal exchange perspective, fair trade and state interests divergent from global income maximization.

An infant industry is one which is newly established in a country. In an open trade system, such an industry will immediately face strong competition from foreign producers which are already established in the market for that particular good. These competitors thus have an advantage over the new industry which, until it reaches the required technology and the low production costs to make it competitive, will incur severe losses and possibly be driven out of the market. Protection of that industry in the initial stages of its development, mercantilists argue, is beneficial, at least until it reaches the competitiveness required to survive on the market. A related argument for the causes of protectionism is the idea of spillover effects, by which the protection of a certain industry generates spillover benefits for other domestic industries connected through the supply chain (these may themselves demand protectionism). Such externalities are not internalized by the market for the industry which generates them, and should therefore be internalized through state intervention. Empirical evidence shows, on the other hand, that the removal of tariff protections on what are initially ‘infant’ industries is not easily achievable, for as the industry grows its political influence also grows, and through the latter the industry will seek continued protection. With continued protection the industry is also unlikely to develop an adequately efficient production process that will enable it to be competitive on the global markets.

As has been shown through the law of comparative advantage, supporters of free trade explain how specialization of individual countries in the production of a few goods benefits all countries. This, however, does not take into account that states are concerned with their security and sovereignty, and that being dependent on trade with other countries for the availability of vital goods (e.g. arms, certain types of food, water and sources of energy production) is not a desirable situation. As realists would stress, on the international stage there is anarchy, and no rules, treaties or alliances can assure the safety of any country. States may thus have an argument in protecting certain industries which ensure a greater degree of safety.

The unequal exchange perspective provides yet another insight into why protectionism may be pursued. While classical economics lies on the assumptions that trade is fair and equal, that all actors in the exchange of goods have the same bargaining power, the same (perfect) degree of information and the same constraints, in the real world, critics argue that trade relations are not equal. Power, wealth, historic relations and path dependency (colonialism contains elements of all four) all contribute to create an imbalance in trade relations which nearly invariably favours the rich developed countries at the expense of the developing ones [11]. Thus developing countries have a justification for restricting free trade to partly balance the situation, both as single countries and as a group in international forums such as the WTO (for example refer to the controversies on the Doha round).

Another argument which refers to imbalances in trade (this time on behalf of developed countries) lies in the advocacy of ‘fair trade’, in opposition to ‘free trade’. Many industries in developing countries are highly competitive on the global market as a result of the low wages and loose legal rights for workers. In western countries such cheap labour is not available to firms, and workers are protected by unions and laws in defence of their rights. This, in the view of developed countries, creates an ‘uneven playing field’ where competition is not based on the same conditions. This is combined to, and reinforced by, concerns about social conditions and human rights of workers in developing countries. Protectionism thus provides the means of disallowing entry into the domestic market of products which do not abide to minimal standards of human rights and working conditions. Another unfair practice is the dumping [12] by foreign firms of their products onto the market, which drives competitors out of the market. The EU alone has issued more than 300 anti-dumping measures since 1998 [13]. Of course, anti-dumping and fair trade may easily become excuses for more private interests. Evidence shows that anti-dumping in the EU targets products for which European comparative advantage has been declining (e.g. raw materials, textiles, industrial inputs), and that duty levels are significantly higher than bound tariffs [14]. Also, low wages have served the interests of western TNCs when outsourcing to developing countries, so there is a degree of incoherence in the argument.

Protectionism provides also a strong source of government revenue. While this may not be considered in the liberal view, where states are given a minimalist role in the economy and are believed to pursue the only goal of wealth maximization, it is of considerable importance, and is just an initial realization of the fact that states have a variety of interests which may cause a trade off with that of income maximization. These include a greater focus on relative gains than on absolute gains (i.e. even if the global economic cake is made smaller, states are mainly interested in having the largest portion of it to themselves), the preservation of political sovereignty and territorial integrity (national security), possibly the enhancement of soft power (such as the international prestige of the national language and culture [15] ), and distributional and welfare objectives. Some scholars have also noted that growing democratic participation may be in itself, if not a direct cause, a contributing cause to the continued use of protectionist policies, as more groups in society have a voice in representing their interests [16]. The next section analyses the role of groups and lobbying in more detail, providing a strong explanation for the continued existence of protectionism in spite of its costs. It is to be noted that, as with the causes above, focus is once more on political mechanisms and processes. The two sets of causes, although distinct, reinforce each other in this respect. Where economic interests seem to be the ones that cause protectionism, it is their partial (as opposed to global) nature which requires political elements and justifications. Thus the infant industry argument justifies political state intervention with reasons of equality of opportunity and justice for developing countries, of improved welfare for the nation’s citizens who often live in poverty; the national security argument is very clearly political in its ultimate defence of national political sovereignty; the unequal exchange perspective refers to international political relations; and the fair trade argument is made in defence of human rights in the most altruistic version and of western country workers and industries in its more self-interested version. Politics is the means by which these concerns and interests are transmitted, represented and protected.

