Protectionism

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Protectionism is the economic policy of restraining trade between nations, through methods such as high tariffs on imported goods, restrictive quotas, a variety of restrictive government regulations designed to discourage imports, and anti-dumping laws in an attempt to protect domestic industries in a particular nation from foreign take-over or competition. This contrasts with free trade, where no artificial barriers to entry are instituted.

The term is mostly used in the context of economics, where protectionism refers to policies or doctrines which "protect" businesses and living wages by restricting or regulating trade between foreign nations:

Subsidies - To protect existing businesses from risk associated with change, such as costs of labour, materials, etc.
Protective Tariffs - to increase the price of a foreign competitor's goods ( Including restrictive quotas, and anti-dumping measures.) on par or higher than domestic prices.
Quotas - to prevent dumping of cheaper foreign goods that would overwhelm the market.
Tax cuts - Alleviation of the burdens of social and business costs.
Intervention - The use of state power to bolster an economic entity.
Trade restriction

Protectionism has frequently been associated with economic theories such as mercantilism, the belief that it is beneficial to maintain a positive trade balance, and import substitution.

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. 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. Most economists view this form of protectionism as a disguised transfer payment from consumers (who pay higher prices for food or other protected goods) to local high-cost producers.

Some may feel that better job choice is more important than lower goods costs. Whether protectionism provides such a tradeoff between jobs and prices has not yet reached a consensus with economists. Some point out that free-trade has not benefitted those in manufacturing, and that service-sector jobs, such as store clerk, do not pay as well as manufacturing used to. [1]

Famous early protectionists in the United States included Alexander Hamilton (who set the country's financing on the tariff), Abraham Lincoln, and Theodore Roosevelt.

1 De facto protectionism
2 Current world trends
3 Criticism
4 See also
5 Notes and references
- 5.1 Other references
6 External links

[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.

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 heavily 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."*[2]

[edit] Current world trends

It is 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. Despite this, many of these countries still place protective and/or revenue tariffs on foreign products to protect some favored or politically influential industries, or to reduce the taxation demands on their internal domestic manufacturing, making their products more competitive. The elimination of these tariffs remains a contentious peg their currencies to the dollar and, thus, set prices of their exports lower than they would be if the market determined the relative prices of each currency.

Protectionist quotas can cause foreign producers to become more profitable, mitigating their desired effect. This happens because quotas artificially restrict supply, so it is unable to meet demand; as a result the foreign producer can command a premium price for its products. These increased profits are known as quota rents.

For example, in the United States (1981-1994), Japanese automobile companies were held to voluntary export quotas. These quotas limited the supply of Japanese automobiles desired by consumers in the United States (1.68 million, raised to 1.85 million in 1984, and raised again to 2.30 million in 1985), increasing the profit margin on each automobile more than enough (14% or about $1200 in 1983 dollars, about $2300 in 2005 dollars) to cover the reduction in the number of automobiles that they sold, leading to greater overall profits for Japanese automobile manufacturers in the United States export market (Berry et al. 1999).

[edit] Criticism

Protectionism is frequently criticised as harming the people it is meant to help, instead of aiding them; such people often support free trade. Some have denounced critics of protectionism as ideologues whose opinions are shaped more by ideology than facts. However, academic economists are generally supporters of free trade, and cite "cutting-edge research" as the basis for their opinions.<ref>Krugman, Paul (Apr. 12, 1998). The $300,000 Man. Slate.</ref> Economic theory, under the principle of comparative advantage, suggests that the gains from free trade outweigh the losses; some modern economists have advocated the view that free trade creates more jobs than it destroys because it allows countries to specialise in the production of goods and services they have a comparative advantage in.<ref>Krugman, Paul (Jan. 24, 1997). The Accidental Theorist. Slate.</ref>

Some economists, such as Paul Krugman, have gone as far as to argue that free trade even 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 penumbra 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.<ref>Krugman, Paul (Mar. 21, 1997). In Praise of Cheap Labor. Slate.</ref> It has even been suggested that those who support protectionism ostensibly to further the interests of third world workers are being disingenuous, seeking only to protect jobs in developed countries.<Ref>Krugman, Paul (Nov. 21, 1997). A Raspberry for Free Trade. Slate.</ref>

Alan Greenspan, former chair of the American Federal Reserve, has criticised 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."<ref>Sicilia, David B. & Cruikshank, Jeffrey L. (2000). The Greenspan Effect, p. 131. New York: McGraw-Hill. ISBN 0-07-134919-7.</ref>

[edit] See also

[edit] Notes and references

[edit] Other references

Berry, S., Levinsohn. J. and Pakes, A. (1999). Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy. American Economic Review 89(3): 400-30. In: Benjamin, D.K. (1999) Voluntary Export Restriction on Automobiles. Bozeman, Montana: PERC - Property and Environment Research Center. [online] Available at: http://www.perc.org/perc.php?subsection=5&id=416.