Protectionism
Encyclopedia
Protectionism is the economic policy
of restraining trade
between states through methods such as tariff
s on imported goods, restrictive quotas
, and a variety of other government regulations designed to allow (according to proponents) "fair competition" between import
s and goods and services produced domestically.
This policy contrasts with free trade
, where government barriers to trade and movement of capital 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.
(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.
Most modern economists agree that protectionism is harmful in that its costs outweigh the benefits, and that it impedes economic growth. 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'."
Recent examples of protectionism in developed countries are typically motivated by the desire to protect the livelihoods of individuals in politically important domestic industries. Whereas formerly mostly blue-collar jobs were being lost from developed countries 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.
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, and supported having the right to purchase manufactured goods from any nation. 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 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 U.S. statesmen, including Senator Henry Clay, continued Hamilton's themes within the Whig Party under the name "American System."
The opposed 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 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.
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 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.
With the North winning the Civil War, Republican dominance was assured over the Southern Democrats. Republicans continued to dominate American politics until around the early 20th century. President William McKinley stated the United States' stance under the Republican Party as thus:
Southern Democrats gradually rebuilt their party, and allied themselves with Northern Progressives. They had many differences but both were 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. Northern Progressives sought free trade to undermine the power base of Republicans – Woodrow Wilson would admit as much in a speech to Congress. 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.
, 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.
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." 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.
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."
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.
, industrial infrastructure, and skill in manufacturing have progressed sufficiently allow the industry to compete in the global market.
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:
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.
s instead support free trade. 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. 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.
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. Economists 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. 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.
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."
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 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.
, 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
in the European Union, longstanding agricultural subsidies and proposed "Buy American" provisions 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.
, 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).
Economic policy
Economic policy refers to the actions that governments take in the economic field. It covers the systems for setting interest rates and government budget as well as the labor market, national ownership, and many other areas of government interventions into the economy.Such policies are often...
of restraining trade
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
between states through methods such as tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
s on imported goods, restrictive quotas
Import quota
An import quota is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time....
, and a variety of other government regulations designed to allow (according to proponents) "fair competition" between import
Import
The term import is derived from the conceptual meaning as to bring in the goods and services into the port of a country. The buyer of such goods and services is referred to an "importer" who is based in the country of import whereas the overseas based seller is referred to as an "exporter". Thus...
s and goods and services produced domestically.
This policy contrasts with free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...
, where government barriers to trade and movement of capital are kept to a minimum. In recent years, it has become closely aligned with anti-globalization
Anti-globalization
Criticism of globalization is skepticism of the claimed benefits of the globalization of capitalism. Many of these views are held by the anti-globalization movement however other groups also are critical of the policies of globalization....
. The term is mostly used in the context of economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, where protectionism refers to policies or doctrines which protect businesses and workers within a country by restricting or regulating trade with foreign nations.
History
Historically, protectionism was associated with economic theories such as mercantilismMercantilism
Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...
(that believed that it is beneficial to maintain a positive trade balance), and import substitution
Import substitution
Import substitution industrialization or "Import-substituting Industrialization" is a trade and economic policy that advocates replacing imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign dependency through the local production of...
. During that time, Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
famously warned against the 'interested sophistry' of industry, seeking to gain advantage at the cost of the consumers.
Most modern economists agree that protectionism is harmful in that its costs outweigh the benefits, and that it impedes economic growth. Economics Nobel prize winner and trade theorist Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
once famously stated that, "If there were an Economist’s Creed, it would surely contain the affirmations 'I understand the Principle of Comparative Advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
' and 'I advocate Free Trade'."
Recent examples of protectionism in developed countries are typically motivated by the desire to protect the livelihoods of individuals in politically important domestic industries. Whereas formerly mostly blue-collar jobs were being lost from developed countries to foreign competition, in recent years there has been a renewed discussion of protectionism due to offshore outsourcing
Offshore outsourcing
Offshore outsourcing is the practice of hiring an external organization to perform some business functions in a country other than the one where the products or services are actually developed or manufactured. It can be contrasted with offshoring, in which the functions are performed in a foreign...
and the loss of white-collar
White-collar worker
The term white-collar worker refers to a person who performs professional, managerial, or administrative work, in contrast with a blue-collar worker, whose job requires manual labor...
jobs.
Protectionism in the United States (USA)
Free trade and protectionism are regional issues. Although not as animating an issue as slavery, differences in trade between the two regions contributed to the Civil WarAmerican Civil War
The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...
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, and supported having the right to purchase manufactured goods from any nation. 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 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 U.S. statesmen, including Senator Henry Clay, continued Hamilton's themes within the Whig Party under the name "American System."
The opposed 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 which the fledgling Republican Party
Republican Party (United States)
The Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the GOP . The party's platform generally reflects American conservatism in the U.S...
, 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.
