protectionism

protectionism

[pruh-tek-shuh-niz-uhm]

Policy of protecting domestic industries against foreign competition by means of tariffs, subsidies, import quotas, or other handicaps placed on imports. The chief protectionist measures, government-levied tariffs, raise the price of imported articles, making them less attractive to consumers than cheaper domestic products. Import quotas, which limit the quantities of goods that can be imported, are another protectionist device. Wars and economic depressions historically have resulted in increases in protectionism, while peace and prosperity have tended to encourage free trade. Protectionist policies were common in Europe in the 17th–18th centuries under mercantilism. Britain abandoned many of its protectionist laws in the 19th century, and by World War I tariffs were low throughout the Western world. Economic and political dislocation led to rising customs barriers in Europe in the 1920s, and the Great Depression produced a spate of protectionist measures; world trade shrank drastically as a result. The U.S. had a long history of protectionism, with tariffs reaching high points in the 1820s and the Great Depression, but in 1947 it became one of 23 nations to sign the General Agreement on Tariffs and Trade (GATT), which substantially reduced customs tariffs while reducing or eliminating quotas. Despite trade agreements such as GATT and NAFTA, calls for protectionism are still heard in many countries when industries suffer severely from foreign competition. Seealso trade agreement; World Trade Organization.

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For the protectionist Australian political party from the 1880s to 1909, see Protectionist Party

Protectionism is the economic policy of restraining trade between nations, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other restrictive government regulations designed to discourage imports, and prevent foreign take-over of local markets and companies. This policy is closely aligned with anti-globalization, and contrasts with free trade, where government barriers to trade 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 "living wages" within a country by restricting or regulating trade between foreign nations.

History

Protectionism has been described by proponents as the economic means to achieve the political goal of an independent nation. For example, the Tariff Act of 1789, signed by American President George Washington on July 4, was called the "Second Declaration of Independence" by newspapers at the time. The opposite of protectionism, free trade, results in interdependent nations.

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. Virtually all modern day economists agree that protectionism is harmful in that its costs outweigh the benefits, and that it impedes economic growth. Economist and trade theorist Paul Krugman once stated that, "If there were an Economist’s Creed, it would surely contain the affirmations 'I believe in the Principle of Comparative Advantage' and 'I believe in Free Trade'."

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. Whereas formerly blue-collar jobs were being lost 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.

Some may feel that better job choice is more important than lower goods costs. Whether protectionism provides such a trade-off between jobs and prices has not yet reached a consensus with economists. 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.

Protectionism in the United States

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 statesmen of U.S. including Senator Henry Clay continued Hamilton's themes within the Whig Party under the name "American System."

The opposition Democratic Party contested several elections throughout the 1830s, 1840s, and 1850's in part over the issue of the tariff and protection of industry. The Whigs favored higher protective tariffs which won the elections of 1840 and 1848 respectively. The pre-eminent economist in the United States at this time Henry Charles Carey became the leading proponent of the "American System" of economics; it had developed in opposition to the 'free trade' system which Carey called the "British System" as was proposed by Adam Smith and advocated by the British Empire. Careys book "Harmony of Interests" together with German-American economist Friedrich List in his scholarly work became widely read and disseminated in America and Germany leading the German Historic School economists to embrace a similar anti-free trade approach which was embraced by Chancellor Bismarck in the late 1800s.

The fledgling Republican Party led by Abraham Lincoln, who called himself a "Henry Clay tariff Whig", strongly opposed free trade and when formed the party 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. President William McKinley stated the United States' stance under the Republican Party (who had won every election for President except the two non-consecutive terms of Grover Cleveland until 1912 maintaining Lincoln's economic principles) 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 benefitting 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.

The tariff and support of protection to support the growth of infrastructure and industrialization of the nation became a leading tenet of the Republican Party thereafter until the Eisenhower administration and the onset of the Cold War.

In the 1930s, the US adopted the protectionist Hawley-Smoot Tariff Act which raised rates to all-time highs beyond the Lincoln levels, which some economists believe exacerbated the Great Depression. In response the Democratic Party under Franklin D. Roosevelt resorted to Hamilton's earlier formula of Reciprocity with moderate tariffs coupled with subsidy to industry which went unbroken until the 1970s when the Free Trade era began for the United States after the Kennedy Round of trade talks in the late sixties were complete.

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 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, for political reasons, such a policy is 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 lead to higher price 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.

Arguments for Protectionism

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 globalization regime, capital tends simply to flow to wherever costs are lowest—that is, to pursue absolute advantage."

Protectionists fault the free trade model as being reverse protectionism in disguise, that of using tax policy to protect foreign manufacturers from domestic competition. By ruling out revenue tariffs on foreign products, government must fully rely on domestic taxation to provide its revenue, which falls heavily 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.

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.

Adverse effects of Protectionism

Protectionism is frequently criticised as harming the people it is meant to help, instead of aiding them; these critics often support free trade. Some have denounced critics of protectionism as ideologues whose opinions are shaped more by ideology than facts. However, nearly all economists are supporters of 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. It is has been estimated by the economist Stephen P. Magee that the benefits of free trade outweigh the losses by as much as 100 to 1.

Economists, such as Milton Friedman and Paul Krugman, have argued that free trade helps third world workers, 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 penumbra 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. It has even been suggested that those who support protectionism ostensibly to further the interests of third world workers are being disingenuous, seeking only to protect jobs in developed countries. Additionally, workers in the third world only accept jobs if they are the best on offer, as all mutually consensual exchanges benefit both sides. That they accept low-paying jobs from western companies shows that the jobs they would have had otherwise are even worse.

Alan Greenspan, former chair of the American Federal Reserve, has criticised 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 mercantalist and protectionist, the American Revolution, which came about primarily due to British tariffs and taxes, as well as the protective policies preceding World War 1 and 2. According to Frederic Bastiat, "When goods cannot cross borders, armies will."

Current world trends

It is 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. Despite this, many of these countries still place protective and/or revenue tariffs on foreign products to protect some favored or politically influential industries. This creates an artificially profitable industry that discourages foreign innovation from taking place.

Protectionist quotas can cause foreign producers to become more profitable, mitigating their desired effect. This happens because quotas artificially restrict supply, so it is unable to meet demand; as a result the foreign producer can command a premium price for its products. These increased profits are known as quota rents.

For example, in the United States (1981–1994), Japanese automobile companies were held to voluntary export quotas. These quotas limited the supply of Japanese automobiles desired by consumers in the United States (1.68 million, raised to 1.85 million in 1984, and raised again to 2.30 million in 1985), increasing the profit margin on each automobile more than enough (14% or about $1200 in 1983 dollars, about $2300 in 2005 dollars) to cover the reduction in the number of automobiles that they sold, leading to greater overall profits for Japanese automobile manufacturers in the United States export market, and higher prices for consumers. (Berry et al. 1999).

See also

Notes and references

Other references

  • Berry, S., Levinsohn. J. and Pakes, A. (1999). Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy. American Economic Review 89(3): 400-30. In: Benjamin, D.K. (1999) Voluntary Export Restriction on Automobiles. Bozeman, Montana: PERC - Property and Environment Research Center. [online] Available at: http://www.perc.org/perc.php?subsection=5&id=416.

External links

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