Essay: Protectionism

Protectionism represents any attempt that imposes restrictions on trade in goods and services. It aims at cushioning domestic businesses and industries from overseas competition and prevents the outcome resulting from the inter-play of free market forces of supply and demand to take place. Protectionism can come in forms of tariffs, quotas, voluntary export restraint arrangements, intellectual property laws, technical barriers to trade, preferential state procurement policies, export subsidies, domestic subsidies, import licensing, exchange controls, financial protectionism and murky or hidden protectionism.
I think protectionism is justified and would like to throw some light on the countries which flourished from protectionism and those which did not.
Recently the average tariff rates have fallen, as we have come closer to free trade. However, there are still many protectionist measures, with tariffs on specific goods. These are a few modern day examples of protectionism in the form of short case studies.
Case 1
As per the US International Trade Commission USITC its been found that the average import tariff rates have fallen, which has reduced many potential gains for the US.
The reason to this fall ion import tariffs is the closer move to free trade .the import tariffs of US is really low and for many other countries its lower than that several protectionism measures have been undertaken with tariffs on specific goods .
A solution can be found by understanding the theory of comparative advantage .this theory states that a country can see an increase in economic welfare by reducing its import tariffs even if the other countries do not reduce them .on the other if the other countries reduce their tariff, then we can have double benefit i.e. the domestic exporters can also see an increase in the economic welfare.
WTO has taken a step forward in reducing the tariffs as the move to free trade and globalization has created an impact on the protectionist measures ,it has demised the strength of these measures as a result of this its seen that in most cases the goods are not produced in one country leading to the emergence of global supply chains by importing raw materials and assembled goods .Between 1980 and 2006 There was total increase of four hundred percent in the value of US manufacturer’s total input costs which was imported from abroad .
This case can be further supported and understood with examples of a global supply chain .Apple is designed in California but its built in China and ford cars produce their tyres in Indonesia and their engines are produced in Europe. this is not just due to the falling tariffs but it’s also the improved technology, transport efficiency and improved cross border cooperation like the standardization of legal property rights.
Case 2
The agricultural industry is facing a problem in spite of the reduction in tariff rates .The THE EU Common Agricultural Policy (CAP) is still imposing substantial tariffs on many agricultural markets. They say that their aim is to increase prices so that the domestic farmers of Europe can have an increased income. The table illustrated bellow tells that some agricultural products like beef and dairy have tariff rates of over 75%.That is ,there are 54 dairy products having tariff rates more than 75%
In this case the protectionist measures have actually benefited the EU farmers as the domestic subsidies of the CAP will help by giving an advantage in exports.
Case 3
One of the latest issues was the substantial tariffs on banana’s which were imported from Latin America also known as the banana war .The exports had to pay ‘176 (??141) per ton of bananas.
As a solution to this, an agreement was made in 2012.The agreement has reduced the tariffs. The banana price is is expected to fall up to 11pc after the historic agreement was signed between the European union and 10 Latin American countries which will further ion lead to the end of the banana war which existed for almost 20 years .This deal has concluded the World’s longest trade dispute and has been followed by eight separate cases dealt by the World Trade Organization (WTO).
Case 4
The US imposed tariffs of 35% on imports of tyres from China.
This was a tremendous victory for United States, Their workers and manufacturers when the World Trade Organization’s top court said that the US was entitled to impose extra safeguard duties on imports of Chinese tires. The Obama administration is going to fight for their business by ensuring jobs .They are going to use the trade laws to stand up for their workers and address harm to them. This protectionist measure has safe guarded the U.S tire industry.
Case 5
Argentina has their food tariffs on 100 products which includes over a dozen of agricultural good under the Common External Tariff (CET).The import tariffs of milk powder was increased to 9 percent which gives rise to a fear of the Argentinean farmers having a decrease in their incomes.
Measures have been taken by the authorized committee to restrict imports,customs,tariffs and trade on Argentina milk powder. These tariff alterations are initially valid for 90 days and it can be renewed for another two years. this decision was prompted when the Argentinean milk imports were confirmed for 2012.These trade restriction actions are expected to protect the jobs of 400,00 small scale farmers producing milk in the country.
