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Protectionism is the economic policy of restraining trade between states, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to discourage imports, and prevent foreign take-over of native markets and companies. This policy is closely aligned with anti-globalization, and contrasts with free trade, where government barriers to trade and movement of capital are kept to a minimum. 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.

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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.[1] Most modern economists agree that protectionism is harmful in that its costs outweigh the benefits, and that it impedes economic growth.[2][3] Economics Nobel prize winner and trade theorist Paul Krugman once famously stated that, "If there were an Economist’s Creed, it would surely contain the affirmations 'I understand the Principle of Comparative Advantage' and 'I advocate Free Trade'."[4]

Recent examples of protectionism in first world countries are typically motivated by the desire to protect the livelihoods of individuals in politically important domestic industries.[citation needed] Whereas formerly mostly blue-collar jobs were being lost from developed countries to foreign competition, in recent years there has been a renewed discussion of protectionism due to offshore outsourcing and the loss of white-collar jobs. However, most economists agree that the benefits from free trade in the form of consumer surplus and increased efficiency outweigh the losses of jobs by at least a margin of 2 to 1, with some arguing the margin is as high as 100 to 1 in favor of free trade.[5]

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Protectionism in the United States

Free trade and protectionism are regional issues. Free trade in America is the policy of economics developed by American slave holding states and protectionism is a northern, manufacturing issue. Although not as animating an issue as slavery, differences in trade between the two regions contributed to the Civil War and remain a point of national difference even today.

Historically, southern slave holding states, because of their low cost manual labor, had little perceived need for mechanization, and supported having the right to purchase manufactured goods from any nation. Thus they called themselves free traders.

Northern states, on the other hand, sought to develop a manufacturing capacity, and successfully raised tariffs to allow nascent Northern manufacturers to compete with their more efficient British competitors. Beginning with 1st U.S. Secretary of the Treasury Alexander Hamilton's "Report on Manufactures", in which he advocated tariffs to help protect infant industries, including bounties (subsidies) derived in part from those tariffs, the United States was the leading nation opposed to "free trade" theory. Throughout the 19th century, leading U.S. statesmen, including Senator Henry Clay, continued Hamilton's themes within the Whig Party under the name "American System."

The opposed Southern Democratic Party contested several elections throughout the 1830s, 1840s, and 1850s in part over the issue of the tariff and protection of industry. However, Southern Democrats were never as strong in the US House as the more populated North. The Northern Whigs sought and got higher protective tariffs, over the bitter resistance of the South. One Southern state precipitated what was called the nullification crisis over the issue of tariffs, arguing that states had the right to ignore federal laws. Mostly over the issue of abolition and other scandals, the Whigs would ultimately collapse, leaving a void which the fledgling Republican Party, led by Abraham Lincoln, would fill. Lincoln, who called himself a "Henry Clay tariff Whig", strongly opposed free trade. He implemented a 44 percent tariff during the Civil War in part to pay for the building of the Union-Pacific Railroad, the war effort, and to protect American industry.[6]

This support for Northern industry was ultimately successful. By President Lincoln's term, the northern manufacturing states had ten times the GDP of the South. Armed with this economic advantage, the North was easily able to defeat the South by starving the South of weapons through a near total blockade, while at the same time was able to supply its own army with everything from heavy artillery to repeating Henry rifles.

With the North winning the Civil War, Republican dominance was assured over the Democrats. Republicans continued to dominate American politics until around the early 20th century. President William McKinley stated the United States' stance under the Republican Party as thus:

"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."[7]

Southern Democrats gradually rebuilt their party, and allied themselves with Northern Progressives. They had many differences but both were staunchly opposed to the great corporate trusts that had built up, and Republican corruption was endemic. This marriage of convenience to face a common enemy reinvigorated the Democratic Party, which catapulted back into power. Northern Progressives sought free trade to undermine the power base of Republicans - Woodrow Wilson would admit as much in a speech to Congress. A brief resurgence by Republicans in the 1920s was disastrous for them. Woodrow Wilson's ideological understudy[citation needed], Franklin Roosevelt, would essentially blame the Great Depression upon the protectionist policies exemplified by the previous Republican President, Herbert Hoover.[citation needed]

The Democratic Party would continue to advance free trade,[citation needed] to appeal to its southern wing, carefully balancing a growing voice among its labor side for restraint. Free trade were among the postwar goals of the Allies in World War II, and many rounds of discussions and treaties would gradually advance this cause. Having been stuck with the blame for the Great Depression, Republicans would gradually become zealots of free trade, a position they retain to this day.