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 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.
With the North winning the Civil War, Republican dominance was assured over the Southern Democrats. Republicans continued to dominate 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."
Southern Democrats gradually rebuilt their party, and allied themselves with Northern Progressives. They had many differences but both were 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. Northern Progressives sought free trade to undermine the power base of Republicans – Woodrow Wilson would admit as much in a speech to Congress. 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.
Protectionist policies
A variety of policies have been used to achieve protectionist goals. These include:- TariffTariffA tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
s: 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 rateFloating exchange rateA floating exchange rate or fluctuating exchange rate is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency....
s, 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 quotaImport quotaAn import quota is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time....
s: 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. regarding food safetyFood safetyFood safety is a scientific discipline describing handling, preparation, and storage of food in ways that prevent foodborne illness. This includes a number of routines that should be followed to avoid potentially severe health hazards....
, 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 "dumpingDumping (pricing policy)In economics, "dumping" is any kind of predatory pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price either below the price charged in its home market, or in quantities that cannot be explained through normal market...
" 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. - Direct subsidiesSubsidyA subsidy is an assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more labor A subsidy (also...
: 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. - Export subsidiesSubsidyA subsidy is an assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more labor A subsidy (also...
: 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. - Exchange rateExchange rateIn finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
manipulation: A government may intervene in the foreign exchange marketForeign exchange marketThe foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
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 inflationInflationIn economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
in the country, which will in turn raise the cost of exports, and reduce the relative price of imports. - International patentPatentA patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....
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 DrahosPeter DrahosProfessor Peter Drahos is an Australian academic and researcher specializing in the areas of intellectual property and global business regulation amongst others. He is the Director of the Centre for Governance of Knowledge and Development and the Head of Program of the Regulatory Institutions...
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 conventionsBerne Convention for the Protection of Literary and Artistic WorksThe Berne Convention for the Protection of Literary and Artistic Works, usually known as the Berne Convention, is an international agreement governing copyright, which was first accepted in Berne, Switzerland in 1886.- Content :...
, 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."
De facto protectionism
In the modern trade arena many other initiatives besides tariffs have been called protectionist. For example, some commentators, such as Jagdish BhagwatiJagdish Bhagwati
Jagdish Natwarlal Bhagwati is an Indian-American economist and professor of economics and law at Columbia University. He is well known for his research in international trade and for his advocacy of free trade....
, 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
Copyright
Copyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time...
, 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.
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 advantageComparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
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
Herman Daly
Herman Daly is an American ecological economist and professor at the School of Public Policy of University of Maryland, College Park in the United States....
, a leading voice in the discipline of ecological economics
Ecological economics
Image:Sustainable development.svg|right|The three pillars of sustainability. Clickable.|275px|thumbpoly 138 194 148 219 164 240 182 257 219 277 263 291 261 311 264 331 272 351 283 366 300 383 316 394 287 408 261 417 224 424 182 426 154 423 119 415 87 403 58 385 40 368 24 347 17 328 13 309 16 286 26...
, 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." 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.
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 RobertsPaul Craig Roberts
Paul Craig Roberts is an American economist and a columnist for Creators Syndicate. He served as an Assistant Secretary of the Treasury in the Reagan Administration earning fame as a co-founder of Reaganomics. He is a former editor and columnist for the Wall Street Journal, Business Week, and...
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."
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
Value added tax
A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
(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 scaleEconomies of scale
Economies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...
, 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-faireLaissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
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 laborChild laborChild labour refers to the employment of children at regular and sustained labour. This practice is considered exploitative by many international organizations and is illegal in many countries...
- collective bargainingCollective bargainingCollective bargaining is a process of negotiations between employers and the representatives of a unit of employees aimed at reaching agreements that regulate working conditions...
- competitionCompetition lawCompetition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies....
(antitrust) - environmental protectionEnvironmental protectionEnvironmental protection is a practice of protecting the environment, on individual, organizational or governmental level, for the benefit of the natural environment and humans. Due to the pressures of population and our technology the biophysical environment is being degraded, sometimes permanently...
- equal opportunityEqual opportunityEqual opportunity, or equality of opportunity, is a controversial political concept; and an important informal decision-making standard without a precise definition involving fair choices within the public sphere...
- intellectual propertyIntellectual propertyIntellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...
- minimum wageMinimum wageA minimum wage is the lowest hourly, daily or monthly remuneration that employers may legally pay to workers. Equivalently, it is the lowest wage at which workers may sell their labour. Although minimum wage laws are in effect in a great many jurisdictions, there are differences of opinion about...
- occupational safety and healthOccupational safety and healthOccupational safety and health is a cross-disciplinary area concerned with protecting the safety, health and welfare of people engaged in work or employment. The goal of all occupational safety and health programs is to foster a safe work environment...
