Protectionism

By Tedric Lucky Reeder

What is Protectionism?
In economics,protectionismis theeconomic policyof
restrainingtradebetween states (countries) through methods
such astariffson imported goods, restrictivequotas, and a
variety of other government regulations.
Protectionist policies protect the producers, businesses and
workers of the import-competing sector in a country from
foreign competitors.
According to proponents, these policies can counteract unfair
trade practices, to allow fair competition
betweenimportsand goods and services produced
domestically.
Protectionists may favor the policy in order to decrease the
trade deficit, maintain employment in certain sectors, or
favor the growth of certain industries.
In recent years, protectionism has become closely aligned
with theanti-globalizationmovement.
The Consensus
There is a broad consensus among
economists that the impact of
protectionism on economic growth (and
on economic welfare in general) is
largely negative, although the impact
on specific industries and groups of
people may be positive.
The doctrine of protectionism contrasts
with the doctrine offree trade, where
governments reduce as much as
possible the barriers to trade.
Protectionist policies
Prevent foreign investors from
taking control of domestic firms
These may include:
Tariffs; import quotas; administrative
barriers; anti-dumping legislation;
direct subsidies; export subsidies;
exchange rate control; International
Patent systems; Political campaigns
advocating domestic consumption;
Preferential governmental spending
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,
to favour local producers.
Tariffs may also be imposed on exports, and in an
economy withfloating 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.
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.
Administrative barriers
Countries are sometimes accused
of using their various
administrative rules (e.g.
regardingfood safety,
environmental standards,
electrical safety, etc.) as a way to
introduce barriers to imports.
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.
Directsubsidies
Government subsidies (in the
form of lump-sum payments or
cheap loans) are sometimes
given to local firms that cannot
compete well against imports.
These subsidies are purported to
"protect" local jobs, and to help
local firms adjust to the world
markets.
Exportsubsidies
Export subsidies are often used by
governments to increase exports.
Export subsidies have the opposite
effect of export tariffs because
exporters get payment, which is a
percentage or proportion of the value of
exported.
Export subsidies increase the amount
of trade, and in a country with floating
exchange rates, have effects similar to
import subsidies.
Exchange ratecontrol
A government mayintervene in the foreign
exchange marketto 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 itstrade balance.
However, such a policy is only effective in the
short run, as it will lead to higherinflationin
the country in the long run, which will in turn
raise the real cost of exports, and reduce the
relative price of imports.
Internationalpatentsyste
ms
There is an argument for viewing national patent systems as a
cloak for protectionist trade policies at a national level.
Two strands of this argument exist: one when patents held by
one country form part of a system of exploitable relative
advantage in trade negotiations against another, and a second
where adhering to a worldwide system of patents confers "good
citizenship" status despite 'de facto protectionism'.
Peter Drahosexplains that "States realized that patent systems
could be used to cloak protectionist strategies.
There were also reputational advantages for states to be seen
to be sticking to intellectual property systems.
One could attend the various revisions of the Paris andBerne
conventions, participate in the cosmopolitan moral dialogue
about the need to protect the fruits of authorial labor and
inventive genius...knowing all the while that one's domestic
intellectual property system was a handy protectionist
weapon."
Political campaigns advocating
domestic consumption
(e.g. the "Buy American"
campaign in the United States,
which could be seen as an extra-
legal promotion of protectionism.)
Preferential governmental
spending
Such as theBuy American Act,
federal legislation which called
upon the United States
government to prefer US-made
products in its purchases.
Modern Trade Arena
In the modern trade arena many other
initiatives besides tariffs have been
called protectionist.
For example, some commentators, such
asJagdish 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.
Against Protection of Intellectual
Property
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, pharmaceuticals, software, and
other manufactured items to high cost
producers with quotas from low cost
producers set to zero.
History
Historically,protectionism was
associated with economic
theories such
asmercantilism(which focused
on maintaining full employment,
domestic industry, and a
positivetrade balance),
andimport substitution.
Adam Smith
In the 18th century,Adam
Smithfamously warned against the
"interested sophistry" of industry,
seeking to gain advantage at the cost
of the consumers.