In the 1960s, the Democratic Party lost its Southern base by passing, in concert with northern Republicans, numerous Civil Rights reforms. The Republican party leveraged its free trade zealotry, along with a tacit disapproval of civil rights reforms, to gain those Southern Votes. Thus the Republican Party traded regions with the Democratic Party. Ironically, having supported free trade so vocally in response to having been labeled as Herbert Hoover instigators of the Great Depression, in the election of 2008 Republicans found themselves condemned for not being protectionist.

Protectionist policies

A variety of policies can be 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. 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 (eg. 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 foreign 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 are the opposite of export tariffs, exporters are paid a percentage of the value of their exports. 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.

De facto protectionism

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, drugs, software, and other manufactured items to high cost producers with quotas from low cost producers set to zero.[8][9]

Arguments for protectionism

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.

The "Comparative Advantage" argument has lost its legitimacy

Opponents of free trade often argue that the comparative advantage argument for free trade 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." [10]

Protectionists would point to the building of plants and shifting of production to Mexico by American companies such as GE, GM, and even Hershey Chocolate as proof of this argument.

Domestic tax policies can favor foreign goods

Protectionist believe that allowing foreign goods to enter domestic markets without being subject to tariffs or other forms of taxation, leads to a situation were 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."[11]

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 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 were 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. This allows exporters of goods from participating countries to reduce the price of products sold in non-participating countries.

Protectionists believe that governments should address this inequity, most likely in the form of tariffs.

Infant industry argument

Some proponents of protectionism claim that imposing tariffs that help protect newly founded infant industries allows those domestic industries to grow and become self-sufficient within the international economy once they reach a reasonable size.

Free Trade undercuts domestic policies for social good

Protectionists argue that governments rightly enact policies into law to protect its citizens from the excesses of laissez-faire capitalism. Examples are:


Child Labor Laws

Environmental Protection Laws

Product Safety Laws

Anti-Trust Laws

Occupational Safety Laws

Equal Opportunity Laws

Intellectual Property Laws

Minimum Wage Laws


Protectionists argue that these laws place a burden on companies that put them at a disadvantage when they compete, both domestically and abroad, with goods and services produced by companies unfettered by such restrictions.

Protectionists argue that governments have a responsibility to protect domestic companies when putting them 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 as harming the people it is meant to help. Many mainstream economists instead support free trade.[1][4] 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.[12] 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.[13]

Most 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 of 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.[14] Economists have suggested that those who support protectionism ostensibly to further the interests of third world workers are in fact being disingenuous, seeking only to protect jobs in developed countries.[15] Additionally, workers in the third world only accept jobs if they are the best on offer, as all mutually consensual exchanges must be of benefit to both sides, else they wouldn't be entered into freely. That they accept low-paying jobs from first world companies shows that their other employment prospects are worse.

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."[16]

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 primarily due to British tariffs and taxes, as well as the protective policies preceding both World War I and World War II. According to Frederic Bastiat, "When goods cannot cross borders, armies will."

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[17] in the European Union and proposed "Buy American" provisions[18] in economic recovery packages in the United States.

The current round of trade talks by the World Trade Organization is the Doha Development Round and the last session of talks in Geneva, Switzerland led to an impassé. The leaders' statement in the G20 meeting in London in early 2009 included a promise to continue the Doha Round.

Protectionism after the 2008 financial crisis

Heads of the G20 at their recent London summit pledged to abstain from imposing any trade protectionist measures. 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.

