Protectionism

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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 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 workers within a country by restricting or regulating trade with foreign nations.

Contents 1 History 1.1 Protectionism in the United States 2 Protectionist policies 2.1 De facto protectionism 3 Arguments for Protectionism 3.1 Infant industry argument 4 Arguments against Protectionism 5 Current world trends 6 See also 7 Notes and references 8 External links

[edit] 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] Virtually all modern day 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 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. 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]

[edit] 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 the animating issue that slavery was, 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, supported having the right to purchase manufactured goods from any nation. They would export food products at low cost to receive them. 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 statesmen of U.S. including Senator Henry Clay continued Hamilton's themes within the Whig Party under the name "American System."

The opposition, 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 into 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.

By winning the Civil War, Republican dominance was assured as Democrats were on the other side. Republicans dominated 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. Both 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, Franklin Roosevelt, would essentially blame the Great Depression upon the protectionist policies exemplified by the previous Republican President, Herbert Hoover.

The Democratic Party would continue to advance free trade, to appeal to its southern wing, carefully balancing a growing voice among its labor side for restraint. Free trade would be among the postwar goals of the Allies in World War II. Many rounds of discussions and treaties would gradually advance the cause of free trade. 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 as it, in concert with northern Republicans, passed numerous Civil Rights reforms. The Republican party would leverage 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 having been labeled as Herbert Hoover instigators of the Great Depression, Republicans, in the election of 2008, found themselves condemned for not being protectionist.

[edit] 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.

[edit] 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]

[edit] 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." ^[10]

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 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]

[edit] 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.

[edit] Arguments against Protectionism

Protectionism is frequently criticized as harming the people it is meant to help. Nearly all 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 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 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 benefit both sides. 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 World War 1 and 2. According to Frederic Bastiat, "When goods cannot cross borders, armies will."

[edit] Current world trends

Since the end of World War 2, 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 which have been criticized by Brussels as protectionist.

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.

[edit] See also

• American School (economics)
• Henry C. Carey
• Alexander Hamilton
• Economic patriotism
• Rent seeking
• Lobbying
• Free trade debate
• Voluntary Export Restraint
• Friedrich List
• WTO
• Washington Consensus

[edit] Notes and references

[edit] External links

• The American Protectionist Society
• Voluntary Export Restrictions on Automobiles
• Protectionism and the Civil War
• FoEI Citizens' Guide To: What is trade?
• American Economic Alert
• Paul Craig Roberts' critique of free trade
• Pat Buchanan commentary on protectionism
• Pat Buchanan view on how revenue tariffs to compensate for foreign countries' VAT rebates on exports can better create a "level playing field"
• Warren Buffett's proposal for use of Import Certificates (IC's) as an alternative to revenue tariffs
• Phyllis Schlafly's 1996 review of free trade and protectionism within the United States
• Economy In Crisis

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