Case 6
A WTO report found that the average EU tariff on primary food products in 2008 was 9.9% but for processed food products it was more than twice as high, at 19.4%.This is for the EU’s most favored nation. Escalated tariffs occur when higher tariffs are place on processed food and it creates a disincentive for countries to process and add value to the raw commodity.
Extensive barriers on the trade policies in agriculture have been tempered by a variety of preference schemes which gives favorable access to developing countries.
In broad terms there are three types of agricultural protection
Firstly, the access to the market is restricted to protect domestic agriculture .this is done by restricting foreign imports which usually involves high import tariffs or quotas which will help in reducing the restrictions on the quantity for a particular product from the country in question and allow domestic producers with high cost of production to compete.
Secondly, global prices have been suppressed and domestic consumers may pay a higher price than foreign consumers for the same product. This scenario has occurred due to export subsidies which act as financial benefits conferred on exporting firms by the Government in order to encourage exports as opposed to domestic consumption.
Thirdly, Trade distorting payments tied to level of production which is called coupled direct payments is encouraging over production and driving down world prices .Moreover, Government gives domestic support to the farmers by paying direct subsidies and price supports.
Case 7
Anti-dumping is occurring in china due to tariffs on imports of stainless steel tubes from EU and Japan.’Dumping’ occurs when firms sell goods below a ‘fair market price’. the low cost and excess of supply can flood a domestic market which has cheap imports ,Making the existence of domestic firm businesses in danger. In this case, countries can justify tariffs on the grounds they are preventing this damaging effect of dumping.
As a solution to this, China has imposed anti-dumping tariff on the imports of stainless steel tubes from the European Union (EU) and Japan. These tariffs can only be justified by WTO if its proved that dumping is occurred .The duties that China wanted to impose ranged from 9.2 % to 14.4%.Dumping is referred to a process where firms allegedly sell goods at prices below fair mar market value.US steel industry’s makers were given state subsidies and tariffs by China. After all this The World Trade Organization (WTO), ruled against the tariffs saying that China has failed to prove its charges on EU and Japan.
Case 8
China and the EU were involved in a dispute over alleged dumping of solar panels by Chinese firms in the EU.EU claimed that such subsidies have helped Chinese firms flood region’s markets with cheaper goods and have hurt their growth. Earlier China has faced similar allegations from the US.
As a solution to the above case The US International Trade Commission upheld higher tariffs that were announced on imports of solar cells from china.
Case 9
European airlines have been criticized for receiving ‘unfair’ support from their Government. European airlines have been declining.
Illegal subsidies are a form of protectionism which occurs when a country gives a subsidy or support to a domestic export industry. This gives the exporters an unfair advantage in the world market. The above case is an example to this
The government supported its projectionist measure by saying that they were just preventing the airline going bust.
Case 10
China had to face a complaint from US in 2012 saying that China was given excess subsidies to its car industry giving unfair competitive advantage
As a reply USTR said the targeted export bases made at least $1 billion in subsidies available to auto and auto-parts exporters in China during the years 2009 through2011.
Case 11
Tariff on imports of solar panels in China is called for.
Technicians inspect that the solar panel products are ready for the European market in Ganyu,Jiangsu province. As a solution the European Union may impose anti-dumping tariffs on Chinese solar panels. The trade spokesman Jhon Clancy of EU confirmed that the commission has held a hearing with representatives of the pathovoltac industry, with about 60 participants coming from all sectors of the industry and including both those companies that produce solar panels and those that fit the solar panels.
Now Finally I would like to have a look at the case of today’s ‘super power ‘US .It is clear that protectionism, from the side of the United States, is the only way the American industrial economy can expand for the benefit of its citizens and for its national welfare The economy needs to get itself out of the huge deficit hole. The Nafta agreement in 1993 bought them to major unemployment in the nation but who benefits was those enterprises who made the overseas move right away, there was nothing but exorbitant profits to be made .
