In the past, protectionism was believed to have an origin from mercantilism, which was believed to bring about a positive balance in trade. It was also closely associated with import substitution. It was at this time that classical economist Adam Smith advised against the “interested sophistry” of industries, which were seeking to take advantage of the consumers.
All through history, majority of the classical economists supported protectionism. However, present day economist lobby for the removal of protectionist trade policies as they claim that its costs are over and above its benefits ; therefore, harmful to the world economy (Singer, 1950). A greater percentage of the contemporary economists uncompromisingly support the anti-protectionist school of thought. They; therefore, have sought to support free trade, which involved no barriers to trade with other nations.
In the last century, the world economy has seen a considerable increase in the value and volume of trade. This phenomenon has been experienced in both developed and developing countries. A great percentage of countries are familiar with the long-term benefits presented by free trade. However, there are unending disputes of what free trade truly is. Trade is considered a mechanism that aids in the growth of the aggregate demand and aggregate supply sides of any economy in the world. Nevertheless, there are frequently arising trade disputes between different nations. This happens when one country thinks that there is an uneven playing field the other country is carrying out trade unfairly. Another instance is when the said country believes that it is economically justified for a certain level of import control.
Free trade, like most economic policies, has both winners and losers. Different countries benefit differently from free trade depending on their level of competitiveness. If any country thinks it is not benefitting from free international trade, then it has the right to seek some form of protectionist measure of import control.
This is the effort by and government to enforce restrictions on trade between countries. This may be done by imposing tariff or non- tariff barriers to trade. Non-tariff barriers are such as embargoes, quotas, exchange controls and export subsidies.
Several economists define a tariff as a tax, which caused the price of imported goods to go up. This leads to a reduction in domestic demand and a general increase in domestic supply. The overall result is that the government gets tax income from the tariff while the level imports are reduced to a certain level. The maximum tariffs are, most of the time, levied on goods coming from developed nations. Amongst non-agricultural products, the European Union has over 135 tariff lines, which are over 15%. Most of these are in labor-intensive goods, which developing countries have a comparative advantage. America has 230 tariff lines above 15%.
Imposition of quotas causes a physical limit to the value of imports and to the number of units that are imported.
Some nations choose to use administrative barriers as a form of trade protectionism. In such a case, the government may choose to be unnecessarily bureaucratic on firms, which want to import commodities into the country (Singer, 1950). Administrative barriers may be in several forms such as long delays in customs arrangements or inflexible safety and requirement checks. This can be seen in the standards that the European Union imposes on dairy product imports.
Preferential Government Procurement Policies and State Aid
In such a case, the government allocates significant spending on projects, which do not favor foreign suppliers but rather favor domestic suppliers. This policy is against free trade principles, but it is a crucial part of the trade policies for the developed nations such as nations in Western Europe. An example is such as the awarding of contracts to suppliers of security equipment or construction companies, which carry out infrastructure ventures. The use of financial assistance from the state may also limit free trade in a country. This is such as the use of subsidies in certain chosen sections of the economy.
Economic impacts of protectionism
Protection from foreign dumping
Under the World Trade Organization rules and regulations, dumping is illegal. This is a form of price discrimination and voracious pricing behavior. Dumping is often used in the context of trade disputes between two countries. Businesses from one country may come up and give evidence that manufacturers from the other country are exporting commodities at a cheaper below the actual cost of production. However, it is a difficult and time-consuming task to prove allegations of dumping by a given manufacturer. It is; therefore, hard to prove, and few firms seek to do so.
A good number of developing countries often complain about the export refunds offered by the EU to producers. This has the effect of causing a substantial reduction in cost of production for the suppliers. It in turn, leads to lower prices and the offloading the surplus commodities to developing economies. This leads to an adverse effect on the level of demand, profits and competitiveness of the domestic producers even in their home country.
Some industries may have a potential, comparative advantage in a given sector, but have not yet been able to fully exploit the prospective economies of scale available to them. This calls for short-term protection from established foreign firms to allow the infant industry to establish its own level of comparative advantage. After this, the trade policy protectionism is relaxed to allow the firm to trade competitively with its foreign counterparts. However, this form of protection may cause the industry to be unable to achieve full efficiency. The government may be forced to make these short-term policies permanent.
