Protectionism

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In economics, protectionism is the economic policy of restraining trade between 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. According to their proponents, protectionist policies protect the businesses and workers within a country by restricting or regulating trade with foreign nations.[1] In recent years, protectionism has manifested itself through popular anti-globalization and anti-immigration movements.

The doctrine of protectionism contrasts with the doctrine of free trade, where governments reduce as much as possible the barriers to trade. There is a broad consensus among economists that the impact of protectionism on economic growth (and on economic welfare in general) is largely negative.[2]

Protectionist policies[edit]

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

  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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."[3]
  • Employment-based immigration restrictions, such as labor certification requirements or numerical caps on work visas.
  • 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.)
  • 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.[4][5]

History[edit]

See also: American School (economics)

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.[6] Friedrich List saw Adam Smith's views on free trade as disingenuous and really in support of a long-term British program for economic domination:

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.[7]

According to Michael Lind, protectionism was the policy of the United States from the passage of the Tariff of 1816 to WWII, "switching to free trade only in 1945, when most of its industrial competitors had been wiped out" by the war.[8] In the late 19th Century, Germany, too, used protectionist measures to grow its industry.[9] After WWII, Japan followed that model.[10] It has also been argued that Deng Xiaoping's post-Mao policies were inspired by List,[11] as well as recent policies in India.[12][13]

Arguments for protectionism[edit]

Although most 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, for example Pres. William McKinley in 1892:

"Under free trade the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man. [It is said] that protection is immoral.... Why, if protection builds up and elevates 63,000,000 [the U.S. population] of people, the influence of those 63,000,000 of people elevates the rest of the world. We cannot take a step in the pathway of progress without benefiting mankind everywhere. Well, they say, 'Buy where you can buy the cheapest'.... Of course, that applies to labor as to everything else. Let me give you a maxim that is a thousand times better than that, and it is the protection maxim: 'Buy where you can pay the easiest.' And that spot of earth is where labor wins its highest rewards."[14]

Infant industry argument[edit]

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.

Arguments against protectionism[edit]

Protectionism is frequently criticized by economists as harming the people it is meant to help. Mainstream economists instead support free trade.[6][15] 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.[16] 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.[17]

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.[18] Economists[who?] 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.[19] 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 16 British economists at the beginning of the 20th century.[20]

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."[21]

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."[22]

Current world trends[edit]

Protectionist measures taken 2008–2013 according to Global Trade Alert.[23]

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[24] Certain policies of First World governments have been criticized as protectionist, however, such as the Common Agricultural Policy[25] in the European Union, longstanding agricultural subsidies and proposed "Buy American" provisions[26] 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,[27] 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-neighbor 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).[28]

See also[edit]

References[edit]

  1. ^ Xinhua (2012-05-24). "Trade-oriented Economy Boosts Growth, Employment". CRI English. Retrieved 26 May 2012. 
  2. ^ See P.Krugman, «The Narrow and Broad Arguments for Free Trade», American Economic Review, Papers and Proceedings, 83(3), 1993 ; and P.Krugman, Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations, New York, W.W. Norton & Company, 1994.
  3. ^ Peter Drahos; John Braithwaite (2002). Information Feudalism: Who Owns the Knowledge Economy?. London: Earthscan. p. 36. ISBN 9781853839177. 
  4. ^ [1] Archived October 17, 2006, at the Wayback Machine.
  5. ^ The Conservative Nanny State
  6. ^ a b Free to Choose, Milton Friedman
  7. ^ The National System of Political Economy, by Friedrich List, 1841, translated by Sampson S. Lloyd M.P., 1885 edition, Fourth Book, "The Politics", Chapter 33.
  8. ^ Michael Lind, "Free Trade Fallacy", New America Foundation, January 1, 2003.
  9. ^ G. B. Curtiss, Protection and Prosperity; and W. H. Dawson, Protection in Germany (London, 1904)
  10. ^ List's influences Japan: see "(3) A contrary view: How the World Works, by James Fallows"
  11. ^ "berkeley.edu on List influences of Deng" (PDF). 
  12. ^ Frederick Clairmonte, "FRIEDRICH LIST AND THE HISTORICAL CONCEPT OF BALANCED GROWTH", Indian Economic Review, Vol. 4, No. 3 (February 1959), pp. 24-44.
  13. ^ Mauro Boianovsky, "Friedrich List and the economic fate of tropical countries", Universidade de Brasilia, June 2011, p. 2.
  14. ^ William McKinley speech, Oct. 4, 1892 in Boston, MA William McKinley Papers (Library of Congress)
  15. ^ Krugman, Paul R. (1987). "Is Free Trade Passe?". The Journal of Economic Perspectives 1 (2): 131–144. doi:10.1257/jep.1.2.131. JSTOR 1942985. 
  16. ^ Krugman, Paul (Jan. 24, 1997). The Accidental Theorist. Slate.
  17. ^ Magee, Stephen P. (1976). International Trade and Distortions In Factor Markets. New York: Marcel-Dekker. 
  18. ^ Krugman, Paul (Mar. 21, 1997). In Praise of Cheap Labor. Slate.
  19. ^ Krugman, Paul (Nov. 21, 1997). A Raspberry for Free Trade. Slate.
  20. ^ "Convictions Opposed to Certain Popular Opinions: The 1903 Anti-Protectionism Letter Supported by 16 British Economists". Econ Journal Watch 7(2): 157–161, May 2010. econjwatch.org
  21. ^ Sicilia, David B. & Cruikshank, Jeffrey L. (2000). The Greenspan Effect, p. 131. New York: McGraw-Hill. ISBN 0-07-134919-7.
  22. ^ DiLorenzo, T. J., ‘Frederic Bastiat (1801–1850): Between the French and Marginalist Revolutions’, accessed at [Ludwig Von Mises Institute] 2012-04-13
  23. ^ http://www.globaltradealert.org/
  24. ^ Fouda, Regine (October 2012). "Protectionism and Free Trade: A Country‘s Glory or Doom?" (PDF). International Journal of Trade, Economics and Finance. 5 3: 351. Retrieved 13 April 2014. .
  25. ^ "A French Roadblock to Free Trade". The New York Times. 2003-08-31. Retrieved 2010-05-22. 
  26. ^ dw-world.de
  27. ^ Independent monitoring of policies that affect world trade. Global Trade Alert. Retrieved on 2013-08-17.
  28. ^ imf.org

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