Domestic Politics, Group Interests and Collective Action

The state may pursue protectionist policies also with the aim of balancing the balance of trade, which entails improving ‘national economic health’ by reducing or eliminating a trade deficit, or increasing a balance of trade surplus. This in itself does not necessarily improve the national economy (especially because as a result of protectionism prices rise, reducing consumers’ purchasing power), but by increasing exports in relation to imports domestic production is increased, and domestic producers are made better off. This may also increase domestic employment.

Employment and the protection of jobs may be in itself a cause for protectionism. While some reports have shown that the overall effects from an increasing imbalance of trade (more imports relative to exports) on overall (global) employment are negligible [17], workers and resource owners in individual countries are affected differently. The country that is importing more faces costs in terms of moving productive resources to other industries, of workers changing jobs and of workers and capital owners relocating to other areas and cities. This causes workers and owners in the targeted industry to lobby for trade restrictions. But the costs of protectionism, it has been shown, are higher than the costs of adjustment and relocation [18]. So why is lobbying successful in obtaining trade restrictions? The Olsonian logic of collective action provides here a highly valuable explanation. Olson theorizes that individuals subscribe and contribute to a group if there is a benefit reserved to the group members only [19]. This is mainly because the benefits from contributing to a public good do not depend strictly on participation, but can as easily be obtained by free-riding (letting the others contribute to the group, and reaping the benefits obtained from their action). Individuals are thus likely to act collectively for a private good, but not for a public one. This logic applies to protectionism too. The costs of trade barriers are borne by all of society through increased prices. Such costs are difficult to identify and relatively small because they are spread out between all consumers. Even supposing citizens are aware of these costs and of their cause, the decision to rally and campaign for free trade faces the Olsonian logic, and does therefore not lead to collective action. Workers and asset owners in a specific industry which seeks protection, on the other hand, reap high benefits from individual involvement in collective action. The costs of participating in the group are smaller than the benefits, and thus collective action is undertaken. Politicians are thus subject to lobbying for protectionism, and are incentivised by the votes and the campaign contributions of the lobbies to respond positively to them. Actually, it would be reasonable to note that consumers have a lot more power in influencing governments, because their aggregate votes far outnumber those of an industry or lobby group. Individuals however are rarely aware of the fact that the prices they face are inflated by protectionism measures, and this lack of awareness substantially erodes their power to counter private industrial interests.

The Olsonian logic has further effects. Because the increase in prices and the reduction in consumer choice of products are equally spread amongst individuals, they will have a larger effect on the poorer groups in society. A 10% increase in the price of bread, for example, will hit a poor family much harder than a family which is better off, even though the latter faces the same 10% increase. Thus there is an argument for the support of free trade in a more ‘leftist’ liberal view. To go even further, what will make the poorer worse-off is protectionism on those products on which the majority of their disposable income is spent, namely food, clothing, energy and the like. The industries producing these products are often the most protected, and this is in spite of the social consequences outlined above. Protectionism on luxury goods would not have such an effect on the most economically vulnerable groups in society. A similar process is observable at the international level, particularly in the agricultural sector, which is subject to intense lobbying for protectionism in rich countries, despite the comparative advantage which the developing countries possess in agriculture. It has been estimated that agricultural protectionism costs developing countries around US$ 24 billion per year in lost income [20], thus contributing to keep the North-South divide wide.

Conclusions

Protectionism represents a source of puzzle and frustration for neo-classical liberal economists. Liberal economic theory has widely demonstrated the benefits of free trade in providing the global society with the maximum levels of income and material economic welfare. Nevertheless, the use of protectionism in international trade is very widespread. This essay has outlined some of the principal causes and effects of the adoption of protectionism measures.