Market failure, externalities and import controls
Protectionism can also be used to deal with negative externalities and demerit goods. Demerit goods are such as narcotic drugs, alcohol and tobacco, which have unpleasant social effects. Protectionism can be used economically as a tool to reduce the importation of such commodities or wholly inhibit importation. This may be done by setting high tariffs on these commodities.
Supporters of protectionism claim that protectionist laws, which keep out goods from foreign competitors, will save jobs and give domestic manufacturers a chance to prosper and thus cause a positive impact on trade deficits (Schwartz, 2000). On the other hand, protectionism has its costs. A country seeking to put up protectionists laws should first critically weigh the pros to the cons. By this, nations will either choose to the trade policy protection way or the free trade way.
Costs of trade policy protectionism
John Stuart Mill, a classical philosopher and economist, noted that trade barriers are notably detrimental to any country that chooses to effect them.
The folly of protectionist trade policy has been studied by economist throughput the world. All these studies have led to one conclusion; the costs of protectionism entirely outweigh the benefits offered by this trade policy. The main arguments against trade protectionism are as follows:
Protectionism has proved to be extremely ineffective at sustaining the level of employment in a country.
Hurting the consumer
Tariffs as a form of trade barrier cause the tax charged on a commodity to increase. This further increases the cost of production and in turn lead to higher prices for the imported commodities. They also protect ineffective sectors of the economy from competition. These tariffs hurt the foreign producer and lead to inefficient allocation of resources both within the country and globally. Import controls enforce costs on the consumers that would not be there if the country practiced free trade. Forms of protection such as tariffs and non-tariff barriers act as a tax on domestic consumers. They are a form of taxation that is regressive in nature. This is because; they hurt the poor consumers as compared to their richer counterparts (Schwartz, 2000). An example is in the European Union where the protectionist policies mean that the highest tax is imposed on necessities such as food and clothing.
Loss of jobs
Protectionism trade policy may either enforce quotas and/or raise the tax on imported commodities that are entering into the country. These laws limit consumer choice tremendously and increase the cost of doing business and purchasing commodities (Lewis, 1954). In fact, when these protectionist laws reduce consumer spending, they also reduce the level of employment. This can be seen through a survey carried out by the US department of labor. It showed that protectionism causes the loss of eight jobs while saving only one job in the protected industry.
In Japan, the consumers pay approximately five times more than the world price for rice. This is due to the import restrictions that are put by the government in a bid to protect the Japanese farmers. American consumers also suffer the same fate and end up paying six times more the global market price for sugar. This is due to the trade restrictions imposed by the American government.
Protectionism trade policy forces consumers to pay more tax on imported commodities. In addition to this, it also raises the level of general taxes for the consumers. This is because, the government has to increase the bureaucracies existing in the customs department (Lewis, 1954). This is a form of trade regulation. However, the bureaucrats have to be paid. This increases the expense for paying increased customs personnel. As a result, there will be increased taxes to fund this government expedition.
Not everyone loses from protectionist trade policy. Some groups such as large corporations, farmers and unions benefit from these laws. They enjoy the support of the government to get higher wages than would be expected in the world market.
If the government of a given nation “A” put up trade restrictions against the imports from country “B”, then country “B” will strike back by also putting up trade restrictions on imports from country “A” the final result of this is that both countries will lose.
Infant industry protection
Economists against the protectionism trade policy have argued that, after the period of protection, the protected industry is likely to have grown. This gives the industry the power to thwart and oppose legislation hence the removal of protection is heavily restricted. This may lead to permanent protection by the government of this industry.
Another argument against infant industry protection is that the best way for the government to intervene is not through a tariff but rather by the use of subsidies. A subsidy will be more effective than a tariff if the aim is to increase production. This is because a subsidy does not bring about the unpleasant effect of reducing consumption in the end.
Loss of economic welfare
Tariffs cause deadweight loss of both the producer and consumer surplus. This is due to a loss of allocative effectiveness. The consumer welfare is reduced by a limit in his/her choice and by an increase in prices.
Poor distribution of income
An increase in tariffs on consumer goods such as foodstuffs and other necessities often attacks the low-income consumers the most. This protectionism policy may lead to further inequalities in income distribution, in a given country.
Industries that are protected from competition from their foreign counterparts often have no incentive to produce quality goods or even lower their production costs (Todaro, Michael, & Smith, 2009).
