Debate: Protectionism

Should governments favor their own industries by protectionist measures?

Background and context

Freedom of international trade has been a goal pursued since 1948, when 23 countries set up the General Agreement on Tariffs and Trade (GATT), and tariff levels in the 1990s were only 10% of their post war level. Since then there have been nine trade talks (‘rounds’), the most recent being Uruguay (1993) and Doha. The 1993 round set up the World Trade Organisation (WTO), which now has over 132 members, and which strengthened regulation by making it impossible for countries to veto penalties for restricting trade. The WTO is matched by regional trading blocs such as the European Union, North American Free Trade Area (NAFTA, set up in 1994), the Association of South East Asian Nations (ASEAN), and Mercosur (in South America). In 1990 there were 25 such areas; there are now in excess of 90. Protection of domestic industry may take the forms of subsidies (paid to companies to decrease production costs), tariffs (duties levied on imported goods to artificially increase their price), or quotas (quantitative restrictions on imports). Increasingly, however, protectionism is taking the form of ‘anti-dumping measures’; dumping being when an importer artificially lowers their prices for a short period to drive competition out of business (‘predatory pricing’). WTO rules do allow some forms of protection: duties in response to subsidised goods, protection against import surges, and anti-dumping measures. However, these are often poorly defined and slow to process through dispute-settlement procedures. Whilst progress has been made on IT and accountancy liberalisation, the most hotly disputed remaining areas are textiles (the world quota system will end in 2005), agriculture, shipping, and migration. Research shows that the level of anti-dumping and anti-subsidy investigations have boomed in recent years, especially in areas such as India. These are mainly targeted against China, Japan, and America. Such action is favoured as the law is unclear, and tariff margins

Anti-dumping measures: Are anti-dumping measures a good protectionist tool?

Yes

• Anti-dumping measures (which can be tried at law) are more carefully targeted measures than blunt tariffs and quotas.

No

• Anti-dumping retaliation is as unnecessary and economically inefficient as any form of protectionism, and would rarely pass domestic antitrust legislation.

Government duty: Does a government have the duty to protect its citizens from foreign competition and loss? Or, does it have an international responsibility as well?

Yes

• The first duty of every government is to protect its own citizens: A duty of care is owed to those whose economic prosperity depends upon industrial production. If outsourcing threatens the prosperity of a citizenry, a government should oppose it.

No

• While a regime’s primary duty of care is to its own people, prosperity for its own citizens is enhanced by trade liberalization. . Given that free trade boosts imports as well as exports, given that it enhances competition, it effectively benefits not only the state, but also its citizens.

During recession: Should protectionism be advanced in times of depression?

Yes

• In times of recession there is pressure to protect declining industries. Some localities, or countries, are dependent on a single source of manufacturing or agriculture, and allowing the free market to take its course would prolong or deepen an economic depression and drive huge numbers of people out of work.

No

• Protectionism worsens depressions by cushioning firms from their effects, preventing sufficient diversification of sources of national income, and discouraging retraining to meet the needs of the future. The Depression of the 1930s was in fact worsened by restrictions placed on free trade (e.g. the USA’s Hawley-Smoot measures), as protectionism spiraled downwards into increasing retaliation.

Subsidizing companies abroad: Should government's subsidize companies that go into developing countries?

Yes

• Developing countries need extra help in building a competitive economy: Short-term subsidies to foreign companies are the early stages of import-substitution and economic independence. It is better that governments offer firms subsidies than try to cut corners on labour standards.

No

• There is a difference between encouragement of foreign industry into a country, and protection of domestic suppliers. Competition will not merely be over the size of national subsidies, but also on wage costs and looser environmental and safety regulations.

Trade blocs: Should developing countries protect themselves from trade blocs? Would they be better off relying on bilateral trade deals?

Yes

• Many developing economies hit a glass ceiling as they attempt to stabilize their economies, as they are unable to diversify into different markets. Maintaining their former colonial relationships is the only way for them to defend themselves against large trading blocs.

No

• Companies in developing economies often suffer from poor stockmarket flexibility and political uncertainty, as a capitalist mentality needs time to develop. The solution is not more protection, but for groups such as the EU to dissolve their barriers to trade.

Essential goods: Should governments protect essential goods from the threat of foreign competition or instability?

Yes

• It is sensible for governments to protect domestic supplies of vital goods, such as oil, food and steel, from the political vicissitudes of world cartels; which is part of foreign policy and not pure economics. To prevent this is to invade national sovereignty.

No

• Worldwide cartels of producers have recently weakened, especially for agricultural goods. For governments to engage in protectionism merely against international cartels is pure hypocrisy; national security will never be gained by the chimera of economic self-sufficiency.

Vs free trade: Is protectionism more efficient than free trade?

Yes

No

• Protectionism undermines competition, thus slows economic progress down. Just like, for example, Corn Laws in 19th century in England, protectionist measures harm competitors and drive up prices in home countries. Lack of competition means less incentives to innovate and move towards efficient business practices.

See also

• Debate: Free trade

External links and resources

• Adam Smith Institute
• US Senate
• World Trade Organisation
• WTO ruling on USA measures to safeguard steel industry
• United Steelworkers of America
• New Internationalist

Books

• Free Trade Today ^{Jagdish N Bhagwati}
• Protectionism (The Ohlin Lectures) ^{Jagdish N Bhagwati}
• Against the Tide: An Intellectual History of Free Trade ^{D.A. Irwin}
• Free Trade Versus Protectionism: A Source Book of Essays and Readings, ^{J. Overbeek}