Protectionism - a general debate

In recent years, we have observed a rise in opposition against the regulations of world trade and a desire to distance away from international dependence. Following events such as Brexit and President Trump's election, many countries have implemented some protectionist policies. This politically motivated defensive measure has a significant impact on the conduct of international trade, and can shift dynamics between countries. However, protectionism is a controversial policy, triggering debates on whether it is politically and economically beneficial.



What is protectionism?

Protectionism refers to the general attitude that the national government or state should implement policies that restrict and restrain international trade through tariffs, government subsidies, import quotas, product standards, and other restrictions placed on the imports of foreign competitors. They are often implemented with the intent to protect domestic industries, local businesses and jobs against foreign competition.

Tariffs

Government levied tariffs are the main form of protectionist measures. There are different types of tariffs that are implemented in different circumstances, but all forms of tariffs are charged and collected by governments in the form of taxes. Taxes are implemented on imported goods that cross the national border of the home country in order to raise the price of articles to exceed those of local prices. One of the examples of trade protectionism is the Smoot-Hawley tariff of 1930. It was originally implemented to protect US farmers from the European agricultural imports that had begun to incorporate itself into the home market. As a result, foreign goods became less competitive compared to cheaper local goods of domestic industries, thus promoting the local products to consumers. This means that foreign competitive industries would be at risk of closure or be unable to enter the market due to the severe competition on pricing. This method works best in countries with a lot of imports as tariffs would decrease the negative impact of foreign competition.


Government subsidies

Governments can help domestic businesses compete by providing subsidies, which comes in the form of tax credits or direct payments. It allows local producers to lower the cost of production and therefore, the price of local goods and services. Subsidies’ ability to generate profits at lower price levels benefits both the consumer and the local business, as lower prices attract more consumers. As a result, since there is market competition in the free trade zone, consumers will choose the cheaper alternative of the same product, giving domestic industries an advantage. This method tends to work best for countries that rely mainly on exports as it would increase the domestic industries’ ability to increase the supply of their products in their home country. Examples of this method of protectionism are the subsidies paid by the Chinese government in order to help develop the country's automotive industry.


Import quotas

Trade quotas are non-tariff barriers that are put in place to set a limit on the quantity of products/certain goods that can be imported into a country over a set period of time. It limits the supply of specified products of a foreign industry, which allows local businesses to benefit and capitalize on unmet demand from the consumers. Therefore, import quotas tend to be more effective than protective tariffs, which do not always dissuade consumers who are willing to pay a higher price for an imported good. Quotas mean that no matter how low a foreign country sets the price through subsidies, it can’t ship more goods. Alternatively, quotas can sometimes cause the foreign industries to raise prices on their products in order for the industry to remain effective and profitable.


Additionally, embargos are the most severe type of quota, as it totally bans the importation of the designated product into the home country. This quota is beneficial because it prevents dangerous substances from entering the country as well as dumping, which is the exportation of foreign goods at a price lower than production costs.


Product standards

Product standards are limitations implemented by a home country to ensure the safety and quality of a product being imported. These limitations can be based on a variety of reasons such as the concerns over product safety, sub-standard materials or labelling. Product standards and administrative barriers make it more difficult to trade. However, these concerns may be exaggerated in order to benefit the local producers through the decrease of imports that comply with the product standards regulations. For example, some of the most popular French cheeses are banned from being imported to the US because they must be aged at least 60 days prior to being imported. This provides local producers the opportunity to compete in the market.




What are the advantages?

Throughout history, protective tariffs and other protectionist policies were usually implemented during times of economic recessions in order to stimulate industries and protect a country from foreign competitors. Overall, countries use protectionist policies in hopes of improving their balance of trade by reducing imports and increasing exports through the development of more profitable and competitive industries for the global marketplace. It's more efficient under the concept of comparative advantage for a country to focus its production on those goods for which it has an advantage in production and import those goods that it does not. However, in order to do so, countries feel the need to protect their domestic industries from imports that could hinder their growth, as increased trade creates new opportunities for foreign businesses to sell their products, increasing competition within the country.


One of the advantages of protectionism is that it can encourage local job growth. For example, the U.S. has to outsource labour because it is more profitable as the international wage standards are often lower than the domestic ones. Protectionism can prevent some of those jobs from being outsourced to cheaper labour. By protecting industries from international competition, it temporarily creates job opportunities for domestic workers, which stimulates the local economy. The protection created by tariffs, quotas, or subsidies encourages domestic companies to hire locally. However, it is not as effective as it stops being an advantage once other countries retaliate by implementing their own protectionist policies.


Secondly, protectionist policies may protect infant industries. Proponents of protectionism argue that these policies may be helpful in developing nations because by restricting imports, it aids the country's domestic economy to develop emergent industries. Protectionism would provide new industries with the opportunity to develop their own competitive advantages and a chance to strengthen, as protectionism policies would protect/ guard new domestic industries from foreign established competitors. Otherwise, the domestic industries might struggle to compete with other countries under free-market conditions. As a result, these developing industries may help grow the country's economy, create jobs, increase the overall wealth of the country and lead to a better balance of trade. Additionally, it can enable more diversity in the economy through the development of new industries.


