Protectionism

"Protectionist" redirects here. For other uses, see Protectionist (disambiguation).

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Protectionism is the economic policy of restraining trade between states (countries) through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow (according to proponents) fair competition between imports and goods and services produced domestically.

This policy contrasts with free trade, where government barriers to trade are kept to a minimum. In recent years, protectionism has become closely aligned with anti-globalization and anti-immigration. The term is mostly used in the context of economics, where protectionism refers to policies or doctrines which protect businesses and workers within a country by restricting or regulating trade with foreign nations.

Protectionist policies

Protectionist measures taken 2008–2013 according to Global Trade Alert.

A variety of policies have been used to achieve protectionist goals. These include:

1. Tariffs: Typically, tariffs (or taxes) are imposed on imported goods. Tariff rates usually vary according to the type of goods imported. Import tariffs will increase the cost to importers, and increase the price of imported goods in the local markets, thus lowering the quantity of goods imported, to favour local producers. Tariffs may also be imposed on exports, and in an economy with floating exchange rates, export tariffs have similar effects as import tariffs. However, since export tariffs are often perceived as 'hurting' local industries, while import tariffs are perceived as 'helping' local industries, export tariffs are seldom implemented.
2. Import quotas: To reduce the quantity and therefore increase the market price of imported goods. The economic effects of an import quota is similar to that of a tariff, except that the tax revenue gain from a tariff will instead be distributed to those who receive import licenses. Economists often suggest that import licenses be auctioned to the highest bidder, or that import quotas be replaced by an equivalent tariff.
3. Administrative barriers: Countries are sometimes accused of using their various administrative rules (e.g. regarding food safety, environmental standards, electrical safety, etc.) as a way to introduce barriers to imports.
4. Anti-dumping legislation: Supporters of anti-dumping laws argue that they prevent "dumping" of cheaper foreign goods that would cause local firms to close down. However, in practice, anti-dumping laws are usually used to impose trade tariffs on foreign exporters.
5. Direct subsidies: Government subsidies (in the form of lump-sum payments or cheap loans) are sometimes given to local firms that cannot compete well against imports. These subsidies are purported to "protect" local jobs, and to help local firms adjust to the world markets.
6. Export subsidies: Export subsidies are often used by governments to increase exports. Export subsidies have the opposite effect of export tariffs because exporters get payment, which is a percentage or proportion of the value of exported. Export subsidies increase the amount of trade, and in a country with floating exchange rates, have effects similar to import subsidies.
7. Exchange rate manipulation: A government may intervene in the foreign exchange market to lower the value of its currency by selling its currency in the foreign exchange market. Doing so will raise the cost of imports and lower the cost of exports, leading to an improvement in its trade balance. However, such a policy is only effective in the short run, as it will most likely lead to inflation in the country, which will in turn raise the cost of exports, and reduce the relative price of imports.
8. International patent systems: There is an argument for viewing national patent systems as a cloak for protectionist trade policies at a national level. Two strands of this argument exist: one when patents held by one country form part of a system of exploitable relative advantage in trade negotiations against another, and a second where adhering to a worldwide system of patents confers "good citizenship" status despite 'de facto protectionism'. Peter Drahos explains that "States realized that patent systems could be used to cloak protectionist strategies. There were also reputational advantages for states to be seen to be sticking to intellectual property systems. One could attend the various revisions of the Paris and Berne conventions, participate in the cosmopolitan moral dialogue about the need to protect the fruits of authorial labor and inventive genius...knowing all the while that one's domestic intellectual property system was a handy protectionist weapon."
9. Employment-based immigration restrictions, such as labor certification requirements or numerical caps on work visas.
10. Political campaigns advocating domestic consumption (e.g. the "Buy American" campaign in the United States, which could be seen as an extra-legal promotion of protectionism.)
11. Preferential governmental spending, such as the Buy American Act, federal legislation which called upon the United States government to prefer U.S.-made products in its purchases.