Mercantilist explanations of the causes of protectionism are based on the underlying belief that state interests do not coincide with global income maximization, but that another set of interests are at play which form a trade off with the latter. In this view states are concerned with relative rather than absolute gains, and thus have an interest in maintaining domestic industries, protecting infant ones, and enhancing domestic production and employment. States are also concerned with national security, and are therefore inclined to ensure that they maintain independence in the production of certain fundamental goods. Additionally, states are interested in maintaining an equal playing field in trade, and use protectionism to this purpose, particularly with regards to working standards and wages.

Liberals, on the other hand, identify the causes of protectionism more strictly in the functioning of domestic politics and representation. In this view, lobbying, group formation, and the interests of politicians distort policy in favour of protectionism, despite the costs that the latter imposes on the whole of society. This is due to the success of lobbying in favour of private interests of restricted groups in society, in contrast with the difficulties rooted in mobilizing collective action for a public good, as explained by the Olsonian logic. This is possibly the strongest explanation for why protectionist policies are adopted. It is important to stress that it brings into the equation political processes and interests, which contribute to the case more than reasons of strict economic interest and efficiency. The incongruence between free trade economic theory and real world trade relations is to be explained mainly through factors in the political realm, which represent the variety of dimensions of the relationship between trading actors, and form the institutional channels for the pursuit of private and corporate economic interests. It is not by chance that we using the framework of International Political Economy to look for explanations. In this sense, the mercantilist view proves not conflicting but rather complementary to the liberal one in analysing “the constraints and opportunities that private economic activity faces, and the ability to create a sense of national purpose around economic goals” [21].

Bibliography

1 David Balaam and Bradford Dillman, Introduction to International Political Economy (5th ed.), London: Longman, 2011, p. 130. For more detailed evidence see Table 6.1 in Robert O’Brien, Marc Williams, Global Political Economy (3rd ed.), Basingstoke: Palgrave Macmillan, 2010, p. 149, which reproduces data from the WTO.

2 David Ricardo, On the Principles of Political Economy and Taxation, Harmondsworth, Penguin, 1971 (originally published: London, J. Murray, 1817).

3 Robert Gilpin, The Political Economy of International Relations, Princeton, N.J.: Princeton University Press, 1987, p. 178.

4 See Friedrich List, The National System of Political Economy, London: Longmans, 1928 (First published in German 1841).

5 David G. Tarr and Morris E. Morkre, ‘Aggregate Costs to the United States of Tariffs and Quotas on Imports: General Tariff Cuts and Removal of Quotas on Automobiles, Steel, Sugar, and Textiles’, Bureau of Economics Staff Report to the Federal Trade Commission, December 1984.
Susan Hickok, ‘The Consumer Cost of U.S. Trade Restraints’, Federal Reserve Bank of New York Quarterly Review (Summer 1985), pp. 1—12.
Gary Clyde Hufbauer, Diane T. Berliner, and Kimberly Ann Ellioti, Trade Protection in the United States: 31 Case Studies, Washington: Institute for International Economics, 1986.

6 Geoffrey E. Wood, and Douglas R. Mudd. ‘The Recent U.S. Trade Deficit- No Cause for Panic’, this Review (April 1978), pp. 2-7.

7 Organization for Economic Co-Operation and Development (OECD), Costs and Benefits of Protection, 1985.

8 Carnegie Endowment, ‘Trade and Globalization’, available from http://www.globalization101.org/uploads/File/Trade/tradeall.pdf, accessed 01-11-2011.

9 Dani Rodrik ‘Mercantilism Reconsidered’, Project Syndicate, 07.10.2009available at: http://www.project-syndicate.org/commentary/rodrik33, accessed 29-10-2011.

10 Helen Milner, ‘International Political Economy: Beyond Hegemonic Stability’, Foreign Policy, No 110, Spring, 1998, p 112.

11 ‘Nationalists note that in a world of free trade the terms of trade tend to favour the most industrially advanced economies’, Gilpin, The Political Economy of International Relations, p. 181.

12 i.e. Selling a certain product more cheaply abroad than at home, sometimes even at a price lower than the cost of production.

13 Lucy Davis ‘Ten years of anti-dumping in the EU: economic and political targeting’, ECIPE Working Paper no. 02/2009, p. 1.

