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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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Protectionism

Protectionism

What It Means

Protectionism refers to any action taken by a government to protect domestic (its own country’s) industries from foreign competition. For example, a government may impose a tariff, or a tax on goods imported from other countries, to make sure that those goods do not sell for less money than goods manufactured domestically. Consider the case of a country that has built its economy on selling domestically produced cars to its citizens. Prices of these cars range from $15,000 to $35,000. If a foreign manufacturer were to sell cars of similar quality in this country for $12,000 to $30,000, many of consumers would choose the imported vehicles. Eventually profits for the domestic auto company would decrease and workers would lose their jobs. To prevent this from happening, the nation producing the more expensive cars might tax the imported cars to raise prices and ensure that consumers kept buying domestic cars.

Other methods for protecting domestic industries include restrictive quotas (limits on the number of each imported item), government subsidies (financial support) of domestic manufacturers, and tax cuts for domestic producers. Restrictive quotas operate in much the same way tariffs do. Going back to the example above, the threatened nation might drive up prices on foreign cars by only importing a limited number of these vehicles. Prices would rise if the demand for these cars exceeded the supply. Tax cuts and subsidies allow domestic producers to sell cars more cheaply by reducing their operating costs. Manufacturers can then pass that savings to the customer and sell cars as cheaply as the foreign competition.

When Did It Begin

Protectionism was the norm until the late eighteenth century because most economists believed that a nation’s wealth depended on maintaining a balance of trade that was in its own favor. In other words a nation needed to export more goods than it imported. Often this could only be accomplished through protectionist tactics. In 1776, however, Adam Smith (1723–90) argued in his book Wealth of Nations that free trade rather than protectionism was the best way to prosperity. Smith believed that unimpeded market forces and trends, or what he called an invisible hand, could best guide a nation’s economy.

From 1789 through 1913, the United States favored protectionist policies. The country’s first tariff was established with the Tariff Act of 1789, which taxed all imports at a rate of between 5 and 15 percent. After the War of 1812, American nationalists began calling for higher tariffs, especially on British iron and textile (fabric products) goods. The government responded with the Tariff of 1828, which taxed imports at as much as 50 percent. This tariff met with strong opposition in the South because it left Southerners little choice but to buy goods produced in the North. Through the Civil War and beyond, protectionism continued to be the trend in the United States until 1914, when World War I significantly changed trade patterns and reduced tariffs.

More Detailed Information

Protectionism has been one of the most hotly debated issues throughout the history of the United States. Advocates of protectionism tend to offer two lines of reasoning to defend their position. The first argument has been called the infant industry argument. According to this view a young country, such as the United States was in 1789, needs a period of time to develop industries and train a workforce before it can withstand foreign competition. Guided by this thinking, Alexander Hamilton (1755–1804), who was the first secretary of the treasury in the United States, proposed a 10 percent tariff on all imported goods. This figure rose steadily throughout the 1800s.

The idea was that protection would create a stable home market for all goods produced in the United States. Farmers would not have to sell their goods abroad, which involved relying on fluctuating international markets, and manufacturers would likewise earn steady profits for the goods they produced and sold in the United States. Small American merchants who sold both finished products and agricultural goods in their stores would also prosper. Though high tariffs initially led to economic growth, they also split the country along regional lines, with the North favoring protection and the South favoring free trade. Along with slavery the tariff issue is considered a leading cause of the Civil War. Other countries that have successfully built strong economies following the infant industry argument are South Korea and Taiwan.

The second argument in favor of protectionism is called the geopolitical argument. Proponents of this idea claim that a country cannot be economically stable without a strong military. In order to win a war, this reasoning goes, a nation must be able to produce the food and munitions it needs to sustain itself during the conflict. In order to be able to produce these goods, a country must encourage the producers and build a dependable home market. This means that protectionist measures must keep the cost of imported goods high so that citizens purchase domestic products. Some people who hold this view take the argument one step further and claim that a strong domestic market unifies the nation because consumers are all buying the same products. Protectionism, they claim, develops patriotism. Unlike the infant industry argument, which advocates protection only until a country builds its economy, the geopolitical argument calls for continued protectionist policies.

