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Debate: Protectionism

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Should governments favor their own industries by protectionist measures?

Background and context

Freedom of international trade has been a goal pursued since 1948, when 23 countries set up the General Agreement on Tariffs and Trade (GATT), and tariff levels in the 1990s were only 10% of their post war level. Since then there have been nine trade talks (‘rounds’), the most recent being Uruguay (1993) and Doha. The 1993 round set up the World Trade Organisation (WTO), which now has over 132 members, and which strengthened regulation by making it impossible for countries to veto penalties for restricting trade. The WTO is matched by regional trading blocs such as the European Union, North American Free Trade Area (NAFTA, set up in 1994), the Association of South East Asian Nations (ASEAN), and Mercosur (in South America). In 1990 there were 25 such areas; there are now in excess of 90. Protection of domestic industry may take the forms of subsidies (paid to companies to decrease production costs), tariffs (duties levied on imported goods to artificially increase their price), or quotas (quantitative restrictions on imports). Increasingly, however, protectionism is taking the form of ‘anti-dumping measures’; dumping being when an importer artificially lowers their prices for a short period to drive competition out of business (‘predatory pricing’). WTO rules do allow some forms of protection: duties in response to subsidised goods, protection against import surges, and anti-dumping measures. However, these are often poorly defined and slow to process through dispute-settlement procedures. Whilst progress has been made on IT and accountancy liberalisation, the most hotly disputed remaining areas are textiles (the world quota system will end in 2005), agriculture, shipping, and migration. Research shows that the level of anti-dumping and anti-subsidy investigations have boomed in recent years, especially in areas such as India. These are mainly targeted against China, Japan, and America. Such action is favoured as the law is unclear, and tariff margins

Contents

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Anti-dumping measures: Are anti-dumping measures a good protectionist tool?

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Yes

  • Govts must address anti-competitive actions such as dumping. While mediation by an international body is the most effective response to such actions, all nations must reserve the right to enact legislation to impose penalties on foreign companies that endeavor to gain market share through anti-completive practices. Further, short of a declaration of war, the only legislation a nation can pass to stop anti-competitive actions taken by citizens of another sovereign nation is to restrict their access to its markets through the use of quotas, tariffs and, if necessary, a complete ban on all imports produced in the offending country.
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No

  • Anti-dumping retaliation is just another form of protectionism. Anti-dumping retaliation is as unnecessary and economically inefficient as any form of protectionism, and would rarely pass domestic antitrust legislation.
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Government duty: Does govt have duty to protect citizens from foreign competition?

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Yes

  • The first duty of every government is to protect its own citizens: A duty of care is owed to those whose economic prosperity depends upon industrial production. If outsourcing threatens the prosperity of a citizenry, a government should oppose it.
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No

  • Prosperity a nation's citizens is enhanced by trade liberalization. Given that free trade boosts imports as well as exports, given that it enhances competition, it effectively benefits not only the state, but also its citizens.
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During recession: Should protectionism be advanced during recession?

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Yes

  • In times of recession there is pressure to protect declining industries. Some localities, or countries, are dependent on a single source of manufacturing or agriculture, and allowing the free market to take its course would prolong or deepen an economic depression and drive huge numbers of people out of work.
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No

  • Protectionism worsens depressions by cushioning firms from their effects, preventing sufficient diversification of sources of national income, and discouraging retraining to meet the needs of the future. The Depression of the 1930s was in fact worsened by restrictions placed on free trade (e.g. the USA’s Hawley-Smoot measures), as protectionism spiraled downwards into increasing retaliation.
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Subsidies: Should govt subsidize companies going into developing countries?

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Yes

  • Developing countries need help in building a competitive economy: Short-term subsidies to foreign companies are the early stages of import-substitution and economic independence. It is better that governments offer firms subsidies than try to cut corners on labour standards.


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No

  • Difference b/w encouraging foreign industry abroad and protectionism at home. Competition will not merely be over the size of national subsidies, but also on wage costs and looser environmental and safety regulations.


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Trade blocs: Should developing countries protect themselves from trade blocs?

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Yes

  • Developing economies hit glass ceiling as they attempt to stabilize economies, as they are unable to diversify into different markets. Maintaining their former colonial relationships is the only way for them to defend themselves against large trading blocs.
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No

  • Companies in developing economies suffer from poor stockmarket flexibility and political uncertainty, as a capitalist mentality needs time to develop. The solution is not more protection, but for groups such as the EU to dissolve their barriers to trade.


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Essential goods: Should governments protect essential goods from the threat of foreign competition or instability?

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Yes

  • It is sensible for governments to protect domestic supplies of vital goods, such as oil, food and steel, from the political vicissitudes of world cartels; which is part of foreign policy and not pure economics. To prevent this is to invade national sovereignty.
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No

  • Worldwide cartels of producers have recently weakened, especially for agricultural goods. For governments to engage in protectionism merely against international cartels is pure hypocrisy; national security will never be gained by the chimera of economic self-sufficiency.
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Vs free trade: Is protectionism more efficient than free trade?

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Yes

  • Efficiency with respect to what?

Free trade produces products with optimum efficiency. Supply is increased which forces down prices. If cheap goods are the only criteria, then Free Trade wins.

However, if we look at maximizing the standard of living of the average citizen of a developed country, then Free Trade is not an effective way to achieve that goal.

  • Developed countries have a strong Dollar (or Euro, if you will) due to the stability of their governments.
  • Developed countries require companies to abide by environmental and product safety laws.
  • Developed countries protect their citizen’s rights including child labor, collective bargaining, work place safety, and health care.
  • Developed counties have minimum wage laws which makes labor costs for domestic companies orders of magnitudes higher than in developing countries.
  • Developed counties have higher tax rates to support their government’s social programs.

The social and moral gains made by developed countries put them at an absolute disadvantage when competing with goods and services produced in the developing countries. Any trade agreement that does not address these basic inequities puts the developed nations in an untenable position with respect to competition for jobs. Increased unemployment, declining standard of living, and a roll back of social and moral gains in developed countries is the inevitable result of the efficiency of Free Trade policies.

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No

  • Protectionism undermines competition, thus slows economic progress down. Just like, for example, Corn Laws in 19th century in England, protectionist measures harm competitors and drive up prices in home countries. Lack of competition means less incentives to innovate and move towards efficient business practices.

See also

External links and resources

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