Protectionism

In economics, protectionism is the economic policy of restraining trade between states (countries) through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations. Protectionist policies protect the producers, businesses, and workers of the import-competing sector in a country from foreign competitors. However, they hurt consumers in general, and the producers and workers in export sectors, both in the country implementing protectionist policies, and in the countries protected against.

There is a broad consensus among economists that protectionism has a negative effect on economic growth and economic welfare, while free trade and the reduction of trade barriers has a positive effect on economic growth.[1][2][3][4][5][6] However, liberalization of trade can cause significant and unequally distributed losses, and the economic dislocation of workers in import competing sectors.[2]

Protectionist policies

A variety of policies have been used to achieve protectionist goals. These include:

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.[13]

History

Tariff Rates in Japan (1870-1960)
Tariff Rates in Spain and Italy (1860-1910)

Historically, protectionism was associated with economic theories such as mercantilism (which focused on achieving positive trade balance and accumulating gold), and import substitution.

In the 18th century, Adam Smith famously warned against the "interested sophistry" of industry, seeking to gain advantage at the cost of the consumers.[14] Friedrich List saw Adam Smith's views on free trade as disingenuous, believing that Smith advocated for freer trade so that British industry could lock out underdeveloped foreign competition.[15]

Some have argued that no major country has ever successfully industrialized without some form of economic protection.[16][17]

Economic historian Paul Bairoch wrote that "historically, free trade is the exception and protectionism the rule".[18]

According to economic historians Douglas Irwin and Kevin O'Rourke, "shocks that emanate from brief financial crises tend to be transitory and have little long-run affect on trade policy, whereas those that play out over longer periods (early 1890s, early 1930s) may give rise to protectionism that is difficult to reverse. Regional wars also produce transitory shocks that have little impact on long-run trade policy, while global wars give rise to extensive government trade restrictions that can be difficult to reverse."[19] They also note that sudden shifts in comparative advantage for specific countries have led said countries to become protectionist: "The shift in comparative advantage associated with the opening up of New World frontiers, and the subsequent “grain invasion” of Europe, led to higher agricultural tariffs from the late 1870s onwards, which as we have seen reversed the move toward freer trade that had characterized mid-nineteenth-century Europe. In the decades after World War II, Japan’s rapid rise led to trade friction with other countries. Japan’s recovery was accompanied by a sharp increase in its exports of certain product categories: cotton textiles in the 1950s, steel in the 1960s, automobiles in the 1970s, and electronics in the 1980s. In each case, the rapid expansion in Japan’s exports created difficulties for its trading partners and the use of protectionism as a shock absorber."[19]

In the United States

Tariff Rates(France, UK, US)
Average Tariff Rates in US (1821–2016)
U.S. Trade Balance (1895–2015)

According to Paul Bairoch, the United States was "the homeland and bastion of modern protectionism" since the end of the 18th century and until the post-World War II period. A very protectionist policy was adopted as soon as the presidency of George Washington by Alexander Hamilton, Secretary of the Treasury from 1789 to 1795 and author of the text "Report on the Manufactures, 1792 " which called for customs barriers to allow American industrial development. This text was one of the references of the German economist Friedrich List (1789-1846). This policy remained throughout the 19th century and the overall level of tariffs was very high (close to 50% in 1830). The victory of the protectionist North states against the free trade states of the South at the end of the Civil War (1861–1865) perpetuated this trend, even during periods of free trade in Europe (1860–1880).

In Europe

Europe became increasingly protectionist during the eighteenth century.[20] Economic historians Findlay and O'Rourke write that "the immediate aftermath of the Napoleonic Wars, European trade policies were almost universally protectionist," with the exceptions being smaller countries such as the Netherlands and Denmark.[20]

Europe increasingly liberalized its trade during the 19th century.[21] Countries such as Britain, the Netherlands, Denmark, Portugal and Switzerland, and arguably Sweden and Belgium, had fully moved towards free trade prior to 1860.[21] Economic historians see the repeal of the Corn Laws in 1846 as the decisive shift toward free trade in Britain.[21][22] A 1990 study by Harvard economic historian Jeffrey Williamsson showed that the Corn Laws (which imposed restrictions and tariffs on imported grain) substantially increased the cost of living for unskilled and skilled British workers, and hampered the British manufacturing sector by reducing the disposable incomes that British workers could have spent on manufactured goods.[23] The shift towards liberalization in Britain occurred in part due to "the influence of economists like David Ricardo ", but also due to "the growing power of urban interests".[21]