Negative multiplier effect
If a given country puts up trade restriction so goods from another country, the resulting decline in total trade will cause a negative multiplier effect. This will have an effect on other countries because exports are an injection of demand to the worldwide circular flow of income. This multiplier effect can be seen better, when the trade war leads to a strike back by the other country.
Protectionism policies hardly ever achieve their objectives. They are exceptionally costly to enforce and lead to higher costs by providing the domestic producers with a shield.
This is used to define regulations that are led by the principle of shielding a countries home economy (Todaro, Michael, & Smith, 2009). This involves protecting jobs, domestic consumption and investment even if it requires that a tariff, quota or any other means of regulation be imposed.
Professor Ha-Joon Chang from Cambridge University argues that almost all developed countries of today promoted their national industries to their current position through protectionism. An example is in the UK and the US where their governments put up relatively high tariffs during the period when they sought industrialization (Chang, 2002). Some economists; therefore, argue that it would be unfair for these countries to re-institute protectionism trade policy. By doing this, they would be preventing developing countries from achieving their own level of development.
The alternative to protectionist trade policies is the enforcing of free trade in the society. Most present day economists favor free trade over protectionist trade policy. This is due to the nature of the benefits offered by free trade.
Free trade and its benefits
Free trade promotes competition and innovation
Very few people in the world today grow all their food or even sew all their clothes. This is because they can get them relatively easily. Another reason is that it people feel making their own commodities is time consuming and would cost them too much (Chang, 2002). This opinion also holds in international trade. It is economically sensible to purchase products from those who have specialized in its production or from those who can make it at a cheaper cost and more easily.
The main purpose of engaging in trade of any form is so that to acquire access to a greater choice of goods and services. A country participates in exports to be able to acquire goods from other countries in return. Importing; therefore, should be unrestricted since it is unavoidable for the benefit of exporting. Many economists see free trade as the only type of just trade. This is because it offers consumers a wide range of goods and services without restrictions to enable them to improve their standards of living.
Free trade also promotes competition and innovation of the local industries. This means that local industries will aim at producing quality goods at a cheaper price to enable them to compete with their counterparts overseas. Protectionism trade policies hinder this level of competition as the industries are shielded from any form of competition.
Generates economic growth
Free trading rewards risk taking industries with increased profit margins, sales and market share. Companies may reinvest these profits by entering new markets, expanding their operations and creating employment and higher paying jobs.
Rivals of free trade fear that if the government removes protectionist’s trade policies, then people will lose their jobs, especially those working in the manufacturing sector (Lewis, 1954). However, the growth of developed economies such as the U.S is of immense benefit even to poorer countries. When these countries trade with the developed countries, they are able to acquire capital for their budding businesses. This fuels production and fosters the development and growth of new industries. People living below the poverty line are thus able to increase their living standards, acquire more goods and better wages.
Free trade; therefore, allows for a win-win situation for both the developed and developing countries. Less developed countries have been caught up in poverty despite all those years of financial aid. The advantage of the less developed countries being able to trade for capital goods other than rely on foreign aid is that the payoffs from investing in development of industries is more long lasting. This is because the funds obtained from foreign aid are privy to fraud and waste by those administering it. Trade in capital goods reduces the dependence of developing countries like Kenya on already developed countries.
Free trade disseminates democratic values.
Free trade encourages support for the rule of law. Firms that engage in international trade are forced to abide in the rules and regulations found in contracts and any other international laws of trade. An outstanding example is how the World Trade Organization requires all its members to abide to terms of trade. Also in the event of any trade dispute, its members have to honor the decisions that WTO comes up with to end the trade dispute (Chang, 2002).
Like all other trade policies, free trade also has a substantial number of demerits. These are such as:
It may lead to entry of harmful products such as drugs and illegal arms, which may lead to loss of social welfare
May cause dumping especially in less developed nations
May lead to loss of employment in industries which do not have a comparative advantage in production.
The government may lose the tax revenue obtained from enforcing tariffs
There are countless benefits to protectionism as there are to free trade. A country; therefore, should choose which of the two trade policies improves the living standards of its citizens while leading to substantial economic growth. A country should be able to forego the cost of its chosen trade policy when weighed against its benefits.
On the other hand, when making this crucial decision it would be of utmost importance for the government to note that contemporary economist of today supports the abolishing of protectionist trade policy. Almost all of these economists and philosophers whole-heartedly embrace the logic of free trade in the world.