The opposite of protectionism is free trade, a policy in which international commerce is unimpeded by tariffs or any other measures that discourage trade. Many economists agree that free trade is ultimately better than protectionism for both consumers and producers because free trade increases the worldwide output of goods. Proponents of free trade argue that there are more goods available because a free-trade environment allows countries involved in trade to specialize and thus to develop an abundance of a given product. For example, Country A could specialize in manufacturing cars, and Country B could focus on producing fabric. Country A would have an excess of cars but a shortage of fabric. Country B would have an excess of fabric but would need cars. The two countries could then trade with each other with no need to levy tariffs on the imports. Countries that engage in trade arrangements similar to the one in this example sign official documents called free-trade agreements in which they pledge not to impose tariffs on each other. Many argue that free-trade privileges developed countries, however, in that it ensures that industrialized powers will have overseas markets for their goods.

Recent Trends

Since World War I the United States has been committed to a policy of reduced tariffs and free trade. A notable exception occurred in the late 1970s when an influx of reliable, fuel-efficient Japanese cars threatened the American auto industry. The auto workers union petitioned the government for protection. Instead of imposing a high tariff, the United States received an agreement from Japan to limit the number of cars exported to the United States. This strategy did not prove to be helpful, however. In order to maintain trade revenue (or income), Japan increased the quality and value of the cars they sold in the United States. This challenged American control of its domestic luxury-car market. Under Ronald Reagan (1911–2004) and George H. W. Bush (b. 1924) the United States returned to the policy of free trade, most notably with the Canada–U.S Free Trade Agreement of 1987, which was designed to increase cross-border trade over a 10-year period. In 1994 the North American Free Trade Agreement (NAFTA), which included Mexico and Canada, supplanted the 1987 agreement.

With the fall of communism in the late 1980s, low tariffs have become the norm in global economics as well. During this time China’s economy has experienced significant growth. One factor that spurred its growth was China’s inclusion in the World Trade Organization in 2000 at the urging of President Clinton. Not only was China admitted, but it was also granted most-favored-nation trading status (now called normal trade relations, or NTR). Since then the United States has become China’s largest market for overseas goods, which consist primarily of electrical appliances and advanced technology, such as data processors and sound equipment.

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Protectionism

PROTECTIONISM

free trade and protection in theory
free trade and protection in practice
bibliography

By and large, protectionist trade policies prevailed in nineteenth-century Europe, although this protection was mild compared with that of the 1930s or the 1950s. The short interlude in the 1860s and 1870s and the free-trade policies of the United Kingdom and some smaller countries are exceptions, but ones that seem to confirm the rule. These protectionist practices contrasted with the almost unanimous opinion of professional economists, who regard free trade as highly beneficial.

free trade and protection in theory

This gap between theory and practice started to open in the eighteenth century. Until then, with very few exceptions such as Henry Martyn (1665–1721), it was believed that the wealth of a nation depended on its stock of gold, which had to be accumulated by running a positive trade balance, that is, by exporting more than importing. This mercantilist ideology was seriously challenged only in the 1750s and 1760s. Enlightenment thinkers such as the Italian Ferdinando Galliani (1728–1787) or the French Physiocrats advocated freedom in grain trade, and Adam Smith (1723–1790) made a compelling case for overall liberalization in his Wealth of Nations (1776). Free trade, according to Smith, is first and foremost a straightforward extension of the principle of the invisible hand—the market knows better than the state how to allocate resources. Furthermore, free trade increases the size of the market and hence the scope for the division of labor and specialization, which in Smith's view is the source of long-term economic growth.