Findlay and O'Rourke characterize the 1860 Cobden Chevalier treaty between France and the United Kingdom as "a decisive shift toward European free trade."[21] This treaty was followed by numerous free trade agreements: "France and Belgium signed a treaty in 1861; a Franco-Prussian treaty was signed in 1862; Italy entered the “network of Cobden-Chevalier treaties” in 1863 (Bairoch 1989, 40); Switzerland in 1864; Sweden, Norway, Spain, the Netherlands, and the Hanseatic towns in 1865; and Austria in 1866. By 1877, less than two decades after the Cobden Chevalier treaty and three decades after British Repeal, Germany “had virtually become a free trade country” (Bairoch, 41). Average duties on manufactured products had declined to 9–12 percent on the Continent, a far cry from the 50 percent British tariffs, and numerous prohibitions elsewhere, of the immediate post-Waterloo era (Bairoch, table 3, p. 6, and table 5, p. 42)."[21]

Some European powers did not liberalize during the 19th century. The Russian Empire and Austro-Hungarian Empire remained highly protectionist, and the Ottoman Empire became increasingly protectionist.[24]

The countries of Western Europe began to steadily liberalize their economies after World War II and the protectionism of the interwar period.[20]

In Latin America

According to one assessment, tariffs were "far higher" in Latin America than the rest of the world in the century prior to the Great Depression.[25][26]

Impact

Protectionism is frequently criticized by economists as harming the people it is meant to help. Mainstream economists instead support free trade.[14][27] 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.[28] 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.[29] Protectionists believe that there is a legitimate need for government restrictions on free trade in order to protect their country’s economic, and therefore political independence.

Living standards

A 2016 study found that "that trade typically favors the poor", as they spend a greater share of their earnings on goods, and as free trade reduces the costs of goods.[30] Other research found that China's entry to the WTO benefitted US consumers, as the price of Chinese goods were substantially reduced.[31] Harvard economist Dani Rodrik argues that while globalization and free trade does contribute to social problems, "a serious retreat into protectionism would hurt the many groups that benefit from trade and would result in the same kind of social conflicts that globalization itself generates. We have to recognize that erecting trade barriers will help in only a limited set of circumstances and that trade policies will rarely be the best response to the problems [of globalization]".[32]

Growth

According to economic historians Findlay and O'Rourke, there is a consensus in the economics literature that protectionist policies in the interwar period "hurt the world economy overall, although there is a debate about whether the effect was large or small."[20]

Economic historian Paul Bairoch argued that economic protection was positively correlated with economic and industrial growth during the 19th century. For example, GNP growth during Europe's "liberal period" in the middle of the century (where tariffs were at their lowest), averaged 1.7% per year, while industrial growth averaged 1.8% per year. However, during the protectionist era of the 1870s and 1890s, GNP growth averaged 2.6% per year, while industrial output grew at 3.8% per year, roughly twice as fast as it had during the liberal era of low tariffs and free trade.[33] One study found that tariffs imposed on manufactured goods increase economic growth in developing countries, and this growth impact remains even after the tariffs are repealed.[34]

According to Dartmouth economist Douglas Irwin, "that there is a correlation between high tariffs and growth in the late nineteenth century cannot be denied. But correlation is not causation... there is no reason for necessarily thinking that import protection was a good policy just because the economic outcome was good: the outcome could have been driven by factors completely unrelated to the tariff, or perhaps could have been even better in the absence of protection."[35] Irwin furthermore writes that "few observers have argued outright that the high tariffs caused such growth."[35]

According to Oxford economic historian Kevin O'Rourke, "It seems clear that protection was important for the growth of US manufacturing in the first half of the 19th century; but this does not necessarily imply that the tariff was beneficial for GDP growth. Protectionists have often pointed to German and American industrialization during this period as evidence in favour of their position, but economic growth is influenced by many factors other than trade policy, and it is important to control for these when assessing the links between tariffs and growth."[36]

A prominent 1999 study by Jeffrey A. Frankel and David H. Romer found, contrary to free trade skeptics' claims, while controlling for relevant factors, that trade does indeed have a positive impact on growth and incomes.[37]

Developing world

There is broad consensus among economists 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.[38] The Nobel laureates, Milton Friedman and Paul Krugman, have argued for free trade as a model for economic development.[1] 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."[39]

Protectionists postulate that new industries may require protection from entrenched foreign competition in order to develop. This was Alexander Hamilton's argument in his "Report on Manufactures", and the primary reason why George Washington signed the Tariff Act of 1789. Mainstream economists do concede that tariffs can in the short-term help domestic industries to develop, but are contingent on the short-term nature of the protective tariffs and the ability of the government to pick the winners.[40][41] The problems are that protective tariffs will not be reduced after the infant industry reaches a foothold, and that governments will not pick industries that are likely to succeed.[41] Economists have identified a number of cases across different countries and industries where attempts to shelter infant industries failed.[42][43][44][45][46]

Economists have speculated 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.[47] 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, or 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 16 British economists at the beginning of the 20th century.[48]

Conflict

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 a slogan of Frédéric Bastiat (1801–1850), "When goods cannot cross borders, armies will."[49]

Protectionist measures taken since 2008 according to Global Trade Alert.[50]

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[51] Certain policies of First World governments have been criticized as protectionist, however, such as the Common Agricultural Policy[52] in the European Union, longstanding agricultural subsidies and proposed "Buy American" provisions[53] in economic recovery packages in the United States.

