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Protectionism: Advantages and Disadvantages

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Published: Tue, 12 Dec 2017

Trade protectionism is implemented by countries when they believe their industries are being affected negatively by unjust competition. It may be seen as a defensive measure and it is almost always driven by political forces. It may turn successful, especially in the short run. In the long run, however it usually does the opposite of its intentions as it can make the country, and the industries it is trying to look after, not so competitive on the global marketplace. While economic theory suggests, and economic history demonstrates, protectionism’s counter productivity on a global scale, we still believe that economists have a responsibility to defy increasing protectionist pressures by more than just recitationfree trade benefits. The typical protectionist argues that the traditional case for free trade is based on an oversimplified model which is no longer applicable to the real world. These charges are usually based on misconstructions or misinterpretations of the role of assumptions in economic theory. The fundamental illustrations of international trade theory are not necessary conditions for the theory’s conclusions to have real world relevance.

Protectionism is the government’s actions and policies that restrict or restrain international trade, often done with the purpose of protecting local businesses and jobs from foreign competition. Classic methods of protectionism are import tariffs, subsidies, quotas and direct state intervention. The fact that trade protection hurts the economy of the country that enforces it is one of the oldest but still most astonishing understandings economics has to offer. The idea dates back to the beginning of economic science itself, which gave birth to economics, contains the argument for free trade by specializing in production instead of producing everything, nations would profit from free trade. In international economics, it is the direct opposite to the proposition that people within a national economy will all be better off if they specialize at what they do best instead of trying to be self-sufficient.

Current debates and discussions about what kind of trade are good and about how open markets affects economy usually has hypothetical character, or takes place due to the influence of interest groups or subjective reasoning. Recent global economic crisis has caused a big change in ideas and policies against free markets and in favour of government intervention. Regardless, the analysis of trade development allows making simple conclusions which is relevant in the current discussion: countries adopting free trade policy prosper, while closing the markets leads to deficiency and economic slowdown. The main aim of this essay is to analyze if protectionism adopted by many countries, especially European countries can be a valid economic policy and if not, why so. It will look at the European Union and discuss the not so long ago fears of rising protectionism within the EU.

Advantages of protectionism

Protectionism marks an economic theory that emphasizes the minimization of free trade between nations. There are currently a lot of nations that practice economic protectionism; such countries believe that the manufacturing of goods should take place domestically, rather than in a global setting. Generally there are two main types of government control on international trade; tariff and non-tariff. Previously, the main dispute between supporters and opponents of protectionism was focused on the discussion of arguments again and for using tariff as an economic policy instrument. Non-tariff barriers became usual in the last years and many of them are used by countries as an escape passage in free trade agreements, since WTO agreements have much weaker restraints on non-tariff protectionism than on tariff. The supporters of protectionism build their arguments on the following:

1) An advantage of protectionism is that it keeps the domestic economy rolling. Since there is a decrease in imports, domestic firms have less competition, and so are able to continue. The domestic economy will also be strengthened because unemployment will be down due to the domestic firms and they will be able to produce and sell more goods with a lot less difficulty, giving firms less reason to decrease its costs by decreasing its workforce. Those with jobs will continue to consume while allowing the economy to flow.

2) Protectionism makes domestic firms less competitive in the export market, as import barriers raise domestic prices through higher costs for mediocre inputs this means that export products also become more expensive and decrease in market share against the international competition.

4) Protectionism permits the new and upcoming firms to work and develop at an acceptable rate, because they will not be pressured by foreign, more experienced firms. The new firms can grow until they themselves are big enough to compete in international markets, encouraging positive features for the domestic economy in the future.

5) Protectionism can also prevent dumping, this is where foreign and bigger economies enter an economy and sell their goods at a price lower than the costs of production. Therefore, the consumers of that specific economy are spending more than the consumers in overseas areas.

3) An exception in which protectionism could improve a nation’s economic well-being is when a country has monopoly power over a good. Economists [1] have argued that a country that produces a large percentage of the world’s output of a good can use an ” optimum’ tariff to take advantage of its latent monopoly power, and thus gain more from trade. This is the same as stating that a monopolist will maximize profits by raising prices and reducing outputs.

As stated before, many countries practice economic protectionism and it may hold several advantages over the separate notion of free trade.

Disadvantages of protectionism

Trade protectionism has more than a few disadvantages, the most noteworthy of which are the pressures it places on the very core principles of free trade. Further disadvantages are the protections it offers to firms that contest on a stage of price over quality, the incorrect sense of security that it builds and the denial of easy access to certain products for consumers. At the core of protectionism are tariffs, duties, quotas and any other measures designed to restrict the import of foreign goods in interest of protecting domestic companies from foreign take overs. More disadvantages are as follows:

1) Consumers pay more with protectionism. Without a system of competitive pricing, domestic companies are free to raise their prices without raising the quality of their goods. When a business has no competition then the consumer is left without options.

2) Businesses suffer from protectionism too. Government support often builds corporate contentment, which could lead to a business to believe that it has a pleasant safety net set up behind it in the event of strong foreign competition as these businesses might not have the resources necessary to survive on their own.

3) Trade protectionism limits consumer access to foreign goods and non-domestic companies that offer unique products and services are also subject to the restrictions.