14 Ibid, p. 1.

15 Benjamin Cohen, ‘The Political Economy of International Trade’, International Organization, 44:2, pp. 261-281, 1990, p. 272.

16 Susan Strange, ‘Protectionism and World Politics’, International Organization, Vol 39 No 2, 1985, p. 238.

17 See OECD, 1985.

18 See Cletus C. Coughlin, K. Alec Chrystal, and Geoffrey E. Wood, ‘Protectionist Trade Policies: A Survey of Theory, Evidence, and Rationale’, Federal Reserve Bank of St Louis, Jan/Feb 1988, available at http://research.stlouisfed.org/publications/review/88/01/Protectionist_Jan_Feb1988.pdf, accessed 31-10-2011.

19 Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups, London: Harvard University Press, 2nd ed. 1971, and Mancur Olson, The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, London: Yale University Press, 1982.

20 Xinshen Diao, Eugenio Diaz-Bonilla and Sherman Robinson, ‘How much does it hurt? The impact of Agricultural Trade Policies on Developing Countries, IFPRI, Washington DC, 2003, p 2.

21 Rodrik, ‘Mercantilism Reconsidered’.

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Written by: Luca Ferrini
Written at: University of Reading
Written for: Marina Della Giusta
Date written: March 2012

Protectionism represents any attempt that imposes restrictions on trade in goods and services. It aims at cushioning domestic businesses and industries from overseas competition and prevents the outcome resulting from the inter-play of free market forces of supply and demand to take place. Protectionism can come in forms of tariffs, quotas, voluntary export restraint arrangements, intellectual property laws, technical barriers to trade, preferential state procurement policies, export subsidies, domestic subsidies, import licensing, exchange controls, financial protectionism and murky or hidden protectionism.

I think protectionism is justified and would like to throw some light on the countries which flourished from protectionism and those which did not.
Recently the average tariff rates have fallen, as we have come closer to free trade. However, there are still many protectionist measures, with tariffs on specific goods. These are a few modern day examples of protectionism in the form of short case studies.

Case 1

As per the US International Trade Commission USITC its been found that the average import tariff rates have fallen, which has reduced many potential gains for the US.

The reason to this fall ion import tariffs is the closer move to free trade .the import tariffs of US is really low and for many other countries its lower than that several protectionism measures have been undertaken with tariffs on specific goods .

A solution can be found by understanding the theory of comparative advantage .this theory states that a country can see an increase in economic welfare by reducing its import tariffs even if the other countries do not reduce them .on the other if the other countries reduce their tariff, then we can have double benefit i.e. the domestic exporters can also see an increase in the economic welfare.

WTO has taken a step forward in reducing the tariffs as the move to free trade and globalization has created an impact on the protectionist measures ,it has demised the strength of these measures as a result of this its seen that in most cases the goods are not produced in one country leading to the emergence of global supply chains by importing raw materials and assembled goods .Between 1980 and 2006 There was total increase of four hundred percent in the value of US manufacturer’s total input costs which was imported from abroad .

This case can be further supported and understood with examples of a global supply chain .Apple is designed in California but its built in China and ford cars produce their tyres in Indonesia and their engines are produced in Europe. this is not just due to the falling tariffs but it’s also the improved technology, transport efficiency and improved cross border cooperation like the standardization of legal property rights.

Case 2

The agricultural industry is facing a problem in spite of the reduction in tariff rates .The THE EU Common Agricultural Policy (CAP) is still imposing substantial tariffs on many agricultural markets. They say that their aim is to increase prices so that the domestic farmers of Europe can have an increased income. The table illustrated bellow tells that some agricultural products like beef and dairy have tariff rates of over 75%.That is ,there are 54 dairy products having tariff rates more than 75%

In this case the protectionist measures have actually benefited the EU farmers as the domestic subsidies of the CAP will help by giving an advantage in exports.

Case 3

One of the latest issues was the substantial tariffs on banana’s which were imported from Latin America also known as the banana war .The exports had to pay ‘176 (??141) per ton of bananas.

As a solution to this, an agreement was made in 2012.The agreement has reduced the tariffs. The banana price is is expected to fall up to 11pc after the historic agreement was signed between the European union and 10 Latin American countries which will further ion lead to the end of the banana war which existed for almost 20 years .This deal has concluded the World’s longest trade dispute and has been followed by eight separate cases dealt by the World Trade Organization (WTO).

