protectionism

protectionism. While international trade has been recognized as a major influence on the growth of the world economy throughout history, virtually all countries at all times have sought to protect either the whole economy, or at least part of it, from the rigours of international competition by imposing barriers. The protection of industries perceived as vital to the national interest in terms of future growth, current employment, or military security have all been identified as worthy of protective support. This has usually taken the form of a tariff, or government levy, on imported goods to bring their price up to or even above the price of home-produced goods. Thus domestic producers are protected against the impact of foreign imports. Besides tariffs, quotas, and other forms of overt discrimination, there exist less obvious non-tariff barriers to trade, such as technical specifications written to favour domestic producers, differential tax regimes, and customs delays together with a variety of bureaucratic regulations. A familiar modern example of protection is the support given to agriculture in the European Economic Community. This has been so successful that, far from being swamped by a massive tide of cheap food imports as was feared when the Common Agricultural Policy (CAP) was originally devised, farmers in the European Union have become large-scale exporters to the rest of the world. Support of domestic industry can also take the form of subsidies to help exports, a payment allowing exporters to offer competitive prices in international markets without having to reduce their costs by an equivalent amount.

Protective barriers distort trade patterns, and bring about redistribution of income. A tariff imposed on imports raises domestic prices so that consumers are worse off. The government gains tax revenue from the tariff and producers gain from the price increase. The redistribution of welfare benefits between different groups in society frequently leads to political disputes. The repeal of the Corn Laws in 1846 redistributed income away from wealthy agriculturalists to manufacturers, although not to any great extent. The repeal also redistributed income to consumers through the fall in food prices, although the scale of this is uncertain. (See free trade.) Chamberlain's tariff campaign of 1903 was intended to redistribute income to industrialists by protecting sectors like the steel industry from the effects of cheap imports. More recently, the CAP has effected substantial redistribution to the advantage of producers and the detriment of consumers and taxpayers. Since the distribution of agriculture is uneven throughout the European Community, some countries have enjoyed a substantial welfare gain from these policies, notably Ireland and Denmark, while others, like Germany and the United Kingdom, have lost. Protection always entails some loss of efficiency because the lowest price obtainable through competition is replaced by a higher subsidized price. The result is over-production in the home market by suppliers who are less efficient than they would be if exposed to world-wide competition, consumer loss through higher prices, and an increase in government revenues from tariffs. A reduction in the level of protection will have the opposite effects: a fall in prices from which consumers gain, increased competitive pressure on producers, and a loss in government tariff revenue.

Clive H. Lee