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,[54] 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-neighbor 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 0.25% to 0.5% (about $50 billion a year).[55]

Since then however, then-President-elect Donald Trump announced in November 2016 that he would abandon the TPP (Trans-Pacific Partnership) deal, placing the protectionist policies reflected in Trumponomics very much on the table, despite the wishes of all the other G20 nations.

See also

References

  1. 1 2 See P. Krugman, "The Narrow and Broad Arguments for Free Trade", American Economic Review, Papers and Proceedings, 83(3), 1993 ; and P. Krugman, Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations, New York, W.W. Norton & Company, 1994.
  2. 1 2 "Free Trade". IGM Forum. March 13, 2012.
  3. ↑ "Import Duties". IGM Forum. October 4, 2016.
  4. ↑ N. Gregory Mankiw, Economists Actually Agree on This: The Wisdom of Free Trade, New York Times (April 24, 2015): "Economists are famous for disagreeing with one another.... But economists reach near unanimity on some topics, including international trade."
  5. ↑ William Poole, Free Trade: Why Are Economists and Noneconomists So Far Apart, Federal Reserve Bank of St. Louis Review, September/October 2004, 86(5), pp. 1: "most observers agree that '[t]he consensus among mainstream economists on the desirability of free trade remains almost universal.'"
  6. ↑ "Trade Within Europe | IGM Forum". www.igmchicago.org. Retrieved 2017-06-24.
  7. ↑ http://www.nytimes.com/2013/06/06/world/asia/wide-china-push-is-seen-to-obtain-industry-secrets.html?_r=0
  8. ↑ https://www.nytimes.com/2017/02/03/technology/artificial-intelligence-china-united-states.html?_r=0
  9. ↑ http://observer.com/2016/04/the-unpleasant-truth-about-chinese-espionage/
  10. ↑ http://thefederalist.com/2016/08/02/why-access-to-china-can-be-suicide-for-u-s-companies/
  11. ↑ http://www.businessinsider.com/chinese-student-spies-2015-8?IR=T
  12. ↑ Peter Drahos; John Braithwaite (2002). Information Feudalism: Who Owns the Knowledge Economy?. London: Earthscan. p. 36. ISBN 9781853839177.
  13. ↑ Archived October 17, 2006, at the Wayback Machine.
  14. 1 2 Free to Choose, Milton Friedman
  15. ↑ The National System of Political Economy, by Friedrich List, 1841, translated by Sampson S. Lloyd M.P., 1885 edition, Fourth Book, "The Politics", Chapter 33.
  16. ↑ Shafaeddin, Mehdi (1998). "How did Developed Countries Industrialize? The History of Trade and Industrial Policy: the Cases of Great Britain and the USA". United Nations Conference on Trade and Development.
  17. ↑ Reinert, Eric (2007). How Rich Countries got Rich and Why Poor Countries Stay Poor. New York: Carroll & Graf.
  18. ↑ http://www.ubcpress.ca/books/pdf/chapters/tradingnation/chap1.pdf
  19. 1 2 C, Feenstra, Robert; M, Taylor, Alan (2013-12-23). "Globalization in an Age of Crisis: Multilateral Economic Cooperation in the Twenty-First Century". NBER.
  20. 1 2 3 4 "Power and Plenty".
  21. 1 2 3 4 5 6 Ronald, Findlay,; H, O'Rourke, Kevin (2003-01-01). "Commodity Market Integration, 1500–2000". NBER.
  22. ↑ "The Cambridge Economic History of Modern Britain". Cambridge Core. Retrieved 2017-06-27. |chapter= ignored (help)
  23. ↑ Williamson, Jeffrey G (1990-04-01). "The impact of the Corn Laws just prior to repeal". Explorations in Economic History. 27 (2): 123–56. doi:10.1016/0014-4983(90)90007-L.
  24. ↑ Daudin, Guillaume; O’Rourke, Kevin H.; Escosura, Leandro Prados de la (2008). "Trade and Empire, 1700–1870".
  25. ↑ Blattman, Christopher; Clemens, Michael A.; Williamson, Jeffrey G. (2003-06-01). "Who Protected and Why? Tariffs the World Around 1870–1938". Rochester, NY.
  26. ↑ Coatsworth, John H.; Williamson, Jeffrey G. (June 2002). "The Roots of Latin American Protectionism: Looking Before the Great Depression".