After seeing the above examples on how protectionist measures have helped different nations .Its affects and impact I would like to explain some theoretical advantages for the economy and society
Firstly. Protectionism protests domestic industries and their workers’ jobs. Labor unions and domestic industries often appeal to patriotism to marshal support for protectionist policies. “Buy American” has been a popular rallying cry, such as among the American auto industry when the Big
Three automakers faced stiff competition from Japanese imports. Economists concede that free trade imposes costs and burdens on some industries and workers in the short run, but that in the long term, it is far more beneficial than protectionism, which they believe helps only a select few at the expense of the larger economy and society.
Secondly, Advocates of protectionism contend that excessive free trade compromises national security by making nations too dependent on goods from other countries. They will then argue for protection of industries deemed vital to national security, such as steel and oil. Rising oil prices, for example, led to calls for more domestic oil production and less reliance on imports from other countries, such as those in the Middle East.
Thirdly, Governments often justify protectionist policies by claiming that such policies are necessary to help industries that are in their infancy to develop. The validity of this argument, however, is undermined by the tendency for such policies to become permanent as the aided industry grows dependent on the support and even lobbies government officials to keep protectionist measures in place.
This work is attempted to identify the meaning and advantages of protectionism. I have explained various examples through a case study and have also mentioned how protectionism is justified in those countries which answer the essay topic. I feel if a country over protects its goods and services then it’s more likely to face issues, hence the right balance of protectionist measure is important in every problem industries and businesses face. A country should make sure that its domestic industry is safe before opening up to free trade and inviting problems like the United States faced in 1993.
Protectionism is a policy adopted by countries to protect domestic industries from global competitors by imposing some restrictions on trade of goods and services between countries. In this policy government of that particular country increases tariffs (import taxes), Quotas, Embargoes (a complete ban on imported goods), import licensing, subsidies, exchange controls etc to increase prices of imported products which make them expensive and less attractive.
Protectionism marks an economic theory emphasizing minimization of free trade between nations. Many countries currently practice economic protectionism. Such countries believe that manufacturing of goods should take place in a country-wide, rather than a global setting. Nations may enforce protectionism through heavy tariffs of foreign goods, or higher taxation on foreign over domestic products.
Protectionism hold several advantages over the separate notion of free trade. Free trade marks a system in which a government minimizes control or in other words has no control over importation of foreign goods. It is understood that protected trade definitely allows for small domestic industries to grow. Protectionists argue that it only leads to lower taxation on domestic firms, lowered structural unemployment and less dumping of products into foreign markets. Small industries hold a greater chance of success in domestic markets versus world markets. Domestic markets may hold less competition than the greater pool of worldwide competitors.
For example, an Indian technological firm may hold the advantage of cutting costs in a manner impossible for United States firms. A government holds the prime responsibility of leveraging taxes to cover incurred costs. A nation may tax foreign imports more heavily than domestic imports. An advantage of protectionism holds that foreign goods lacking taxation in a free trade system gain unfair advantage over domestically taxed firms. Such taxed domestic firms may turn to dumping, or selling products below cost in a foreign market to gain new customer bases. Domestic firms may not compete efficiently with foreign firm costs. This creates structural unemployment. Protectionism holds the advantage of less stringent local labor competition. This in turn may lead to greater national job growth in some areas of manufacturing. This higher production of goods may then lead to a more stable balance of traded goods in place of trade deficit.
Having explained what protectionism is and how it works towards helping a country’s economy I would like to lay down few very well known advantages of Protectionism,
The motives for protection
A detailed view on why every country should adopt protectionism
Protect sunrise industries
Barriers to trade can be used to protect sunrise industries, also known as infant industries, such as those involving new technologies. This gives new firms the chance to develop, grow, and become globally competitive.
Protection of domestic industries may allow them to develop a comparative advantage. For example, domestic firms may expand when protected from competition and benefit from economies of scale. As firms grow they may invest in real and human capital and develop new capabilities and skills. Once these skills and capabilities are developed there is less need for trade protection, and barriers may be eventually removed.