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 economistEconomist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
s instead support free trade. Economic theory, under the principle of comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
, 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. Protectionism results in deadweight loss
Deadweight loss
In economics, a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal...
; 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.
Most economists, including Nobel prize winners Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
and Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
, 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. Economists 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. 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.
Alan Greenspan
Alan Greenspan
Alan Greenspan is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. He currently works as a private advisor and provides consulting for firms through his company, Greenspan Associates LLC...
, 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."
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
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
and World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
. According to Frederic Bastiat
Frédéric Bastiat
Claude Frédéric Bastiat was a French classical liberal theorist, political economist, and member of the French assembly. He was notable for developing the important economic concept of opportunity cost.-Biography:...
, "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 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
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
. In other words visa entrance requirements are a form of local protectionism.
Current world trends
Since the end of World War IIWorld War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, it has been the stated policy of most First World
First World
The concept of the First World first originated during the Cold War, where it was used to describe countries that were aligned with the United States. These countries were democratic and capitalistic. After the fall of the Soviet Union and the end of the Cold War, the term "First World" took on a...
countries to eliminate protectionism through free trade policies enforced by international treaties and organizations such as the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
. Certain policies of First World governments have been criticized as protectionist, however, such as the Common Agricultural Policy
Common Agricultural Policy
The Common Agricultural Policy is a system of European Union agricultural subsidies and programmes. It represents 48% of the EU's budget, €49.8 billion in 2006 ....
in the European Union, longstanding agricultural subsidies and proposed "Buy American" provisions in economic recovery packages in the United States .
The current round of trade talks by the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
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 at their recent London summit pledged to abstain from imposing any trade protectionist measures. Although they were reiterating what they had already committed to, last November in WashingtonWashington, D.C.
Washington, D.C., formally the District of Columbia and commonly referred to as Washington, "the District", or simply D.C., is the capital of the United States. On July 16, 1790, the United States Congress approved the creation of a permanent national capital as permitted by the U.S. Constitution....
, 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).
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.
- Thailand - ban on all parcels to the US weighing over 453 grams until February 2011.
See also
- American School (economics)American School (economics)The American School, also known as "National System", represents three different yet related constructs in politics, policy and philosophy. It was the American policy for the 1860s to the 1940s, waxing and waning in actual degrees and details of implementation...
- Buy American ActBuy American ActThe Buy American Act passed in 1933 by Congress and signed by President Hoover on his last full day in office , required the United States government to prefer U.S.-made products in itspurchases...
- Henry C. Carey
- Digital Millennium Copyright ActDigital Millennium Copyright ActThe Digital Millennium Copyright Act is a United States copyright law that implements two 1996 treaties of the World Intellectual Property Organization . It criminalizes production and dissemination of technology, devices, or services intended to circumvent measures that control access to...
- Economic patriotism
- Free trade debateFree trade debateFree trade is one of the most debated topics in economics of the 19th, 20th, and 21st century. Arguments over free trade can be divided into economic, moral, and socio-political arguments. The academic debate among economists is currently settled in favor of free trade, with a consensus having...
- Alexander HamiltonAlexander HamiltonAlexander Hamilton was a Founding Father, soldier, economist, political philosopher, one of America's first constitutional lawyers and the first United States Secretary of the Treasury...
- Friedrich ListFriedrich ListGeorg Friedrich List was a leading 19th century German economist who developed the "National System" or what some would call today the National System of Innovation...
- LobbyingLobbyingLobbying is the act of attempting to influence decisions made by officials in the government, most often legislators or members of regulatory agencies. Lobbying is done by various people or groups, from private-sector individuals or corporations, fellow legislators or government officials, or...
- Not Invented HereNot Invented HereNot invented here is a term used to describe persistent social, corporate, or institutional culture that avoids using or buying already existing products, research, standards, or knowledge because of their external origins. It is normally used in a pejorative sense, and may be considered an...
- Protected Geographical StatusProtected Geographical StatusProtected Geographical Status is a legal framework defined in European Union law to protect the names of regional foods. Protected Designation of Origin , Protected Geographical Indication and Traditional Speciality Guaranteed are distinct regimes of geographical indications within the framework...
- Protection or Free TradeProtection or Free TradeProtection or Free Trade: An Examination of the Tariff Question with Especial Regard to the Interests of Labor was a book written by 19th century economist and social philosopher, Henry George ....
- Rent seekingRent seekingIn economics, rent-seeking is an attempt to derive economic rent by manipulating the social or political environment in which economic activities occur, rather than by adding value...
- Voluntary Export Restraint
- Washington ConsensusWashington ConsensusThe term Washington Consensus was coined in 1989 by the economist John Williamson to describe a set of ten relatively specific economic policy prescriptions that he considered constituted the "standard" reform package promoted for crisis-wracked developing countries...
- WTO
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