protectionism

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 government regulations designed to allow (according to proponents) "fair competition" between imports and goods and services produced domestically.

This policy contrasts with free trade, where government barriers to trade are kept to a minimum. In recent years, it has become closely aligned with anti-globalization. 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.

History

Punch cartoon, 1930: The character on the right represents a skeptical Britain becoming increasingly protectionist and dissatisfied with its Free Trade policies, as represented by the Micawber character to the left, during the Great Depression.

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]

Over the course of history, the majority of economists promoted protectionism. However, in the contemporary era, most mainstream economists state that protectionism is harmful in that its costs outweigh the benefits and that it impedes economic growth.^[2][3] Almost all present day economic schools solely promoted Free trade and have assumed a dogmatically anti-protectionist opinion. Indeed, economics Nobel prize winner and trade theorist Paul Krugman once infamously stated, "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]

Paradoxically, the history of Protectionism shows it a successful form of economic policy. Every developed state from England to France to the United States of America used protectionism to advance industrialization, commerce, and rapid economic growth. In fact, the recent examples of protectionism in developed countries are typically motivated by the desire to emulate the past success of protectionism compared to the relative failure of Free trade. Thus, almost all developing countries currently use protectionism to gather foreign direct investment and promote domestic capital markets thereby making huge strides in economic growth. Currently, all of the Asian markets, Brazil, India, Russia and People's Republic of China have continued using protectionism successfully. Most of these gains have come at the cost of De-indrustrialization of the Developed world resulting in their sustaining huge losses of high paying industrial jobs, real declining tax revenue, while simultaneously suffering increased disparities in wealth and class conflict. Subsequently, with these mostly blue-collar jobs being lost from developed countries to foreign competition^{[citation needed]}, in recent years there has been a renewed discussion^{[by whom?]} of protectionism due to offshore outsourcing and the loss of white-collar jobs.

For instance, in remarking upon the success of protectionism, Cambridge University Professor Ha-Joon Chang argues that virtually all developed countries today successfully promoted their national industries through protectionism. Chang points to the significantly high tariffs of the UK, the US and other countries during their process of industrialization. While noting the success of protectionism, Chang has attempted to argue that it would be unfair if the developed countries now re-instituted protectionism by stating that those countries that used protectionist policies during their growth would be trying to "kick away the ladder" from developing countries.^[5] In the words of 19th century German economist, Friedrich List:

“It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him. In this lies the secret of the cosmopolitical doctrine of Adam Smith, and of the cosmopolitical tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations. Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth” ^[6]

Protectionism in the US

Protectionism was the first economic policy implemented by the United States government. Under the argument and guidance of George Washington, Alexander Hamilton, Thomas Jefferson, James Madison and James Monroe, protectionism was implemented as a national economic policy. Realizing that the benefits of union with the United Kingdom had been severed as a result of independence while the economic ties remained in favor of the British Empire, the early American leadership saw that a new national economic policy was required. Accordingly, protectionism was viewed as a means to protect the less developed American industrial and agricultural economy from more efficient British goods whilst also gaining additional revenue for the Federal government. In time, tariffs were increased, subsidies apportioned, and infrastructure developed which allowed the expansion of the American made goods and their replacement of British made goods within the domestic economy. Thus, protectionism finally broke most of the economic bonds that had tied the American colonies with the British Empire thereby enabling the United States to establish itself as an independent major power. In subsequent decades, the argument over the amount of Protectionism became a contested regional issue as the power of domestic manufacturers in the north captured more and more of the subsidies, infrastructure development and overall gains of Protectionism. Consequently tariffs became a regional issue which eventually served to fracture the American union into a north and south divide.^{[citation needed]} Equal to the issue of slavery, differences in trade between the two regions contributed to the Civil War and remain a point of national difference even today.^[7]

Historically, southern slave holding states, because of their low cost manual labor, had little perceived need for mechanization, gained capital from selling their commodities abroad, and supported a policy which would allow them access to cheaper foreign goods. Northern states, on the other hand, sought to develop a manufacturing capacity, and successfully slowly raised tariffs higher and higher to allow nascent Northern manufacturers to compete with British competitors and eventually capture the domestic market.