Protect sunset industries
At the other end of scale are sunset industries, also known as declining industries, which might need some support to enable them to decline slowly, and avoid some of the negative effects of such decline. For the UK, each generation throws up its own declining industries, such as ship building in the 1950s, car production in the 1970s, and steel production in the 1990s.
Protect strategic industries
Barriers may also be erected to protect strategic industries, such as energy, water, steel, armaments, and food.
Protect non-renewable resources
Non-renewable resources, including oil, are regarded as a special case where the normal rules of free trade are often abandoned. For countries aiming to rely on oil exports lasting into the long term, such as the oil-rich Middle Eastern economies, limiting output in the short term through production quotas is one method employed to conserve resources.
Deter unfair competition
Barriers may be erected to deter unfair competition, such as dumping by foreign firms at prices below cost.
Help the environment
Some countries may protect themselves from trade to help limit damage to their environment, such as that arising from CO2 emissions caused by increased production and transportation.
Limit over-specialization
Many economists point to the dangers of over-specialization, which might occur as a result of taking the theory of comparative advantage to its extreme. Retaining some self-sufficiency is seen as a sensible economic strategy given the risks of global downturns, and an over-reliance on international trade.
Advantages of Trade Protectionism
Growth of Infant Industries:
If a country is trying to grow strong in a new industry, tariffs will protect it from foreign competitors. This allows companies in the new industry time to learn how to produce the good efficiently, and develop their own competitive advantages.
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.
Creates New Jobs:
If a country favors protectionism they will impose duty/tariff on goods from foreign market which will keep the foreign competitors away from entering into competition with domestic markets. This will in turn lead to consumers buying domestic products from domestic markets (as there is no competition from foreign markets). The more the consumers buy there is demand surplus. As domestic companies are protected by tariffs, quotas or subsidies, they will hire locally. This will lead to more employment opportunities for the locals.
One strength of protectionism is that it keeps the domestic economy flowing. The domestic economy also strengthens, because the unemployment rate will be minimal. This is because the domestic firms are able to produce and sell more goods with a lot less difficulty, giving firms less incentive to decrease its cost by decreasing its work force. The people with jobs will keep consuming, allowing a flow of the economy.
Anti-Dumping:
If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be ‘dumping’ the product. Protectionist measures have also helped as a reaction against ‘import dumping’. Dumping is a type of predatory pricing behavior and is also a form of price discrimination. . Actually in the short term, consumers benefit from the low prices of the foreign goods, but in the longer term, persistent undercutting of domestic prices will force the domestic industry out of business and allow the foreign firm to establish itself as a monopoly. Once this is achieved the foreign owned monopoly is free to increase its prices and exploit the consumer. Therefore protection, via tariffs on ‘dumped’ goods can be justified to prevent the long-term exploitation of the consumer.
Case study
India adopting protectionist measures in agricultural and dairy sectors’
According to Washington post India is not only adopting protectionist measures in the agriculture sector, but also has put unjustified barriers to US dairy and meat products, a former top American trade official has alleged.
“India is very protectionist when it comes to agriculture and to a large extent because they’re concerned about rural economic and political instability,” Allen Johnson, the former Chief Agricultural Negotiator in the Office of the US Trade Representative, told lawmakers at a Congressional hearing yesterday.
He said India has very high agricultural tariffs. “Some of the highest in the world, averaging between — maximum bound rates are generally between 100 per cent and 300 per cent, with an average of about 120 per cent. Applied tariffs are about average 35 per cent”.
Difference between the bound and applied is called water. “They use that water effectively for managing imports, basically. So if they want to avoid domestic food inflation, they lower the tariff. If they want to protect domestic prices, they raise the tariff. And they can do it within their WTO bound levels,” he explained.
Johnson said most US exports could face a bound level of up to 100 per cent.
Almonds, the top US export, faces a specific rate of Rs 35 per kg for shelled and Rs 57 per kg for unshelled.