In the modern trade arena many other initiatives besides tariffs have been called protectionist. For example, some commentators, such as Jagdish Bhagwati, see developed countries efforts in imposing their own labor or environmental standards as protectionism. Also, the imposition of restrictive certification procedures on imports are seen in this light.

Further, others point out that free trade agreements often have protectionist provisions such as intellectual property, copyright, and patent restrictions that benefit large corporations. These provisions restrict trade in music, movies, pharmaceuticals, software, and other manufactured items to high cost producers with quotas from low cost producers set to zero.

History

Historically, protectionism was associated with economic theories such as mercantilism (that believed that it is beneficial to maintain a positive trade balance), and import substitution. During that time, Adam Smith famously warned against the "interested sophistry" of industry, seeking to gain advantage at the cost of the consumers.

Mainstream economists agree that protectionism is harmful in that its costs outweigh the benefits and that it impedes economic growth.

Cambridge University Professor Ha-Joon Chang argues that virtually all developed countries today successfully promoted their national industries through protectionism. Chang points to the significantly high tariffs of the UK, the US and other countries during their process of industrialization. While noting the success of protectionism, Chang has attempted to argue that it would be unfair if the developed countries now re-instituted protectionism by stating that those countries that used protectionist policies during their growth would be trying to "kick away the ladder" from developing countries. In the words of 19th century German economist, Friedrich List:

It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him. In this lies the secret of the cosmopolitical doctrine of Adam Smith, and of the cosmopolitical tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations. Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth

—

Arguments for protectionism

Although economists are generally against the policy of trade restrictions, protectionists believe that there is a legitimate need for government restrictions on free trade in order to protect their country’s economy and its people’s standard of living.

Infant industry argument

Main article: Infant industry argument

Protectionists believe that 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. They believe that without this protection, infant industries will die before they reach a size and age where economies of scale, industrial infrastructure, and skill in manufacturing have progressed sufficiently to allow the industry to compete in the global market.

Criticisms of the Theory of Comparative Advantage as a basis for trade policy

According to Britannica.com, "The theory of comparative advantage provides a strong argument in favour of free trade and specialization among countries. The issue becomes much more complex, however, as the theory’s simplifying assumptions—a single factor of production, a given stock of resources, full employment, and a balanced exchange of goods—are replaced by more-realistic parameters."

Protectionists argue that comparative advantage has lost its legitimacy in a globally integrated world in which capital is free to move internationally. Herman Daly, a leading voice in the discipline of ecological economics, emphasizes that although Ricardo's theory of comparative advantage is one of the most elegant theories in economics, its application to the present day is illogical: "Free capital mobility totally undercuts Ricardo's comparative advantage argument for free trade in goods, because that argument is explicitly and essentially premised on capital (and other factors) being immobile between nations. Under the new global economy, capital tends simply to flow to wherever costs are lowest—that is, to pursue absolute advantage." Protectionists would point to the building of plants and shifting of production to Mexico by American companies such as GE, GM, and Hershey Chocolate as proof of this argument.

Domestic tax policies can favor foreign goods

Protectionists believe that allowing foreign goods to enter domestic markets without being subject to tariffs or other forms of taxation, leads to a situation where domestic goods are at a disadvantage, a kind of reverse protectionism. By ruling out revenue tariffs on foreign products, governments must rely solely on domestic taxation to provide its revenue, which falls disproportionately on domestic manufacturing. As Paul Craig Roberts notes: "Foreign discrimination of US products is reinforced by the US tax system, which imposes no appreciable tax burden on foreign goods and services sold in the US but imposes a heavy tax burden on US producers of goods and services regardless of whether they are sold within the US or exported to other countries."