Moreover, it reduces economic gaps. Although free trade is beneficial to the majority, this economic structure is most accommodating to the more privileged people and industries. By implementing protections on domestic goods and services, it becomes possible to reduce gaps in income and reduce class inequality within society.


Furthermore, protectionism can enhance national security. In some ways, the diversity of open borders can help an economy to thrive due to the fresh ideas and new perspectives that it brings. However, on the other hand, open borders bring about multitude of security concerns. By enforcing protectionist policies, the borders of a nation become more secure. That makes it more difficult for industries to enter a market, therefore preventing the importation of dangerous products. As a result, the general population feels more secure and engages in activities which benefit the economy.


Lastly, protectionist policies generate revenues for the government. Through the use of tariffs, revenues are used to fund government operations. Billions of dollars are generated annually because of the charging of taxes and tariffs. In 2017, the United States earned a total of $44 billion through protectionist policies.



What are the disadvantages? However, on the other hand, trade protectionism is not efficient from an economic standpoint. The Peterson Institute for International Economics estimates that ending all trade barriers would increase U.S. income by $500 billion. It makes the country and its industries less competitive in the long term, protectionism may protect inefficient smaller national firms, which can’t benefit from the same economies of scale, to stay in business.


Firstly, protectionism often raises import and consumer prices. Generally, competition within the market keeps prices down as businesses try to attract more consumers and sell more of their products. As a result of tariffs implemented on foreign goods, businesses have to raise their prices in order to remain profitable. Moreover, domestic companies often use this opportunity to raise their prices to match the price increase of foreign goods to increase their profits. This is a disadvantage for consumers because they would have to pay more money for the same goods.


Secondly, increasing protectionism may slow down economic growth as it could lead to retaliation from other countries. For example, such policies could cause layoffs among the 12 million U.S. workers who owe their jobs to exports.


Thirdly, these policies limit customer choice. Protectionism limits the choice presented by free trade because it would be harder for foreign markets to enter or compete in the home country, and international goods may not be supplied in such abundance to the local market. Moreover, consumers in the domestic market may be denied the ability to acquire better produced imports for the same price. As a result, the lack of competition within the market and the quality of products may inferior or limited.


Additionally, it can lower the quality or quantity of products for consumers. In the long term, trade protectionism weakens the industry. Due to the lack of competition, customers have limited choices for their products. This would also dissuade companies to innovate and improve the quality of their products within the country. This could potentially result in the decline of product standards for higher prices than that of foreign competitors. Moreover, one way in which foreign companies deal with the issue of tariffs is to change the export product or service being provided. Offering a smaller quantity of the same product or lowering its overall quality can keep pricing at acceptable levels for the consumer. This means that the consumers must either make-do with fewer items or settle for an inferior product compared to those of the free trade zone.


Moreover, protectionism may result in a skills-gap in the workforce, as it may also limit immigration and visa approvals into the country. For example, many high-skilled jobs in the UK are filled by immigrants. However, as one of the predominant arguments in favour of Brexit was the fact that immigrants take up a large portion of local job placements, limiting freedom of movement may result in “brain drain”, as service gaps begin to form in the economy, such as domestic shortages in several different sectors, including science and engineering, because there are not enough people educated in those disciplines locally.


Furthermore, in the worse case scenario, it may spark warfare between nations. Protectionism is more likely to start a “trade war” because global dynamics become risky and anarchic as each country acts for themselves. There are fewer opportunities for different nations to cooperate or communicate with each other about various issues, meaning that individual nations become unpredictable and are unaware of each other’s actions. In comparison, countries are unlikely to go to war with one another when their economies are dependent.



Is it the right policy? It is clear that protectionism is a complex and controversial policy choice. As with all other important issues, the issue of protectionism is multi-faceted; it is difficult to decide on whether the benefits outweigh the disadvantages brought about by it. In my opinion, protectionism benefits the country only for a short period of time, since other countries retaliate with their own trade barriers against imports. It can temporarily aid domestic infant industries to develop in a safe environment, which could increase growth in the local economy and make it more competitive in a free trade zone. However, in the long term protectionism may be destructive. Due to the fact that protectionism often hurts the people it is intended to protect by slowing economic growth and pushing up prices, making free trade a better alternative. However, I believe that there is no single recipe for success, as all countries are influenced by different factors, meaning that one has to critically evaluate all the benefits and detriments before deciding on the implementation of protectionism policies.



Sources:

  • https://www.investopedia.com/terms/p/protectionism.asp

  • https://www.britannica.com/topic/protectionism

  • https://www.thebalance.com/what-is-trade-protectionism-3305896

  • https://www.economicshelp.org/trade2/trade_protectionism/

  • https://vittana.org/13-most-valid-protectionism-pros-and-cons

  • https://www.economicshelp.org/trade2/benefits_free_trade/

  • https://www.ipe.com/investment/briefing-investment/world-trade-is-protectionism-on-the-rise/www.ipe.com/investment/briefing-investment/world-trade-is-protectionism-on-the-rise/10017403.fullarticle




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