“That’s equal, under recent prices, to about a 14 per cent tariff. Imagine what we could do if that didn’t exist, and it is our third largest export…,” he added.
“Other products, such as beef, pork, poultry are facing similar situations in that they have bound rates of 100 per cent and applied rates between 30 per cent and 100 per cent.
“Dairy, for example, has bound rates between 40 and 150 per cent and applied rates between 30 and 60 per cent. We actually import twice as much dairy from India as we export” he said.
Rational protectionism on diary products has helped the growth of local diary manufacturing giants like Amul. Amul spurred India’s White Revolution, which made the country the world’s largest producer of milk and milk products.[5] In the process Amul became the largest food brand in
India and has ventured into markets overseas.
‘Brazil adopting protectionist measures in Automobile sector’
Brazil has perfected the art. Looking for a way to reduce car imports, it introduced a new programme to encourage innovation, Inovar-Auto. Designed to stay within WTO rules, this requires Brazilian car manufacturers (all foreign-owned) to invest in local innovation and engineering and to meet certain fuel-efficiency standards by 2017, or else face higher excise taxes and import tariffs on domestic sales. This has boosted domestic investment in engineering and fuel-saving technology.
Brazil has also used state-controlled companies and banks to encourage domestic innovation and industry. Over the past decade it has required Petrobras, the state-controlled oil company, to meet ever tougher domestic-content requirements.
The US imposed tariffs of 35% on imports of tyres from China.
This was a tremendous victory for United States, Their workers and manufacturers when the World Trade Organization’s top court said that the US was entitled to impose extra safeguard duties on imports of Chinese tires. The Obama administration is going to fight for their business by ensuring jobs .They are going to use the trade laws to stand up for their workers and address harm to them. This protectionist measure has safe guarded the
U.S tire industry.
‘Japan’s flying geese strategy’
According to Ian Fletcher Author, ‘Free Trade Doesn’t Work: What Should Replace It and Why’
Tokyo instead protected its fledgling automobile industry in the 1950s, limiting imports to $500,000 per year. (In the 1960s, prohibitive tariffs replaced this quota.) Japan only allowed foreign investment in so far as this transferred technology to its own manufacturers. Today, it produces over two-and-a-half times as many cars as the U.S., mostly for export.
As Japan has historically been the economic leader for the whole of Confucian Asia (Japan, Korea, China, Taiwan, Vietnam, Hong Kong, and Singapore), its protectionist policies have been shared with nearby nations to a huge extent. The ultimate basis of these policies is an attitude towards economics that sees the economy not as an end in itself, but as an instrument of national power.
In relation to its neighbors, Japan has employed something called the “flying geese” strategy, christened thus by the Japanese economist Akamatsu Kaname in the 1930s. Japan breaks into an industry, wipes out existing Western competitors, then successively hands the industry down to less sophisticated neighboring economies such as Korea, Taiwan, Thailand, Malaysia, and Vietnam as they mature. This pattern has held for goods from garments to televisions for five decades. Japan’s withdrawal from labor-intensive goods in the 1970s opened up space for Taiwan, South Korea, Singapore, and Hong Kong, and their ongoing withdrawal from these goods is opening up space for China.
‘Russia’s plan to adopt protectionist measures’
According to RIA Novosti ‘ Russian President Vladimir Putin told international investors Wednesday that his government is planning protectionist measures to give an edge to domestic manufacturers in a move that will cause consternation among fellow World Trade Organization members.
Now having a look at US it is clear that protectionism, from the side of the United States, is the only way the American industrial economy can expand for the benefit of its citizens and for its national welfare the economy needs to get itself out of the huge deficit hole. The NAFTA agreement in 1993 bought them to major unemployment in the nation but who benefits was those enterprises who made the overseas move right away, there was nothing but exorbitant profits to be made.
Conclusion
Though anti-protectionist theorists argue that free trade will help in increased production and production efficiency, only rational protectionism will help in the growth of domestic economy. With this I conclude by saying every country must adopt ‘rational’ protectionism in order to sustain, compete and grow.