Protectionists argue that this reverse protectionism is most clearly seen and most detrimental to those countries (such as the US) that do not participate in the Value Added Tax (VAT) system. This is a system which generates revenues from taxation on the sale of goods and services, whether foreign or domestic. Protectionists argue that a country that does not participate is at a distinct disadvantage when trading with a country that does. That the final selling price of a product from a non-participating country sold in a country with a VAT tax must bear not only the tax burden of the country of origin, but also a portion of the tax burden of the country where it is being sold. Conversely, the selling price of a product made in a participating country and sold in a country that does not participate, bears no part of the tax burden of the country in which it is sold (as do the domestic products it is competing with). Moreover, the participating country rebates VAT taxes collected in the manufacture of a product if that product is sold in a non-participating country. According to Congressman Bill Pascrell, Jr., "Altogether, imports into the U.S. face average tariffs of 1.3% and no VAT penalty, whereas U.S. exports face average tariffs worldwide of about 40% plus VAT border adjustment penalty of 15.7%. In addition, foreign companies get a VAT rebate when they export to the U.S. averaging 15.7%!"

Protectionists believe that governments should address this inequity, if not by adopting a VAT tax, then by at least imposing compensating taxes (tariffs) on imports.

Unrestricted trade undercuts domestic policies for social good

Most industrialized governments have long held that laissez-faire capitalism creates social evils that harm its citizens. To protect those citizens, these governments have enacted laws that restrict what companies can and can not do in pursuit of profit. Examples are laws regarding:

• collective bargaining
• child labor
• competition (antitrust)
• environmental protection
• equal opportunity
• intellectual property
• minimum wage
• occupational safety and health

Protectionists argue that these laws, adding cost to production, place an economic burden on domestic companies bound by them that put those companies at a disadvantage when they compete, both domestically and abroad, with goods and services produced in countries without such laws. They argue that governments have a responsibility to protect their corporations as well as their citizens when putting its companies at a competitive disadvantage by enacting laws for social good. Otherwise they believe that these laws end up destroying domestic companies and ultimately hurting the citizens these laws were designed to protect.

Arguments against protectionism

Protectionism is frequently criticized by economists as harming the people it is meant to help. Mainstream economists instead support free trade. Economic theory, under the principle of comparative advantage, shows that the gains from free trade outweigh any losses as free trade creates more jobs than it destroys because it allows countries to specialize in the production of goods and services in which they have a comparative advantage. Protectionism results in deadweight loss; this loss to overall welfare gives no-one any benefit, unlike in a free market, where there is no such total loss. According to economist Stephen P. Magee, the benefits of free trade outweigh the losses by as much as 100 to 1.

Economists, including Nobel prize winners Milton Friedman and Paul Krugman, believe that free trade helps workers in developing countries, even though they are not subject to the stringent health and labour standards of developed countries. This is because "the growth of manufacturing — and of the myriad other jobs that the new export sector creates — has a ripple effect throughout the economy" that creates competition among producers, lifting wages and living conditions. Economists have suggested that those who support protectionism ostensibly to further the interests of workers in least developed countries are in fact being disingenuous, seeking only to protect jobs in developed countries. Additionally, workers in the least developed countries only accept jobs if they are the best on offer, as all mutually consensual exchanges must be of benefit to both sides, or else they wouldn't be entered into freely. That they accept low-paying jobs from companies in developed countries shows that their other employment prospects are worse. A letter reprinted in the May 2010 edition of Econ Journal Watch identifies a similar sentiment against protectionism from sixteen British economists at the beginning of the 20th century.

Alan Greenspan, former chair of the American Federal Reserve, has criticized protectionist proposals as leading "to an atrophy of our competitive ability. ... If the protectionist route is followed, newer, more efficient industries will have less scope to expand, and overall output and economic welfare will suffer."

Protectionism has also been accused of being one of the major causes of war. Proponents of this theory point to the constant warfare in the 17th and 18th centuries among European countries whose governments were predominantly mercantilist and protectionist, the American Revolution, which came about ostensibly due to British tariffs and taxes, as well as the protective policies preceding both World War I and World War II. According to a slogan of Frédéric Bastiat (1801–1850), "When goods cannot cross borders, armies will."

