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Protectionism

Protectionism

ANCIENT HISTORY

MODERN HISTORY

PHILOSOPHIES OF PROTECTIONISM

EMPIRICAL EVIDENCE

BIBLIOGRAPHY

Protectionism includes a broad range of obstacles created by governments to change the flows of international trade. A variety of policy instruments for trade barriers, including tariffs, quotas, and subsidies, has historically been used to protect domestic import-competing industries and to encourage exports. Occasionally, extreme measures such as a total prohibition of certain imports (bans) and sanctions are employed for economic or political reasons. Also, to avoid retaliation, or a trade war, strategies such as voluntary export restraints may occasionally be used. Broader restrictive measures that may be regarded as policies aimed at shaping the pattern of trade include: exchange-rate controls; the creation of monopoly power by establishing cartels, such as the Organization of Petroleum Exporting Countries (OPEC), to stabilize prices of raw materials; free trade areas, such as custom unions; most-favored-nations principles; relaxed property-rights protection; environmental standards; and imports certificates.

The effect of trade barriers on individual countries depends upon market structure in the world and the type of policy tools used. Protectionism in principle alters the allocation of resources, creating distortions and inefficiencies in production. While free trade as the rule of thumb is best, there are exceptions. For example, it has been argued that some trade strategies, such as temporary and targeted protection of key infant industries, may benefit the domestic economy in the long run, though the effects on the global economy are unclear. In fact, some of todays industrial powers have benefited from such protectionist policies in the past. Similarly, the optimum tariff concept suggests that limited tariffs on imports may be advantageous to a nation, though world efficiency would diminish.

ANCIENT HISTORY

In ancient times, trade routes such as the Silk Road, the Spice Route, and the Incense Road were created and supported by governments to facilitate the exchange of goods between civilization centers in China, the Mediterranean, and Europe. During this period, raising revenue, rather than protection of domestic producers, was the primary objective of tariffs. For example, revenues from tariffs were used to build and maintain bridges and roads to make trade possible. However, China, between the late tenth and thirteenth centuries, maintained strict control over maritime trade by monopolizing exports, restricting trade to a few ports, imposing tariffs on imports, and regulating the purchase of traded Chinese goods. Trade was also a persistent issue in the relationship between Europe and the East. For example, the Crusaders banned trade with their Mediterranean foes, and only after conquering the eastern Mediterranean did they open it to European shipping.

In the sixteenth century, with the rise of nation-states, mercantilists introduced a formal analysis of winners and losers in trade and exercised protectionist policies lasting through the eighteenth century to accumulate gold and silver for armies. The mercantilists maintained that precious metals were the only things of value. In France, Jean Baptiste Colbert (1619-1683) brought all aspects of production under state control, including luxury goods, in order to improve industry in the colonial empire. To stimulate trade, the French government established an alliance with business by building and repairing canals and even subsidizing shipbuilders and shippers. Also, to defend French industry against foreign competition, Colbert imposed tariffs on imported cloth and subsidized the settlement of Dutch weavers into France. To discourage domestic consumption of exportable luxury goods, excise taxes known as sumptuary taxes were imposed. However, the extreme protectionist policies of Colbert did not bring prosperity to the French economy because the costs of such intervention exceeded the value of the benefits.

The protective trade policies of the mercantilists in Britain and Germany, on the other hand, were shaped by interest groups, wars, and recessions. For example, in Britain, Thomas Mun (1571-1641), director of the East Indian Company, maintained a state-supported monopoly over trade with India because of his lobbying power and influence in the Parliament.

MODERN HISTORY

At the start of the Industrial Revolution in the late eighteenth century, as belief in the protectionist policies of the mercantilists was dwindling, the views of physiocrats gained popularity. The physiocrats believed that land is the source of value and were the first to articulate free trade under their laissez-faire policy, according to which there should be no tariffs on the export of agricultural goods. Later, the English classical economists Adam Smith (1723-1790) and David Ricardo (17721823) rebelled against the mercantilists protectionist doctrine. Using the comparative advantage argument, Ricardo advocated free trade and attacked the corn laws, which limited the import of grain into England to protect domestic farmers. Assuming what was called later perfect competition, Smith viewed unconstrained expansion of markets through free international trade as a powerful force providing additional opportunities for specialization and the division of labor.