Friedrich Listsaw Adam Smith's views
onfree tradeas disingenuous,
believing that Smith advocated for
freer trade so that British industry
could lock out underdeveloped foreign
competition.
Germany and others
n the late 19th Century,Germanyalso used
protectionist measures to grow its industry.
AfterWorld War II,Japanfollowed that model.
It has been argued thatDeng Xiaoping's post-
Mao policies were inspired by List, and that
policies inIndiaafterindependencewere, as
well.
It has been noted byMehdi Shafaeddinthat no
major country has ever successfully
industrialized without some form of economic
protection.
This observation is likewise claimed byEric
Reinert, Ian Fletcher,and Spencer P Morrison.
In America
According toMichael Lind, protectionism was
America'sde factopolicy from the passage of
theTariff of 1816toWorld War II, "switching to
free trade only in 1945, when most of its
industrial competitors had been wiped out" by
the war.
However, it has been argued that one of the
underlying motivations for theAmerican
Revolutionitself was a desire to industrialize,
and reverse the trade deficit with Britain,
which had grown by a factor of ten in the
space of a few decades, from 67,000 (1721
30) to 739,000 (176170).
US Secretary of the
Treasury
The firstUS Secretary of the Treasury,Alexander
Hamilton, advocated tariffs to help protect infant
industries in his "Report on Manufactures".
Heeding Hamilton's advice,George
Washingtonsigned theTariff Actof 1789, making
it the Republic's second ever piece of legislation.
Increasing the domestic supply of manufactured
goods, particularly war materials, was seen as an
issue of national security.
Washington and Hamilton believed that political
independence was predicated upon economic
independence.
Jefferson
For the most part, the
"Jeffersonians" strongly opposed
it. However, after theWar of
1812, Thomas Jefferson himself
acknowledged that tariffs were
necessary for preventing import
dependency, which undermined
the nation's security. He
confessed in a letter to his friend
Benjamin Austin in 1816:
experience has taught me that
manufactures are now as necessary
to our independence as to our
comfort: and if those who quote me
as of a different opinion will keep
pace with me in purchasing nothing
foreign where an equivalent of
domestic fabric can be obtained,
without regard to difference of
price
American System
In the 19th century, statesmen
such as SenatorHenry
Claycontinued Hamilton's
themes within theWhig
Partyunder the name "American
System".
Republican Party
The fledglingRepublican Partyled byAbraham
Lincoln, who called himself a "Henry Clay tariff
Whig", strongly opposed free trade, and
implemented a 44-percent tariff during theCivil
Warin part to pay for railroad subsidies and for
the war effort, and to protect favored industries.
This policy was continued by PresidentsUlysses S
GrantandTheodore Roosevelt. William
McKinley(later to become President of the United
States) stated the stance of the Republican Party
(which won every election for President from
1868 until 1912, except the two non-consecutive
terms ofGrover Cleveland) 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.
Kicking Away the Ladder
InKicking Away the Ladder, developmental economistHa-Joon
Changreviews the history of free trade policies and economic
growth, and notes that many of the now-industrialized countries
had significant trade barriers throughout their history.
The United States and Britain, sometimes considered the homes of
free trade policy, employed protectionism to varying degrees at all
times.
During the 1820s, during the height of theIndustrial Revolution,
Britain's exports on manufactured goods stood at over 50%. In fact,
it has been argued that the Industrial Revolution was only made
possible due to protectionist policies, coupled with pressure from
chronic warfare, which created a large incentive for Britain to invest
in labor-saving devices.[Britain's turn to free trade only began in
the middle of the century. In 1846 theCorn Laws, which restricted
import of grain, were repealed due to domestic pressures caused
by theIrish Potato Famine . Britain reduced protection rapidly until
its industry began to collapse during the late 19th century, in
response to pressure from American and German competition.
U.S. and Britain
The United States and Britain,
sometimes considered the homes
of free trade policy, employed
protectionism to varying degrees
at all times.
Industrial Revolution of
Britain
During the 1820s, during the height of theIndustrial
Revolution, Britain's exports on manufactured goods
stood at over 50%.