Case 4

The US imposed tariffs of 35% on imports of tyres from China.

This was a tremendous victory for United States, Their workers and manufacturers when the World Trade Organization’s top court said that the US was entitled to impose extra safeguard duties on imports of Chinese tires. The Obama administration is going to fight for their business by ensuring jobs .They are going to use the trade laws to stand up for their workers and address harm to them. This protectionist measure has safe guarded the U.S tire industry.

Case 5

Argentina has their food tariffs on 100 products which includes over a dozen of agricultural good under the Common External Tariff (CET).The import tariffs of milk powder was increased to 9 percent which gives rise to a fear of the Argentinean farmers having a decrease in their incomes.
Measures have been taken by the authorized committee to restrict imports,customs,tariffs and trade on Argentina milk powder. These tariff alterations are initially valid for 90 days and it can be renewed for another two years. this decision was prompted when the Argentinean milk imports were confirmed for 2012.These trade restriction actions are expected to protect the jobs of 400,00 small scale farmers producing milk in the country.

Case 6

A WTO report found that the average EU tariff on primary food products in 2008 was 9.9% but for processed food products it was more than twice as high, at 19.4%.This is for the EU’s most favored nation. Escalated tariffs occur when higher tariffs are place on processed food and it creates a disincentive for countries to process and add value to the raw commodity.

Extensive barriers on the trade policies in agriculture have been tempered by a variety of preference schemes which gives favorable access to developing countries.

In broad terms there are three types of agricultural protection

Firstly, the access to the market is restricted to protect domestic agriculture .this is done by restricting foreign imports which usually involves high import tariffs or quotas which will help in reducing the restrictions on the quantity for a particular product from the country in question and allow domestic producers with high cost of production to compete.

Secondly, global prices have been suppressed and domestic consumers may pay a higher price than foreign consumers for the same product. This scenario has occurred due to export subsidies which act as financial benefits conferred on exporting firms by the Government in order to encourage exports as opposed to domestic consumption.

Thirdly, Trade distorting payments tied to level of production which is called coupled direct payments is encouraging over production and driving down world prices .Moreover, Government gives domestic support to the farmers by paying direct subsidies and price supports.

Case 7

Anti-dumping is occurring in china due to tariffs on imports of stainless steel tubes from EU and Japan.’Dumping’ occurs when firms sell goods below a ‘fair market price’. the low cost and excess of supply can flood a domestic market which has cheap imports ,Making the existence of domestic firm businesses in danger. In this case, countries can justify tariffs on the grounds they are preventing this damaging effect of dumping.

As a solution to this, China has imposed anti-dumping tariff on the imports of stainless steel tubes from the European Union (EU) and Japan. These tariffs can only be justified by WTO if its proved that dumping is occurred .The duties that China wanted to impose ranged from 9.2 % to 14.4%.Dumping is referred to a process where firms allegedly sell goods at prices below fair mar market value.US steel industry’s makers were given state subsidies and tariffs by China. After all this The World Trade Organization (WTO), ruled against the tariffs saying that China has failed to prove its charges on EU and Japan.

Case 8

China and the EU were involved in a dispute over alleged dumping of solar panels by Chinese firms in the EU.EU claimed that such subsidies have helped Chinese firms flood region’s markets with cheaper goods and have hurt their growth. Earlier China has faced similar allegations from the US.
As a solution to the above case The US International Trade Commission upheld higher tariffs that were announced on imports of solar cells from china.

Case 9

European airlines have been criticized for receiving ‘unfair’ support from their Government. European airlines have been declining.

Illegal subsidies are a form of protectionism which occurs when a country gives a subsidy or support to a domestic export industry. This gives the exporters an unfair advantage in the world market. The above case is an example to this

The government supported its projectionist measure by saying that they were just preventing the airline going bust.

Case 10

China had to face a complaint from US in 2012 saying that China was given excess subsidies to its car industry giving unfair competitive advantage
As a reply USTR said the targeted export bases made at least $1 billion in subsidies available to auto and auto-parts exporters in China during the years 2009 through2011.

Case 11

Tariff on imports of solar panels in China is called for.