Although liberal trade policies gained prominence in the nineteenth century, some economists on both sides of the Atlantic questioned the assumptions of these free trade theories. They argued that in the presence of positive externalities and dynamic economies of scale, government must pursue activist national policies to promote economic development and industrialization. Among these economists, Friedrich List (17891846) of Germany is notable for the power of his argument and his historical exemplarsdemonstrating how, alternatively, free trade or protectionism is useful, depending on the stage of economic development. In the nineteenth century, Hamburg was a major trading center benefiting from free trade, even as the largely agricultural economy of Germany was becoming overwhelmed by the industrial supremacy of Great Britain. List linked economic development and industrial growth to the national interest and security of Germany, and he called for elimination of internal tariffs among states and for the expansion of the custom union (Zollverein ). He also pleaded for protection of infant industries with tariffs as a part of a broader development strategy that included other policies, such as the creation of a national railway network. List did not suggest a return to mercantilist policies; rather, he believed in the importance of manufacturing to the national economy. Living in the United States in the 1830s, List was influenced by the views of Alexander Hamilton (1755/571804), who, like List, was critical of protectionist policies such as corn laws and agreed with Adam Smith on national defense as a justification for protectionism. The infant industry argument was also supported by prominent contemporary economists, such as John Stuart Mill (18061873) and Alfred Marshall (19081993).

Historically, changes in economic theories seem to have motivated changes in government trade policies, though the direction of causation is not always clear. With the new ideological tool of laissez-faire, government policies moved toward more free trade during the nineteenth century. In the late nineteenth century, a revolution in shipping and an expansion of railways contributed to falling transportation costs, offsetting rising tariffs. The use of trade barriers rose during the twentieth centurys two world wars. However, after World War II (19391945), international organizations, such as the General Agreements on Tariffs and Trade (GATT), brought order to world trade by allowing a multilateral system of rules for government trade policies. During the oil and financial crises of the 1970s, protectionism tended to expand again in world trade. However, the Uruguay Round of the GATT trade negotiations led in 1995 to the formation of the World Trade Organization (WTO), which provides a forum for trade negotiations and dispute resolution among member states. The WTO has experienced some success in reducing trade barriers and reaching agreements in the areas of financial services, telecommunications, and information technology. In agriculture, however, reducing subsidies among developed countries has remained a challenge for the WTO.

PHILOSOPHIES OF PROTECTIONISM

While the old protectionism philosophy was concerned with attracting and retaining precious metals, modern protectionism theories are interested in the production benefits of restricted trade policies. Some of the new theories of international trade consider the consequences of economies of scale and relax the assumption of perfect competition. These theories question comparative advantage as the explanation for trade, and renew support for protectionism for national interests.

The historical pattern of government policy on international trade appears to exhibit cyclical movements between free trade and protectionism. The apparent systemic shifts between openness and protectionism are caused by a variety of factors, such as hegemonic stability emphasizing the importance of leadership. For example, in the second half of the nineteenth century, after Britain became the world economic and political power, it pursued an open economic system. U.S. leadership after World War II and the dominance of capitalism led to a worldwide reduction in tariffs by GATT. Other causes of changes in international trade policies include excess industrial capacity and overproduction or a glut of agricultural products leading to high unemployment, declining profitability, and eventually protectionism, and developments of new economic theories, such as those by Smith and Ricardo. It is even argued that patriotic sentiments help shape protectionist beliefs.

EMPIRICAL EVIDENCE

Numerous studies since the 1980s examine various protectionist policies and their effects. For example, some studies have shown that the greatest growth in the world has been associated with the most liberal trade policies (Capie 1994; Baldwin 1986). However, since the late 1950s, some of the empirical evidence and casual observations have not been fully consistent with the simple theory of comparative advantage. In some cases, endogenous technological change, economies of scale, and imperfect competition have explained patterns of international trade better than the simple law of comparative advantage and have provided justification for government intervention. Strategic trade policies of export subsidies and import restrictions, targeting sensitive industries with increasing return and imperfect competition, have been successful in some countries in creating sustainable comparative advantage. However, economists such as Paul Krugman (1995) argue that the influence of interest groups on governments can lead to excessive and misguided interventions that are likely to raise national income but benefit only a small group of people. In other words, real world politics is as imperfect as markets. Typically, a small group of stakeholders in the protected industry benefit from protectionist policies, whereas the costs are distributed among a large number of consumers. Therefore, as Jong-Wha Lee and Phillip Swagel (1997) argue, while protectionism is inefficient economically, it may be efficient politically.

Gene Grossman and Elhanan Helpman (1994) produce a more rigorous analysis of protectionism and the role of interest groups. In their model, the structure of protectionism is determined by the elasticity of import demand, which determines the degree of welfare distortion and the ratio of imports to domestic output, showing the political significance of the domestic industry. Daniel Trefler (1993) carries this argument further by demonstrating that the level of trade protectionism is endogenously determined. According to the theory of endogenous protectionism, as import penetration rises in an industry, lobbying activities by interest groups intensify, leading to greater protection.