  27. ↑ Krugman, Paul R. (1987). "Is Free Trade Passe?". The Journal of Economic Perspectives. 1 (2): 131–44. JSTOR 1942985. doi:10.1257/jep.1.2.131.
  28. ↑ Krugman, Paul (January 24, 1997). The Accidental Theorist. Slate.
  29. ↑ Magee, Stephen P. (1976). International Trade and Distortions In Factor Markets. New York: Marcel-Dekker.
  30. ↑ Fajgelbaum, Pablo D.; Khandelwal, Amit K. (2016-08-01). "Measuring the Unequal Gains from Trade". The Quarterly Journal of Economics. 131 (3): 1113–80. ISSN 0033-5533. doi:10.1093/qje/qjw013.
  31. ↑ Amiti, Mary; Dai, Mi; Feenstra, Robert; Romalis, John (2017-06-28). "China’s WTO entry benefits US consumers". VoxEU.org. Retrieved 2017-06-28.
  32. ↑ Rodrik, Dani. "Has Globalization Gone Too Far?" (PDF). Institute for International Economics.
  33. ↑ Bairoch, Paul (1993). Economics and World History: Myths and Paradoxes. Chicago: University of Chicago Press. p. 47.
  34. ↑ DeJong, David (2006). "Tariffs and Growth: an empirical exploration of contingent relationships.". The Review of Economics and Statistics. 88: 625–40.
  35. 1 2 Irwin, Douglas A. (2001-01-01). "Tariffs and Growth in Late Nineteenth Century America". World Economy. 24 (1): 15–30. ISSN 1467-9701. doi:10.1111/1467-9701.00341.
  36. ↑ H. O'Rourke, Kevin (2000-11-01). "British trade policy in the 19th century: a review article". European Journal of Political Economy. 16 (4): 829–42. doi:10.1016/S0176-2680(99)00043-9.
  37. ↑ Frankel, Jeffrey A; Romer, David (1999/06). "Does Trade Cause Growth?". American Economic Review. 89 (3): 379–99. ISSN 0002-8282. doi:10.1257/aer.89.3.379. Check date values in: |date= (help)
  38. ↑ Krugman, Paul (March 21, 1997). In Praise of Cheap Labor. Slate.
  39. ↑ Sicilia, David B. & Cruikshank, Jeffrey L. (2000). The Greenspan Effect, p. 131. New York: McGraw-Hill. ISBN 0-07-134919-7.
  40. ↑ "The Case for Protecting Infant Industries". Bloomberg.com. 2016-12-22. Retrieved 2017-06-24.
  41. 1 2 Baldwin, Robert E. (1969). "The Case against Infant-Industry Tariff Protection". Journal of Political Economy. 77 (3): 295–305.
  42. ↑ O, Krueger, Anne; Baran, Tuncer (1982). "An Empirical Test of the Infant Industry Argument". American Economic Review. 72 (5).
  43. ↑ Choudhri, Ehsan U.; Hakura, Dalia S. (2000). "International Trade and Productivity Growth: Exploring the Sectoral Effects for Developing Countries". IMF Staff Papers. 47 (1): 30–53.
  44. ↑ E, Baldwin, Richard; Paul, Krugman, (1986-06-01). "Market Access and International Competition: A Simulation Study of 16K Random Access Memories". NBER.
  45. ↑ Luzio, Eduardo; Greenstein, Shane (1995). "Measuring the Performance of a Protected Infant Industry: The Case of Brazilian Microcomputers". The Review of Economics and Statistics. 77 (4): 622–633.
  46. ↑ "US Tire Tariffs: Saving Few Jobs at High Cost". PIIE. 2016-03-02. Retrieved 2017-06-24.
  47. ↑ Krugman, Paul (November 21, 1997). A Raspberry for Free Trade. Slate.
  48. ↑ "Convictions Opposed to Certain Popular Opinions: The 1903 Anti-Protectionism Letter Supported by 16 British Economists". Econ Journal Watch 7(2): 157–61, May 2010. econjwatch.org
  49. ↑ DiLorenzo, T. J., Frederic Bastiat (1801–1850): Between the French and Marginalist Revolutions. accessed at [Ludwig Von Mises Institute] 2012-04-13
  50. ↑ "Independent monitoring of policies that affect world trade". Global Trade Alert. Retrieved 2016-12-16.
  51. ↑ Fouda, Regine (October 2012). "Protectionism and Free Trade: A Country‘s Glory or Doom?" (PDF). International Journal of Trade, Economics and Finance. 5. 3: 351. Retrieved 13 April 2014..
  52. ↑ "A French Roadblock to Free Trade". The New York Times. 2003-08-31. Retrieved 2010-05-22.
  53. ↑ (www.dw.com), Deutsche Welle (30.01.2009). "Brussels Warns US on Protectionism". Check date values in: |date= (help)
  54. ↑ Independent monitoring of policies that affect world trade. Global Trade Alert. Retrieved on 2013-08-17.
  55. ↑ imf.org
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