Technicians inspect that the solar panel products are ready for the European market in Ganyu,Jiangsu province. As a solution the European Union may impose anti-dumping tariffs on Chinese solar panels. The trade spokesman Jhon Clancy of EU confirmed that the commission has held a hearing with representatives of the pathovoltac industry, with about 60 participants coming from all sectors of the industry and including both those companies that produce solar panels and those that fit the solar panels.

Now Finally I would like to have a look at the case of today’s ‘super power ‘US .It is clear that protectionism, from the side of the United States, is the only way the American industrial economy can expand for the benefit of its citizens and for its national welfare The economy needs to get itself out of the huge deficit hole. The Nafta agreement in 1993 bought them to major unemployment in the nation but who benefits was those enterprises who made the overseas move right away, there was nothing but exorbitant profits to be made .

After seeing the above examples on how protectionist measures have helped different nations .Its affects and impact I would like to explain some theoretical advantages for the economy and society

Firstly. Protectionism protests domestic industries and their workers’ jobs. Labor unions and domestic industries often appeal to patriotism to marshal support for protectionist policies. “Buy American” has been a popular rallying cry, such as among the American auto industry when the Big

Three automakers faced stiff competition from Japanese imports. Economists concede that free trade imposes costs and burdens on some industries and workers in the short run, but that in the long term, it is far more beneficial than protectionism, which they believe helps only a select few at the expense of the larger economy and society.

Secondly, Advocates of protectionism contend that excessive free trade compromises national security by making nations too dependent on goods from other countries. They will then argue for protection of industries deemed vital to national security, such as steel and oil. Rising oil prices, for example, led to calls for more domestic oil production and less reliance on imports from other countries, such as those in the Middle East.

Thirdly, Governments often justify protectionist policies by claiming that such policies are necessary to help industries that are in their infancy to develop. The validity of this argument, however, is undermined by the tendency for such policies to become permanent as the aided industry grows dependent on the support and even lobbies government officials to keep protectionist measures in place.

This work is attempted to identify the meaning and advantages of protectionism. I have explained various examples through a case study and have also mentioned how protectionism is justified in those countries which answer the essay topic. I feel if a country over protects its goods and services then it’s more likely to face issues, hence the right balance of protectionist measure is important in every problem industries and businesses face. A country should make sure that its domestic industry is safe before opening up to free trade and inviting problems like the United States faced in 1993.

Protectionism is a policy adopted by countries to protect domestic industries from global competitors by imposing some restrictions on trade of goods and services between countries. In this policy government of that particular country increases tariffs (import taxes), Quotas, Embargoes (a complete ban on imported goods), import licensing, subsidies, exchange controls etc to increase prices of imported products which make them expensive and less attractive.

Protectionism marks an economic theory emphasizing minimization of free trade between nations. Many countries currently practice economic protectionism. Such countries believe that manufacturing of goods should take place in a country-wide, rather than a global setting. Nations may enforce protectionism through heavy tariffs of foreign goods, or higher taxation on foreign over domestic products.

Protectionism hold several advantages over the separate notion of free trade. Free trade marks a system in which a government minimizes control or in other words has no control over importation of foreign goods. It is understood that protected trade definitely allows for small domestic industries to grow. Protectionists argue that it only leads to lower taxation on domestic firms, lowered structural unemployment and less dumping of products into foreign markets. Small industries hold a greater chance of success in domestic markets versus world markets. Domestic markets may hold less competition than the greater pool of worldwide competitors.

For example, an Indian technological firm may hold the advantage of cutting costs in a manner impossible for United States firms. A government holds the prime responsibility of leveraging taxes to cover incurred costs. A nation may tax foreign imports more heavily than domestic imports. An advantage of protectionism holds that foreign goods lacking taxation in a free trade system gain unfair advantage over domestically taxed firms. Such taxed domestic firms may turn to dumping, or selling products below cost in a foreign market to gain new customer bases. Domestic firms may not compete efficiently with foreign firm costs. This creates structural unemployment. Protectionism holds the advantage of less stringent local labor competition. This in turn may lead to greater national job growth in some areas of manufacturing. This higher production of goods may then lead to a more stable balance of traded goods in place of trade deficit.