At first, beginning with the "Report on Manufactures," by the first US Secretary of the Treasury, Alexander Hamilton, advocating tariffs to help protect infant industries, including bounties (subsidies) derived in part from those tariffs, the United States became the leading nation opposed to "free trade" theory. Southern statesmen agreed with the need to gain American independence but argued with Northern interests over the utility of higher and higher tariffs. Throughout the 19th century, leading US statesmen, including Senator Henry Clay, bridged the differences between the two competing interests, and continued Hamilton's themes within the Whig Party under the name American System. However, as more and more of the benefits accrued to northern interests, and ever higher tariffs were proposed by northern politicians, the tariff issue started widening the crack into a chasm between North and South.

The opposed Southern Democratic Party successfully contested several elections throughout the 1830s, 1840s, and 1850s in part over the increasing tariffs and protections of industry which was seen as more and more beneficial to the North at the cost of the South. Representing themselves as the champions of the farmer and the artisan and craftsman against the factory owner, the southern faction of the Democratic Party and the Whigs remained dominate in national affairs. Nonetheless, Southern Democrats were never as strong in the US House as the more populated North. The Northern Whigs sought and finally 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. Yet, for the time being, a combination of Southern and Western Democrats in favor of Union united with Southern Whigs interested in bridging the divide between North and South, and managed to guide the Union through these later decades.

However, mostly over the issue of abolition and other scandals, the Whigs would ultimately collapse by the middle of the century, leaving a void in the national leadership which the fledgling Republican Party, led by Abraham Lincoln, would fill. Lincoln, who called himself a "Henry Clay tariff Whig", strongly opposed free trade, as did a large number of Southern leaders who nonetheless argued for less protectionism. Unfortunately, the similarly of these interests was insufficient to smother the differences between northern and southern leaders. The increasingly strident and militant tone Abolitionism in the North and the Republican Party, as well as the increasing capture of wealth by northern capitalist, repelled the South from the Republicans. With the election of Lincoln and the capture of the majority of Northern state constituencies by Republicans, the South was driven into secession. Freed of compromise over tariffs with Southern interests, the Northern States under Lincoln 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.^[8]

This support for Northern industry was ultimately successful. The combination of capital for war industry, rail-roads, and new domestic goods to replace foreign goods walled out by the high tariff, brought a huge increase in American production. Meanwhile, the Union naval blockade, and devastation waged by Union Armies upon Southern states obliterated southern manufacturers. Armed with this economic advantage, the North was easily able to starve 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 the end of President Lincoln's term, the northern manufacturing states had ten times the GDP of the South.

With the North victorious in the War Between the States, Republican dominance was assured over the Southern Democrats. Although a combination of former Whigs, Moderate Republicans, Northern and Southern Democrats looked to lower tariffs, the Radical Republicans, managed to eject the Southern delegations, arrest their opponents, overthrow Southern states, establish military despotism and overawe their opponents for the next ten years. The Lincoln era high tariffs remained in place for the next decades.

In turn, the economic policy of Protectionism continued to dominate American politics until around the early 20th century. For the remainder of the century the issue was not as much about the level of Protectionism as it was the growth of Corporations and Capital centralization and the subsequent issues regarding Labor rights. Although the beneficiaries of Robber Barons, the GOP at first succeeded in forestalling the issues of corporate capital centralization and increasing degradation of labor by pointing to the success of Protectionism in protecting American jobs. 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."^[9]

President Ulysses S. Grant further echoes that in his quote here:

“For centuries England has relied on protection, has carried it to extremes and has obtained satisfactory results from it. There is no doubt that it is to this system that it owes its present strength. After two centuries, England has found it convenient to adopt free trade because it thinks that protection can no longer offer it anything. Very well then, Gentlemen, my knowledge of our country leads me to believe that within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade.” ^[5]