Investigating the determinants of trade barriers, Edward Ray (1981a) finds that tariff and nontariff barriers are the result of both economic and political factors. Rays cross-sectional study of U.S. trade finds that both the existence and intensity of nontariff barriers affect exports, though the profitability of protectionism depends on industry characteristics. Elsewhere, Ray (1981b) finds that industries with an apparent comparative advantage and with larger consumer losses tend to receive more protection in the United States. While tariffs are positively related to labor intensity, they are inversely related to the capital/labor ratio. Interestingly, the opposite is true for nontariff barriers. Furthermore, nontariff barriers are negatively related to seller concentration and geographical concentration, but tariffs are positively related to seller concentration and geographical concentration. Lee and Swagel (1997) accounted for country and industry characteristics and found that weak, declining, and politically important industries tend to receive more protection than exporting industries.

SEE ALSO Absolute and Comparative Advantage; Quotas, Trade; Tariffs; Trade, Bilateral

BIBLIOGRAPHY

Baldwin, Robert E. 1986. The New Protectionism: A Response to Shifts in National Economic Power. NBER Working Papers Series 1823. Cambridge, MA: National Bureau of Economic Research.

Bhagwati, Jagdish N. 1988. Protectionism. Cambridge, MA: MIT Press.

Canterbery, E. Ray. 2003. The Making of Economics. 4th ed. River Edge, NJ: World Scientific.

Capie, Forrest. 1994. Tariffs and Growth: Some Illustrations from the World Economy, 18501940. Manchester, U.K.: Manchester University Press.

Grossman, Gene M., and Elhanan Helpman. 1994. Protection for Sale. American Economic Review 84 (4): 833850.

Krugman, Paul. 1995. Development, Geography, and Economic Theory. Cambridge, MA: MIT Press.

Lee, Jong-Wha, and Phillip Swagel. 1997. Trade Barriers and Trade Flows Across Countries and Industries. Review of Economics and Statistics 79 (3): 372382.

Ray, Edward John. 1981a. The Determinants of Tariff and Nontariff Trade Restrictions in the United States. Journal of Political Economy 89 (1): 105121.

Ray, Edward John. 1981b. Tariff and Nontariff Barriers to Trade in the United States and Abroad. Review of Economics and Statistics 68 (2): 161168.

So, Billy K. L. 2000. Prosperity, Region, and Institutions in Maritime China: The South Fukien Pattern, 9461368. Cambridge, MA: Harvard University Press.

Trefler, Daniel. 1993. Trade Liberalization and the Theory of Endogenous Protectionism: An Econometric Study of U.S. Import Policy. Journal of Political Economy 101 (1): 138160.

Akbar Marvasti

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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

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Protectionism

PROTECTIONISM


Protectionism is a set a policies by which a government seeks to shelter its industries from foreign competition and or help them increase exports to international markets. The most common form of protectionism is a tariff, which is a duty or tax imposed on goods based on their value or size. Subsidies are direct payments or credit given by the government to a protected industry to encourage it to export its products. Quotas set upper limits on the amount of imports that can enter the protected country, and governments can also set limits on investments by foreign companies in domestic businesses. A more recent protectionist policy is the "voluntary export restraint" in which a foreign country is strongly "encouraged" to refrain from importing certain goods under the threat of some more severe action such as quotas. Protectionism can also take the form of preferential purchasing policies, such as the U.S. government's requirement that its agencies "buy American."

Throughout its history, the United States has been a protectionist country. A series of tariff laws throughout the nineteenth century steadily raised barriers to foreign trade to encourage the growth of U.S. industry. Beginning in the mid-1870s, however, the United States began exporting more than it imported and it became much more integrated in the global marketplace. Strong protectionist trade policies returned with a vengeance around the world in the 1920s, and the high tariffs the United States imposed through the Smoot-Hawley Tariff of 1930 were later credited with contributing to the United States' shrinking foreign markets during the Great Depression (19291939). After World War II (19391945) it was clear that strong protectionist policies had contributed to the destruction of the world order in the 1940s. The launching of the General Agreement on Tariffs and Trade (GATT) in 1948 represented a mostly effective attempt to reduce protectionism and create a positive climate for free trade worldwide.

Under GATT, tariff rates were cut and member nations agreed to drop discriminatory trade policies and adopt the same "most favored nation" trade practices for all other members. Under the so-called Kennedy Round (19641967) of GATT negotiations, the United States took a further step away from its protectionist history, and GATT members agreed to include agricultural products under GATT guidelines while adopting an "anti-dumping" code to prevent countries from flooding another's markets with cheap goods. The Tokyo Round (19731979) brought further tariff reductions, guidelines for outlawing unfair subsidy practices, and policies for encouraging trade with less developed countries. In 1995 GATT was replaced by a permanent free trade organization, the World Trade Organization, but protectionism was far from dead.

See also: General Agreement on Tariffs and Trade, Quota, Smoot-Hawley Tariff, Tariff

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Protectionism

PROTECTIONISM

PROTECTIONISM. SeeTariff.

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