Protectionism (The General Agreement on Tariffs and Trade);

Protectionism is a policy of restraining trade between
nations by means of raising the price of foreign products, lowering cost for
domestic producers, and limiting the access of foreign producers’ to domestic
market. According to Regine A. N. Fouda, (2012), protectionism doctrines have
words such as “state activism”, “protect businesses” and “living
wages” within a country by regulating or restricting trade amongst nations.
The concept of protectionism contrasts with the Free Trade policies which
promote the unrestricted purchase and sale of goods and services between
countries without the imposition of constraints such as tariffs, duties and
quotas.

 

Protectionism is
designed to allow fair competition and prevent 
foreign take – over of local markets and companies. The methods to
achieve such protection familiar and include:

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·        
tariff taxes on imports which continue
to be used in spite of great progress under GATT (The General Agreement on
Tariffs and Trade);

·        
quota ceilings on quantity of foreign
products sold in domestic market, which limit the supply and raise the price of
imported products;

·        
regulatory obstacles that place hurdles
in the way of imported products such as product   classifications   and  
seemingly   endless   lists  
of   standards   and specifications;

·        
subsidies  to 
domestic  producers  that 
range  from  tax 
breaks  to  direct 
cash payments; and

·        
currency controls to limit access to
foreign currencies or manipulate exchange rates 
to  inflate  the 
price  of  foreign 
products  and  lower 
the  price  of 
domestic products.

 

Protectionism was historically
associated with economic theories like mercantilism which was the main economic system of trade in the 16th
to 18th centuries and it promoted use of government
regulations to achieve profits at the expense of rival nations. Another theory
associated with protectionism is the Import Substitution Industrialization
(ISI) which is employed by developing countries and/or emerging markets that
are trying to decrease dependence on developed countries and to increase their self-sufficiency.

 

It argued that almost
all of the now developed countries i.e. The United Kingdom, Germany, Sweden Japan,
and the United States were the earliest proponents of trade protectionism where
they used some form of infant industry promotion strategy when they were in
catching-up positions. By 1816 the US had imposed a 35% tax on most imported
manufactures, which rose to 50% in 1832. Between 1864 and 1913 it was the most
heavily protected nation on earth, and the fastest-growing. The history of the
US depicts a state that grew economically strong and prosperous because of
trade barriers. According to Pat Buchanan (1998), “Behind a tariff wall built
by Washington, Hamilton, Clay, Lincoln, and the Republican presidents who
followed, the United States had gone from an agrarian coastal republic to
become the greatest industrial power the world had ever seen — in a single
century. Such was the success of the policy called protectionism that is so
disparaged today” According to Michael Lind (2011), the United States employed protectionism
before the passing of the Tariff of 1816 to WWII, and only switched to free
trade in 1945, when majority of her industrial competitors had been eliminated by
the war. In the late 19th century, Germany also used protectionism
measures to nurture and grow its industries and after WWII Japan also followed
the same model. To protect its infant industries, Britain imposed tough tariffs
on almost all manufactured goods and only became an ardent supporter for free
trade after building economic dominance on protectionism. For example, in 1699,
Britain banned the import of Irish woolens and in 1700 banned imports of cotton
cloth from India. Some of the laws passed at the time to protect British
industry include: 1685 – 10% import tariff on Indian goods; 1690 – tariff
doubled to 20%; 1701 – First Calico Act, legislation banning imports of dyed,
painted or printed fabric; 1707 – British textiles manufacturers obtained
further tariffs on Indian textiles; 1721 – Second Calico Act, which further
banned imports of Indian textiles. Japanese on the hand agree that
protectionism is what made the country rich. In the word of the economic
historian Kozo Yamamura:

“Protection
from foreign competition was probably the most important incentive to domestic
development that the Japanese government provided. The stronger the home market
cushion…the smaller the risk and the more likely the Japanese competitor was
to increase capacity boldly in anticipation of demand growth. This can give the
firm a strategic as well as a cost advantage over a foreign competitor operating
in a different environment who must be more cautious.”

 

Within The (ACP) African,
Caribbean and Pacific Group of States, the great success story of the past 30
years is the country whose protectionism has been fiercest: during the 1980s
and 1990s, Mauritius imposed import tariffs of up to 80% (George Monbiot, 2008).

 

Advantages
of Protectionism

In the modern
economies, there is no country in the world that truly practices free trade.
All governments to some extent do restrict the movement of goods & services
in & out of borders. The causes of Protectionism are mainly mercantilist
and they include:

 

Protecting
infant industries:
These are newly established industries in a country. It is argued that in a
free trade system, an open trade system, such industries will face strong
competition from foreign producers which are already established in the market.
This reasoning is mainly held by developing countries who claim that their
young industries have the potential of becoming international companies but they
are yet to realize the cost advantages from economies of scale. The therefore
need time to enlarge their market share, trained their laborers & learn to
produce via the most cost-efficient method. Protection of these industries in
the initial stages of its development, it is argued, is beneficial, at least
until it reaches the competitiveness required to survive on the market (Lusa
Ferrini, 2002).