Free trade promotes equal access to domestic resources (human, natural, capital, etc.) for domestic participants and foreign participants alike. Some thinkers extend that under free trade, citizens of participating countries deserve equal access to resources and social welfare (labor laws, education, etc.). Visa entrance policies tend to discourage free reallocation between many countries, and encourage it with others. High freedom and mobility has been shown to lead to far greater development than aid programs in many cases, for example eastern European countries in the European Union. In other words visa entrance requirements are a form of local protectionism.

Current world trends

Since the end of World War II, it has been the stated policy of most First World countries to eliminate protectionism through free trade policies enforced by international treaties and organizations such as the World Trade Organization Certain policies of First World governments have been criticized as protectionist, however, such as the Common Agricultural Policy in the European Union, longstanding agricultural subsidies and proposed "Buy American" provisions in economic recovery packages in the United States .

Heads of the G20 meeting in London on 2 April 2009 pledged "We will not repeat the historic mistakes of protectionism of previous eras". Adherence to this pledge is monitored by the Global Trade Alert, providing up-to-date information and informed commentary to help ensure that the G20 pledge is met by maintaining confidence in the world trading system, detering beggar-thy-neighbour acts, and preserving the contribution that exports could play in the future recovery of the world economy. Although they were reiterating what they had already committed to, last November in Washington, 17 of these 20 countries were reported by the World Bank as having imposed trade restrictive measures since then. In its report, the World Bank says most of the world's major economies are resorting to protectionist measures as the global economic slowdown begins to bite. Economists who have examined the impact of new trade-restrictive measures using detailed bilaterally monthly trade statistics estimated that new measures taken through late 2009 were distorting global merchandise trade by 0.25% to 0.5% (about $50 billion a year).

Krugman contrasts between Free Trade and Protectionism, the latter having various flaws. However, a third way has been suggested; replacing the WTO area with a "Free Trade under Contractual Development Area" All the countries of this wide area would systematically use a percentage of export income to develop domestic social protection and human capital. It means an area where national economies would respect the current existing rules of the W.T.O. which would add the rule that each national economy would use a part (specified in advance) of the created wealth to develop infrastructures and social protection.

There is a broad consensus among economists that the impact of protectionism on economic growth (and on economic welfare in general) is largely negative, although researchers have pointed out that the magnitude of this impact varies considerably across countries and crucially depends on the macroeconomic and policy environment. Although, to date, there is no major evidence that concrete protectionist measures have increased, protectionist pressures seem to be mounting. Support for globalization is weakening in several regions of the world, which is unsurprising given that protectionist pressures tend to become stronger at times of economic and financial stress.

See also

• American School (economics)
• Henry C. Carey
• Developmentalism
• Digital Millennium Copyright Act
• Economic patriotism
• Free trade debate
• Alexander Hamilton
• Friedrich List
• Lobbying
• Not Invented Here
• Project Labor Agreement
• Protected Geographical Status
• Protection or Free Trade
• Rent seeking
• Voluntary Export Restraint
• Washington Consensus
• WTO
• Protectionism in the United States

External links

• Voluntary Export Restrictions on Automobiles
• Protectionism and the Civil War
• FoEI Citizens' Guide To: What is trade?
• American Economic Alert
• Paul Craig Roberts' critique of free trade
• Pat Buchanan commentary on protectionism
• Pat Buchanan view on how revenue tariffs to compensate for foreign countries' VAT rebates on exports can better create a "level playing field"
• Warren Buffett's proposal for use of Import Certificates (IC's) as an alternative to revenue tariffs
• Phyllis Schlafly's 1996 review of free trade and protectionism within the United States
• Economy In Crisis
• Bhagwati, Jagdish (2008). "Protectionism". In David R. Henderson (ed.). Concise Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN 978-0865976658. OCLC 237794267. 
• Protectionism and Protectionists Theories in the Balkans in the Interwar Period