In fact, it has been argued that the Industrial Revolution
was only made possible due to protectionist policies,
coupled with pressure from chronic warfare, which
created a large incentive for Britain to invest in labor-
saving devices.
Britain's turn to free trade only began in the middle of
the century. In 1846 theCorn Laws, which restricted
import of grain, were repealed due to domestic pressures
caused by theIrish Potato Famine.
Britain reduced protection rapidly until its industry began
to collapse during the late 19th century, in response to
pressure from American and German competition.
Of America and Others
The United States maintained weighted average
tariffs on manufactured products of approximately
4050% up until the 1950s, although they dipped
to lows of roughly 10% during the 1920s, which
were augmented by the natural protectionism of
high transportation costs in the 19th century.
The most consistent practitioners of free trade
have been Switzerland, the Netherlands, and to a
lesser degree Belgium.
Chang describes theexport-oriented
industrializationpolicies of theFour Asian
Tigersas "far more sophisticated and fine-tuned
than their historical equivalents".
Arguments for Protectionism
Protectionists believe that there is a
legitimate need for government restrictions
on free trade in order to protect their
countrys economic, and therefore political
independence.
This was the contention of theAmerican
Schoolof economics.
PresidentsGeorge Washington,Abraham
Lincoln,William McKinley, andTheodore
Rooseveltwere all strong advocates for
protectionist policies, and could be considered
proponents of the American School.
Protection leads to long-term
growth
Economic historianPaul Bairochhas noted that economic
protection is positively correlated with economic and
industrial growth during the 19th century.
For example,GNPgrowth during Europe's "liberal period" in
the middle of the century (where tariffs were at their
lowest), averaged 1.7% per year, while industrial growth
averaged 1.8% per year.
However, during the protectionist era of the 1870s and
1890s, GNP growth averaged 2.6% per year, while
industrial output grew at 3.8% per year, roughly twice as
fast as it had during the liberal era of low tariffs and free
trade.
More recently, it has been shown that tariffs imposed on
manufactured goods increase economic growth in
developing countries by a significant margin, and this
growth impact remains even after the tariffs are repealed.
Long term growth
It is also argued that protection, calibrated
in advanced industries, or those subject to
increasing returns, benefits long-term
economic growth because it maximizes the
likelihood ofblack swanevents, which lead
to explosive, non-linear economic growth
through technological gains.
This is because protectionist policies
artificially expand domestic production,
thereby increasing exposure to discoveries,
particularly if the measures are aimed at
advanced, knowledge-generating industries.
Infant industry argument
Protectionists postulate that new industries may require
protection from entrenched foreign competition in order to
develop.
This wasAlexander Hamilton's argument in his "Report on
Manufactures", and the primary reason why George
Washington signed theTariff Actof 1789.
The idea was that for America to retain her political
independence, she must become economically
independent.Mehdi Shafaeddinhas noted that no major
nation has ever industrialized without protectionist policies.
New Trade theoristsalso challenge the assumption of
diminishing returns to scale.
They argue that using protectionist measures to build up a
large industrial base in industries with increasing returns
(i.e. manufacturing) can set those sectors up for
international dominance once they mature.
Economic independence is necessary for political
independence
Ithas been argued by politicians as ideologically disparate as
Washington,John A MacDonaldandOtto von Bismarck, that
political independence is predicated upon economic
independence, for the simple fact that if a country depends upon
another for critical imports, then it must necessarily consider its
trading partners interests, even to its own detriment.
This is particularly true for commodities like food, oil, or military
equipment.
Even Milton Friedman stated in his free trade manifesto "Free to
Choose", admitted that import dependency poses a credible
threat a country's security andsovereignty.
His proposed solution was to maintain adequate stockpiles.
However, it is argued that doing so would undermine the benefits
of free trade, and would be insufficient for a large-scale conflict.
Instead, it may be more efficient to simply maintain a minimal
level of industry using protective measures, that could be scaled
up in times of need.
Arguments against comparative advantage

Opponents of free trade have

argued thatcomparative
advantagedoes not apply in a
globally integrated world, in
which capital is free to move
internationally.