Having explained what protectionism is and how it works towards helping a country’s economy I would like to lay down few very well known advantages of Protectionism,

The motives for protection

A detailed view on why every country should adopt protectionism

Protect sunrise industries

Barriers to trade can be used to protect sunrise industries, also known as infant industries, such as those involving new technologies. This gives new firms the chance to develop, grow, and become globally competitive.

Protection of domestic industries may allow them to develop a comparative advantage. For example, domestic firms may expand when protected from competition and benefit from economies of scale. As firms grow they may invest in real and human capital and develop new capabilities and skills. Once these skills and capabilities are developed there is less need for trade protection, and barriers may be eventually removed.

Protect sunset industries

At the other end of scale are sunset industries, also known as declining industries, which might need some support to enable them to decline slowly, and avoid some of the negative effects of such decline. For the UK, each generation throws up its own declining industries, such as ship building in the 1950s, car production in the 1970s, and steel production in the 1990s.

Protect strategic industries

Barriers may also be erected to protect strategic industries, such as energy, water, steel, armaments, and food.

Protect non-renewable resources

Non-renewable resources, including oil, are regarded as a special case where the normal rules of free trade are often abandoned. For countries aiming to rely on oil exports lasting into the long term, such as the oil-rich Middle Eastern economies, limiting output in the short term through production quotas is one method employed to conserve resources.

Deter unfair competition

Barriers may be erected to deter unfair competition, such as dumping by foreign firms at prices below cost.

Help the environment

Some countries may protect themselves from trade to help limit damage to their environment, such as that arising from CO2 emissions caused by increased production and transportation.

Limit over-specialization

Many economists point to the dangers of over-specialization, which might occur as a result of taking the theory of comparative advantage to its extreme. Retaining some self-sufficiency is seen as a sensible economic strategy given the risks of global downturns, and an over-reliance on international trade.

Advantages of Trade Protectionism

Growth of Infant Industries:

If a country is trying to grow strong in a new industry, tariffs will protect it from foreign competitors. This allows companies in the new industry time to learn how to produce the good efficiently, and develop their own competitive advantages.

Infant Industries must be protected in order to allow them to grow to a point where they can fairly compete with the larger mature industries established in foreign countries.

Creates New Jobs:

If a country favors protectionism they will impose duty/tariff on goods from foreign market which will keep the foreign competitors away from entering into competition with domestic markets. This will in turn lead to consumers buying domestic products from domestic markets (as there is no competition from foreign markets). The more the consumers buy there is demand surplus. As domestic companies are protected by tariffs, quotas or subsidies, they will hire locally. This will lead to more employment opportunities for the locals.

One strength of protectionism is that it keeps the domestic economy flowing. The domestic economy also strengthens, because the unemployment rate will be minimal. This is because the domestic firms are able to produce and sell more goods with a lot less difficulty, giving firms less incentive to decrease its cost by decreasing its work force. The people with jobs will keep consuming, allowing a flow of the economy.

Anti-Dumping:

If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be ‘dumping’ the product. Protectionist measures have also helped as a reaction against ‘import dumping’. Dumping is a type of predatory pricing behavior and is also a form of price discrimination. . Actually in the short term, consumers benefit from the low prices of the foreign goods, but in the longer term, persistent undercutting of domestic prices will force the domestic industry out of business and allow the foreign firm to establish itself as a monopoly. Once this is achieved the foreign owned monopoly is free to increase its prices and exploit the consumer. Therefore protection, via tariffs on ‘dumped’ goods can be justified to prevent the long-term exploitation of the consumer.

Case study

India adopting protectionist measures in agricultural and dairy sectors’

According to Washington post India is not only adopting protectionist measures in the agriculture sector, but also has put unjustified barriers to US dairy and meat products, a former top American trade official has alleged.

“India is very protectionist when it comes to agriculture and to a large extent because they’re concerned about rural economic and political instability,” Allen Johnson, the former Chief Agricultural Negotiator in the Office of the US Trade Representative, told lawmakers at a Congressional hearing yesterday.

He said India has very high agricultural tariffs. “Some of the highest in the world, averaging between — maximum bound rates are generally between 100 per cent and 300 per cent, with an average of about 120 per cent. Applied tariffs are about average 35 per cent”.

Difference between the bound and applied is called water. “They use that water effectively for managing imports, basically. So if they want to avoid domestic food inflation, they lower the tariff. If they want to protect domestic prices, they raise the tariff. And they can do it within their WTO bound levels,” he explained.