There is a growing fear that protectionism will slowly sneak in and grow in the wake of the crisis. Apart from direct trade measures, a number of countries are introducing sector-specific bailout packages targeted to support crisis-hit companies, such as for automobile firms. These could distort resource allocation, and prove disadvantageous for other sectors and competitors in other countries — thereby effectively becoming trade barriers. Also, governments the world over are likely to run into very high fiscal deficits in the process that will be difficult to sustain. Remaining un-protectionist is necessary, yet not sufficient. It is vital to intensify the process of trade facilitation and removal of the persistent non-tariff border barriers to trade. Diverting resources to trade-creating investment is vital. The G20’s commitment of $250 billion for trade finance is noteworthy in this context, as the decline in trade credit contributed significantly to the fall in trade flows. It is also clear that this needs to be done in a politically palatable manner. The governments will have to cleverly tread the thin line between protectionistic measures that help domestic economy while taking action to accelerate global trade. Discriminatory procurement actions such as the “Buy American” clause included in stimulus packages are clearly not right since they run the risk of encouraging retaliation and severely constrain supply chains that use imported inputs. [19]

See also

References

  1. ^ a b Free to Choose, Milton Friedman
  2. ^ Bhagwati, Jagdish. "CEE:Protectionism". Concise Encyclopedia of Economics. Library of Economics and Liberty. http://www.econlib.org/library/Enc/Protectionism.html. Retrieved 2008-09-06. 
  3. ^ Mankiw, N. Gregory. "Smart Taxes: An Open Invitation to Join the Pigou Club" (PDF). http://www.economics.harvard.edu/faculty/mankiw/files/Smart%20Taxes.pdf. Retrieved 2008-09-06. 
  4. ^ a b Krugman, Paul R. (1987). "Is Free Trade Passe?". The Journal of Economic Perspectives 1 (2): 131–144. http://www.jstor.org/pss/1942985. 
  5. ^ Benefits of offshoring jobs exaggerated: Experts- Outsourcing-Indiatimes - Infotech
  6. ^ [1] Lind, Michael. New America Foundation.
  7. ^ William McKinley speech, Oct. 4, 1892 in Boston, MA William McKinley Papers (Library of Congress)
  8. ^ [2]
  9. ^ The Conservative Nanny State
  10. ^ Daly, Herman (2007). Ecological Economics and Sustainable Development, Selected Essays of Herman Daly. Northampton MA: Edward Elgar Publishing. 
  11. ^ Paul Craig Roberts (July 26, 2005). "US Falling Behind Across the Board". VDARE.com. http://www.vdare.com/roberts/050726_behind.htm. Retrieved 2008-10-08. 
  12. ^ Krugman, Paul (Jan. 24, 1997). The Accidental Theorist. Slate.
  13. ^ Magee, Stephen P. (1976). International Trade and Distortions In Factor Markets. New York: Marcel-Dekker. 
  14. ^ Krugman, Paul (Mar. 21, 1997). In Praise of Cheap Labor. Slate.
  15. ^ Krugman, Paul (Nov. 21, 1997). A Raspberry for Free Trade. Slate.
  16. ^ Sicilia, David B. & Cruikshank, Jeffrey L. (2000). The Greenspan Effect, p. 131. New York: McGraw-Hill. ISBN 0-07-134919-7.
  17. ^ http://www.nytimes.com/2003/08/31/opinion/a-french-roadblock-to-free-trade.html
  18. ^ http://www.dw-world.de/dw/article/0,,3988551,00.html
  19. ^ Prakash, Shravani, Protect trade from protectionism, The Economic Times, 27th April, 2009

External links


Simple English

Protectionism means that a country has laws or other rules that make it easier for their own products and brands to sell by making goods from foreign countries more expensive or harder to get.

The idea of protectionism is to stop outsourcing (when a country buys goods from other countries instead of producing their own).

For example, if farmers from China selling wheat at a lower price than American farmers are, Americans would buy more wheat from Chinese farmers than American farmers, and American farmers would lose money because they cannot compete with China.

The benefits to protectionism is that some people in a country would make more money because they would be able to sell things at higher prices, but on the other hand, other people would lose money because they wouldn't be able to buy the things from other countries that sell them cheaper.

Many protectionists (people who believe in protectionism) support a lot of tariffs (taxes on a trade involving a foreign country) because the government can get a lot of money from the tariffs.

When a country raises a tariff on another country, usually the other country raises their tariffs on that country to get even. This is called a trade war.

Tariffs were popular in the United States during the 1800's, but when the United States made the Hawley-Smoot Tariff a law in 1930, it raised tariffs very high on Europe. In response, Europe raised its tariffs on the United States, which resulted in a trade war. Many economists and historians believe that the tariffs made the Great Depression worse.

Protectionism is no longer popular now. Instead, people support free trade (the opposite of protectionism where the government makes it easier for the country to trade with other countries).

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