David Ricardo
David Ricardohimself was the
first to recognize this critique,
and duly noted that his theory
only applied in situations where
capital is immobile. Regarding his
famous example, he wrote:
it would undoubtedly be advantageous
to the capitalists [and consumers] of
England [that] the wine and cloth
should both be made in Portugal [and
that] the capital and labour of England
employed in making cloth should be
removed to Portugal for that purpose.
Ricardo recognized that applying his theory in
situations where capital was mobile would
result inoffshoring, and therefore economic
decline and job loss.
To correct for this, he argued that (i) "most
men of property [will be] satisfied with a low
rate of profits in their own country, rather
than seek[ing] a more advantageous
employment for their wealth in foreign
nations", and (ii) that capital was functionally
immobile.
However, because capital is now mobile, it is
argued that comparative advantage is not
necessarily applicable in today's economy.
Evidence from NAFTA
For evidence, protectionists point to the shifting
of production to Mexico by US companies after
the passing of theNorth American Free Trade
Agreementas support for this argument.
Herman Dalyargues that: "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.
In the new global economy, capital tends simply
to flow to wherever costs are lowestthat is, to
pursue absolute advantage."
Arguments against
Protectionism is frequently criticized by
economists as harming the people it is
meant to help.
Mainstreameconomistsinstead support
free trade.
The principle ofcomparative
advantageshows 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.
Deadweight loss
Protectionism results
indeadweight 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.
Milton FriedmanandPaul
Krugman
Economists 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
manufacturingand of the myriad 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.
Income disparity
Economists have speculated that those who support
protectionism ostensibly to further the interests of workers
in least developed countries are in fact being disingenuous,
seeking only to protect jobs in developed countries.
Additionally, workers in the least developed countries only
accept jobs if they are the best on offer, as all mutually
consensual exchanges must be of benefit to both sides, or
else they wouldn't be entered into freely.
That they accept low-paying jobs from companies in
developed countries shows that their other employment
prospects are worse.
A letter reprinted in the May 2010 edition ofEcon Journal
Watchidentifies a similar sentiment against protectionism
from 16 British economists at the beginning of the 20th
century.
Alan Greenspan
Former chair of the
AmericanFederal 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."
Cause of War?
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
predominantlymercantilistand protectionist,
theAmerican Revolution, which came about
ostensibly due to British tariffs and taxes, as
well as the protective policies preceding
bothWorld War IandWorld War II.
According to a slogan ofFrdric Bastiat(1801
1850), "When goods cannot cross borders,
armies will."
Current world trends
Since the end ofWorld War II, it has been the
stated policy of mostFirst Worldcountries to
eliminate protectionism through free trade
policies enforced by international treaties and
organizations such as theWorld Trade
Organization.
Certain policies of First World governments
have been criticized as protectionist, however,
such as theCommon Agricultural Policyin the
European Union, longstandingagricultural
subsidiesand proposed "Buy American"
provisions in economic recovery packages in
the United States.
G20
Heads of theG20meeting in London on 2 April
2009 pledged "We will not repeat the historic
mistakes of protectionism of previous eras".
Adherence to this pledge is monitored by the
Global Trade Alert,providing up-to-date
information and informed commentary to help
ensure that the G20 pledge is met by
maintaining confidence in the world trading
system, deteringbeggar-thy-neighboracts,
and preserving the contribution that exports
could play in the future recovery of the world
economy.
G20 Nations
The members include 19 individual countries
Argentina
Australia
Brazil
Canada
China
France
Germany
India
Indonesia
Italy
Japan
South Korea
Mexico
Russia
Saudi Arabia
South Africa
Turkey
United Kingdom
United States
along with the
European Union(EU).
The World Bank Reports
Although they were reiterating what they had already
committed to, last November inWashington, 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.
Economists who have examined the impact of new
trade-restrictive measures using detailed bilaterally
monthly trade statistics estimated that new measures
taken through late 2009 were distorting global
merchandise trade by 0.25% to 0.5% (about $50 billion
a year).
President Donald Trump
Since then however, then-
President-electDonald
Trumpannounced in November
2016 that he would abandon the
TPP (Trans-Pacific Partnership)
deal, placing the protectionist
policies reflected
inTrumponomicsvery much on
the table, despite the wishes of
all the other G20 nations.