Protection
of jobs: The general theory is that the less a country
import, the more it has to make locally and the more people are employed to
work in the industries.

Revenue:
In many developing countries, it is quite difficult to earn sufficient revenue
from income tax & corporation tax. This is because, the level of
unemployment is usually high & there are very few large firms around.
Therefore the governments impose tariffs onto foreign goods in order to raise
the desired revenue.

National
Security: Some governments admit that although they may not
have comparative advantage in the production of a good, protectionist measures
must be maintained to ensure their survival. In Japan, very high restrictive
quotas & tariffs are placed on rice. The farmers need to be protected so
that they can grow enough food to feed the Japanese in crisis. This is the same
reason given by the US which protects for its steel industry so that they can
produce sufficient tanks & munitions during an international conflict. Agriculture
& steel industries can become strategically important especially in time of
crisis or war where they are easily cut off (Suhail Abboushi 2010)

 

Narrow
Balance of Payment (BOP) deficit:
One of the arguments for protectionist measures is also to fix the deficit in
balance of payments particularly current account. It is hoped that with more
expensive foreign goods, its demand will fall in relation to exports and over time
the current account deficit will be narrowed. The International Monetary Fund (IMF)
allows member countries to enforce short-term trade restrictions to get their
BOP fixed.

 

Protection
from dumping:
This
is where a country or company exports a product at a price that is lower in
the foreign market than the price charged in the domestic market with the
intention of which drives competitors out of the market. Governments therefore
impose a tariff on foreign imports that it believes are priced below fair
market value. Since 1998, the EU alone has released more than three hundred
anti-dumping measures since 1998 (Lucy Davis, 2009).

 

Discourage
unethical practices:
Some
countries impose trade restrictions to force a change in other countries. For
instance, tariffs are placed onto shoes & textile from East Asia to exhibit
dissatisfaction & a form of ‘boycott’ against the working practices there
which include; long working hours & under payment in China, employers failing
to comply with compulsory health & safety legislations thus giving them
artificial cost competitiveness. Also trade restrictions are used to show
dissatisfactions with some African nations where money is used to finance civil
war & terrorism within Africa.

 

Protect
consumers from unsafe products. Very often consumers
are unaware of the quality & safety of the products they consume. Therefore
governments step in to guarantee consumers product safety. For instance, cars
must pass safety inspection, there are certain rules made regarding the types
of chemicals that can be added onto food etc.

 

 

 

 

Disadvantages
of protectionism

Poor
quality products: By effectively preventing foreign competitor’s
access to a domestic market, sheltered domestic producers tend to become
complacent; producing costly, poor quality products inefficiently. This
principle was exemplified by the industries of Eastern European nations during
the reign of Communism (John Manzela, 1994).

Protectionism makes national businesses less
competitive in the export market: Import
barriers raise domestic prices through higher costs for intermediate inputs –
and so export products also become more expensive and lose market share in the
face of international competition. Also, protectionism can lead to vengeance by
other trading partners.

Protectionism holds back economic growth for all
countries: Full liberalization of
trade in goods and services would help increase average real incomes in
developing countries by 1.3%, and by 0.76% in high-income countries.
Newly-emerging economies, including Egypt, Thailand and Nigeria, would gain 3%
to 6% of GDP (OECD, 2010).

Protectionism has a negative impact on the global
economy: An increase of $1 in tariff revenues can result in a
$2.16 fall in world exports and a $0.73 drop in world income (OECD, 2010)

Extra costs for exporters:
For goods that are produced globally, high tariffs
and other barriers on imports act as a tax on exports, damaging economies, and
jobs, rather than protecting them

Regressive effect on the distribution of income: Higher prices
from tariffs hit those on lower incomes hardest, because the tariffs (e.g. on
foodstuffs, clothing) fall on products that lower income families spend a
higher share of their income.

Production inefficiencies: Firms that are
protected from competition have little incentive to reduce their production
costs. This can lead to increased-inefficiency and higher average costs.

Trade wars:
There is the danger that one country imposing import controls will lead to
retaliatory action by another leading to a decrease in the volume of world
trade.

Negative multiplier effects: If one country
imposes trade restrictions on another, the resultant decrease in trade will
have a negative multiplier effect affecting many more countries because exports
are an injection of demand into the global circular flow of income.

 

 

 

 

Modern
Day Examples of Protectionism

According to Global
Trade Alert (2015), Governments introduced 539 protectionist measures in the
first 10 months of 2015, up from 407 in the same period of 2014 and just 183 in
the first 10 months of 2012.

 

EU Common
Agricultural Policy (CAP):
EU imposes substantial tariff rates on many agricultural markets. The aim is to
increase prices for domestic European farmers in order to increase their
income. In addition, EU farmers benefits from the domestic subsidies of
the CAP which help give an advantage in exports. The table below suggests that
some agricultural products, e.g. beef and dairy, have very substantial tariff
rates of over 75%. For example, there are 54 dairy products which have tariff
rates of more than 75%.