Johnson said most US exports could face a bound level of up to 100 per cent.

Almonds, the top US export, faces a specific rate of Rs 35 per kg for shelled and Rs 57 per kg for unshelled.

“That’s equal, under recent prices, to about a 14 per cent tariff. Imagine what we could do if that didn’t exist, and it is our third largest export…,” he added.

“Other products, such as beef, pork, poultry are facing similar situations in that they have bound rates of 100 per cent and applied rates between 30 per cent and 100 per cent.

“Dairy, for example, has bound rates between 40 and 150 per cent and applied rates between 30 and 60 per cent. We actually import twice as much dairy from India as we export” he said.

Rational protectionism on diary products has helped the growth of local diary manufacturing giants like Amul. Amul spurred India’s White Revolution, which made the country the world’s largest producer of milk and milk products.[5] In the process Amul became the largest food brand in

India and has ventured into markets overseas.

‘Brazil adopting protectionist measures in Automobile sector’

Brazil has perfected the art. Looking for a way to reduce car imports, it introduced a new programme to encourage innovation, Inovar-Auto. Designed to stay within WTO rules, this requires Brazilian car manufacturers (all foreign-owned) to invest in local innovation and engineering and to meet certain fuel-efficiency standards by 2017, or else face higher excise taxes and import tariffs on domestic sales. This has boosted domestic investment in engineering and fuel-saving technology.

Brazil has also used state-controlled companies and banks to encourage domestic innovation and industry. Over the past decade it has required Petrobras, the state-controlled oil company, to meet ever tougher domestic-content requirements.

The US imposed tariffs of 35% on imports of tyres from China.

This was a tremendous victory for United States, Their workers and manufacturers when the World Trade Organization’s top court said that the US was entitled to impose extra safeguard duties on imports of Chinese tires. The Obama administration is going to fight for their business by ensuring jobs .They are going to use the trade laws to stand up for their workers and address harm to them. This protectionist measure has safe guarded the

U.S tire industry.

‘Japan’s flying geese strategy’

According to Ian Fletcher Author, ‘Free Trade Doesn’t Work: What Should Replace It and Why’

Tokyo instead protected its fledgling automobile industry in the 1950s, limiting imports to $500,000 per year. (In the 1960s, prohibitive tariffs replaced this quota.) Japan only allowed foreign investment in so far as this transferred technology to its own manufacturers. Today, it produces over two-and-a-half times as many cars as the U.S., mostly for export.

As Japan has historically been the economic leader for the whole of Confucian Asia (Japan, Korea, China, Taiwan, Vietnam, Hong Kong, and Singapore), its protectionist policies have been shared with nearby nations to a huge extent. The ultimate basis of these policies is an attitude towards economics that sees the economy not as an end in itself, but as an instrument of national power.

In relation to its neighbors, Japan has employed something called the “flying geese” strategy, christened thus by the Japanese economist Akamatsu Kaname in the 1930s. Japan breaks into an industry, wipes out existing Western competitors, then successively hands the industry down to less sophisticated neighboring economies such as Korea, Taiwan, Thailand, Malaysia, and Vietnam as they mature. This pattern has held for goods from garments to televisions for five decades. Japan’s withdrawal from labor-intensive goods in the 1970s opened up space for Taiwan, South Korea, Singapore, and Hong Kong, and their ongoing withdrawal from these goods is opening up space for China.

‘Russia’s plan to adopt protectionist measures’

According to RIA Novosti ‘ Russian President Vladimir Putin told international investors Wednesday that his government is planning protectionist measures to give an edge to domestic manufacturers in a move that will cause consternation among fellow World Trade Organization members.

Now having a look at US it is clear that protectionism, from the side of the United States, is the only way the American industrial economy can expand for the benefit of its citizens and for its national welfare the economy needs to get itself out of the huge deficit hole. The NAFTA agreement in 1993 bought them to major unemployment in the nation but who benefits was those enterprises who made the overseas move right away, there was nothing but exorbitant profits to be made.

Conclusion

Though anti-protectionist theorists argue that free trade will help in increased production and production efficiency, only rational protectionism will help in the growth of domestic economy. With this I conclude by saying every country must adopt ‘rational’ protectionism in order to sustain, compete and grow.

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