While the GOP managed to convince small businesses and labor of its altruistic support for their interests, the increasing dominance of large corporations and their pushing out of the market of small manufacturers, artisans, craftsmans, and tradesmen ultimately called into question the GOP's true allegiance. In reply, Southern Democrats gradually rebuilt their party, restored a modicum of small industries in the South and allied themselves with Northern Progressives both Republican and Democrat opposed to the Big Business domination of the GOP. This coalition had many differences but it was staunchly opposed to the great corporate trusts that had built up. This marriage of convenience to face a common enemy reinvigorated the Democratic Party, which catapulted back into power.

Realizing the large power Big Business had over the GOP, Northern Progressives sought free trade as a means of undermining the power base of Republicans; Woodrow Wilson would admit as much in a speech to Congress. Woodrow Wilson's ideological understudy^{[citation needed]}, Franklin Roosevelt, would essentially blame the Great Depression upon the protectionist policies exemplified by the previous Republican President, Herbert Hoover.^{[citation needed]} However, these rhetorical attacks were more political talking points required to differentiate the Democrats from Republicans than real deep ideological contrasts. Regardless of which party was in power, tariffs and other protectionist policies remained in place, with arguments over their rates and amounts being the issues defining the two parties. Consequently, Protectionism remained a policy of the government throughout the 20th century until it was finally totally abandoned by the US in 1973.

Protectionist policies

A variety of policies have been 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 (e.g. 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 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.
8. International patent systems: 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 Drahos explains 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 and Berne 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."^[10]

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, pharmaceuticals, software, and other manufactured items to high cost producers with quotas from low cost producers set to zero.^[11][12]

Arguments for protectionism

Protectionists believe that there is a legitimate need for government restrictions on free trade in order to protect their country’s economy and its people’s standard of living.

Comparative advantage has lost its legitimacy

Comparative advantage is used by most economists as a basis for their support of free trade policies. Opponents of these policies argue that comparative advantage 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 global economy, capital tends simply to flow to wherever costs are lowest—that is, to pursue absolute advantage."^[13] Protectionists would point to the building of plants and shifting of production to Mexico by American companies such as GE, GM, and Hershey Chocolate as proof of this argument.

The Comparative Advantage argument is also premised on full employment. According to the Wikipedia entry on Comparative Advantage, “if one or other of the economies has less than full employment of factors of production, then this excess capacity must usually be used up before the comparative advantage reasoning can be applied”. Protectionists believe that it is therefore erroneous to base trade policy on the principle of Comparative Advantage in those countries that suffer from significant unemployment or underemployment.

Domestic tax policies can favor foreign goods

Protectionists believe that allowing foreign goods to enter domestic markets without being subject to tariffs or other forms of taxation, leads to a situation where domestic goods are at a disadvantage, a kind of reverse protectionism. By ruling out revenue tariffs on foreign products, governments must rely solely 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."^[14]

Protectionists argue that this reverse protectionism is most clearly seen and most detrimental to those countries (such as the US) that do not participate in the Value Added Tax (VAT) system. This is a system which generates revenues from taxation on the sale of goods and services, whether foreign or domestic. Protectionists argue that a country that does not participate is at a distinct disadvantage when trading with a country that does. That the final selling price of a product from a non-participating country sold in a country with a VAT tax must bear not only the tax burden of the country of origin, but also a portion of the tax burden of the country where it is being sold. Conversely, the selling price of a product made in a participating country and sold in a country that does not participate, bears no part of the tax burden of the country in which it is sold (as do the domestic products it is competing with). Moreover, the participating country rebates VAT taxes collected in the manufacture of a product if that product is sold in a non-participating country. This allows exporters of goods from participating countries to reduce the price of products sold in non-participating countries.

Protectionists believe that governments should address this inequity, if not by adopting a VAT tax, then by at least imposing compensating taxes (tariffs) on imports.