4) Foreign businesses and domestic consumers face the greatest disadvantages of trade protectionism. Businesses face imbalanced restrictions while their domestic competitors are offered financial advantages, and the consumer ends up paying higher prices for a limited variety of products that are not always worth their costs.

5) Protectionism can cause a retaliation reaction from other nations, ruining vital relationships between nations. a clear example of this would be the relationship between USA and China, when the US put boundaries on the Chinese tires , China retaliated by putting up barriers against different U.S. goods such as their chicken. This kind of hostility between nations decreases the specialization between two nations, eventually damaging the economy.

Additionally to all of this, some governments provide subsidies and loans to businesses that are not able to compete against their foreign competitors. These actions restrain the free market by giving benefits to domestic companies while creating consequences upon foreign businesses. Some argue that trade protectionism is a step towards anti-globalization because of these reasons.

Where is protectionism most prominent

The U.S. has a long history as a protectionist country, with its tariffs reaching their highest in the 1820s and during the great depression. The country’s protectionist policies changed toward the middle of the 20th century. In 1947, they were one of the 23 nations to sign mutual trade agreements in the form of the general agreement on tariffs and trade. That agreement, modified in 1994, was substituted in 1995 by the world trade organization in Geneva. Through WTO negotiations, most of the world’s chief trading nations have significantly reduced their customs tariffs. The mutual trade agreements normally bound protectionist measure instead of eradicating them completely, however, calls for protectionism are still heard when industries in different countries suffer from economic struggle or unemployment believed to be aggravated by foreign competition. Critics argue that, over the long term, protectionism often ends up hurting the people it is supposed to protect and often encourages free trade as a greater alternative to protectionism.

Another region that protectionism is becoming more popular is Europe. Recently the European commission drew attention to the increase in protectionist inclinations worldwide. It stated that 123 new trade restrictions had been implemented over the time span of 8 months (2012) this was an acceleration of 25% compared with the previous period studied. However the commissions own anticipated trade reforms, were ignored. These would push the EU itself towards further protectionism, they were seen to hamper with the global economy and hurt developing countries, according to an ODI [2] study.EU import likings for low income countries are focused around primary merchandises. That’s why they have lower tariffs for these goods. These encouragements have strengthened structural shortages towards extractive industries especially in sub Saharan Africa. The EU modifications have prevented these economies from expanding into value adding industries, hence slowing their development. Even though the proposals suggests using trade to improve development, there is little acknowledgement of the influence of the EU’s Common Agricultural Policy [3] , which distorts trade and prevents development. The economic subsidy given to farmers alters world prices and the external tariffs punish foreign farmers selling products to the EU market. These interventions prevent many developing countries progressing through export-driven growth. In this context, the EU’s moves towards further protectionist measure are a cause for deep concern. The policies threaten to damage developing countries and reduce the efficiency of the global economic system

Based on economic theory, all elimination of trade barriers is beneficial to the world economy. Through increasing trade barriers, by tariff and non-tariff funds, domestic consumer costs increase, foreign exporters sales decrease and efficiency gains through comparative advantage [4] are prevented. These decisions are hence political. Arguable they have been put in place to prevent possible rivals from catching up with EU countries. The statement that the imports from the middle-income countries will be substituted by those from low-income countries seems doubtful.

It is vital to distinguish between the cases for free trade for nations own benefit and the case for free trade for all nations. The first is an argument for free trade to improve one nations own well-being, also known as the national-efficiency argument. The other is an argument for free trade to improve every trading country’s welfare. Both of these cases assume that free markets determine prices and there are no market failures. However, the reality is that market failures can and do occur. Market failures can rise from governmental action as well. Hence, governments may misrepresent market prices by subsidizing production, as European governments have notably done and as all wealthy countries governments do in agriculture. Governments can also protect intellectual property unproductively, leading to underproduction of new knowledge; they may also overprotect it. In those cases, production and trade, led by inaccurate prices, will not be effective.

Conclusion

The history of trade development shows that protectionism and free trade policies were replaced to correspond to a certain economic situation in the world. However, there has been apparent shift to open markets, decreased trade barriers and international cooperation among countries in the last few decades. With all of this said, the impact of recent economic slowdown pushed many countries to stray from free trade agreements in order to support domestic economies and employment. As a result, what we are seeing today is protectionism which is not an upfront declaration of a trade war using tariffs; rather it is protectionism with non-tariff weapons. These metaphorical weapons are used mainly by developed countries especially by many European countries. Demands for labour and domestic market protection stand as a problem for European leaders. They run against EU rules that guarantee the free flow of goods, services and workers.

There are two sides of using protective policy, but it is clear that the disadvantages of such policies will almost always prevail over its advantages. Economists stress more on the threats rather than the benefits of protectionism, and claim that it is not a solution for problems in the long run. For European and other countries it is extremely desirable to find ways to increase employment and reduce the impact of the crisis, but using any sort of protection would have very little short run benefits. It would also result in reduced worldwide employment very quickly and make growth prospects much more difficult when recovery does come. It is not even a case of when one country benefits at the expense of another. Such moves might bring upon a chain reaction of protectionism that makes the economic slowdown even worse. One country’s protection will not just hurt partner-country exports. Sooner or later, the formers exports will be affected as well. Therefore Europe should avoid adopting protective measures separately, as free trade is seen to be the only solution to crisis by stimulating future growth and creating jobs in the future.


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