Infant industry argument

Protectionists believe that infant industries must be protected in order to allow them to grow to a point where they can fairly compete with the larger mature industries established in foreign countries. They believe that without this protection, infant industries will die before they reach a size and age where economies of scale, industrial infrastructure, and skill in manufacturing have progressed sufficiently allow the industry to compete in the global market.

Unrestricted trade undercuts domestic policies for social good

Most industrialized governments have long held that laissez-faire capitalism creates social evils that harm its citizens. To protect those citizens, these governments have enacted laws that restrict what companies can and can not do in pursuit of profit. Examples are laws regarding:

• child labor
• collective bargaining
• competition (antitrust)
• environmental protection
• equal opportunity
• intellectual property
• minimum wage
• occupational safety and health

Protectionists argue that these laws place an economic burden on domestic companies bound by them that put those companies at a disadvantage when they compete, both domestically and abroad, with goods and services produced by companies unfettered by such restrictions. They argue that governments have a responsibility to protect their corporations as well as their citizens when putting its companies at a competitive disadvantage by enacting laws for social good. Otherwise, they believe that these laws end up destroying domestic companies and ultimately hurting the citizens these laws were designed to protect.

Arguments against protectionism

Protectionism is frequently criticized by mainstream economists as harming the people it is meant to help. Most 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.^[15] 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.^[16]

Most economists, including Nobel prize winners Milton Friedman and Paul Krugman, 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 manufacturing — and 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.^[17] Economists^[who?] have suggested 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.^[18] 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, 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 of Econ Journal Watch identifies a similar sentiment against protectionism from sixteen British economists at the beginning of the 20th century.^[19]

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."^[20]

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 ostensibly due to British tariffs and taxes, as well as the protective policies preceding both World War I and World War II. According to Frederic Bastiat, "When goods cannot cross borders, armies will."

Free trade promotes equal access to domestic resources (human, natural, capital, etc.) for domestic participants and foreign participants alike. Some thinkers^[who?] extend that under free trade, citizens of participating countries deserve equal access to resources and social welfare (labor laws, education, etc.). Visa entrance policies tend to discourage free reallocation between many countries, and encourage it with others. High freedom and mobility has been shown to lead to far greater development than aid programs in many cases, for example eastern European countries in the European Union. In other words visa entrance requirements are a form of local protectionism.

Current world trends

Since the end of World War II, 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^{[citation needed]}. Certain policies of First World governments have been criticized as protectionist, however, such as the Common Agricultural Policy^[21] in the European Union, longstanding agricultural subsidies and proposed "Buy American" provisions^[22] in economic recovery packages in the United States .

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 impasse. The leaders' statement in the G20 meeting in London in early 2009 included a promise to continue the Doha Round.

Protectionism after the 2008 financial crisis

Heads of the G20 meeting 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,^[23]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, detering beggar-thy-neighbour acts, and preserving the contribution that exports could play in the future recovery of the world economy. Although they were reiterating what they had already committed to, last November in Washington, 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 1/4 to 1/2 percent (about $50 billion a year).^[24]

New US incoming airmail compliance

Despite pledges to abstain from protectionism, the US has imposed a new 'security check' on all international airmail entering the US that weighs over 453 grams from November 2010. In addition to the 48 hour delay on all such airmail, compliance fees have been shifted onto the international postal services. Effectively this is protectionism under the guise of 'aviation security'. For example,

• Australia - an additional $9AUD is charged in Australia for the cost of compliance making the posting of most small items to the US uneconomical.^[25]
• Thailand - ban on all parcels to the US weighing over 453 grams until February 2011.^[26]

See also

• American School (economics)
• Buy American Act
• Henry C. Carey
• Digital Millennium Copyright Act
• Economic patriotism
• Free trade debate
• Alexander Hamilton
• Friedrich List
• Lobbying
• Not Invented Here
• Protected Geographical Status
• Protection or Free Trade
• Rent seeking
• Voluntary Export Restraint
• Washington Consensus
• WTO

References

External links

• 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