David Ricardo (1772–1823), author of Principles of Political Economy and Taxation (1817), and other "classical" economists such as James Mill (1773–1836) and Robert Torrens (1780–1864) sharpened Smith's argument. They held that specialization is not driven by absolute advantage (i.e., by the comparison of costs between domestic and foreign producers) but by comparative advantage (i.e., by the comparison of production costs among alternative uses of available factors). A country can gain from trade even if it could produce the imported good at a lower cost, provided that it could produce something else at an even lower relative cost. Therefore, all countries have something to gain from free trade. The principle of comparative advantage is still the cornerstone of trade theory.

Economists later found some exceptions, such as Torrens's terms of trade argument for duties by large countries, Frank Graham's external economies argument for protection of industries with increasing returns, and Barbara J. Spencer and James A. Brander's strategic trade argument for export subsidies. These exceptions, however, hold true only under very special circumstances: in almost all cases, free trade would deliver the optimal allocation of existing resources, given the available technology.

In contrast, most arguments for protection focus on its alleged dynamic benefits. Advocates of protectionism hold that short-term losses from protection can be outweighed by long-term economic and/or geopolitical gains. The economic gains can include the full development of the potential of the country. Alexander Hamilton (1755–1804), the first U.S. secretary of the treasury, and John Stuart Mill (1806–1873), the most famous British economist (and a staunch protrader), argued that a limited period of protection could be necessary to start potentially suitable productions (the infant industry argument). Such industries need some time to acquire the necessary technical and organizational capabilities, to train the necessary workforce, and so on before they will be able to withstand the foreign competition. The geopolitical argument for protection assumes that an independent state could not pursue its foreign policy without military capabilities, which must be built up even at the cost of welfare losses. A great power should be able to produce all goods necessary to wage a victorious war, including of course its food. In this case, unlike in the infant industry argument, protection could be permanent. This line of reasoning can be traced back to Friedrich List (1789–1846), author of The National System of Political Economy (1841). The geopolitical argument was quite popular among nationalistic writers of the nineteenth and early twentieth centuries.

These "dynamic" arguments for protection were and still are fairly diffused among the lay public, but by and large they have failed to persuade economists. The latter doubt that protection could ever be temporary and stress that competition from imports is a powerful stimulus for improving the efficiency of domestic producers.

free trade and protection in practice

How is it possible to account for the gap between theory and practice? Why has protectionism been so often adopted if it is harmful to the overall welfare? One can suggest three possible answers: the need for state revenue, the state of international relations, and pressure from producers' lobbies.

Duties can be a sizable source of revenue only if imports do not fall, that is, if imports are not replaced by domestic production. This is the case with duties on goods that cannot be produced at home, such as wine in the United Kingdom. These duties were allegedly instituted only for fiscal purposes—although they could also guarantee some protection to domestic producers of competing goods (such as beer). But openly protective duties could also yield substantial revenue if domestic production is insufficient for the desired consumption at the prevailing price, inclusive of the duty. This fiscal motivation was particularly important in the nineteenth century, because, before the introduction of personal taxation, custom duties were in fact major sources of revenues. On the eve of World War I, they accounted for about 10 to 15 percent of total revenues and up to 45 percent for federal states, such as Germany. Thus, the need for revenues could be invoked to justify otherwise unpalatable increases in protection. This happened in Italy in 1894, when the duty on wheat was increased by 50 percent during a budget crisis. In the following decade, duty on wheat provided between 3 and 4 percent of the total revenues of Italy.

The prevalence of protectionist policies may be associated with the lack of a "hegemonic" power, such as the United States after 1950. A hegemonic power would force other countries to adopt the trade policy that best fits its interests—that is, almost always, to open their markets to its own exports. In this vein, one might explain the liberalization in the first half of the nineteenth century with the waxing of British political hegemony and the return to protection toward the end of the century with its waning. But Peter T. Marsh strongly plays down the British role in the establishment of the network of trade treaties that was instrumental in the liberalization of the 1860s (if any country played the leading role, it was France). Similarly, it is difficult to attribute the return to protection in the late 1870s to the lack of a hegemonic power. If it had any effect at all, the system of international relations dampened the protectionist reaction via the network of trade treaties and the most favored nation (MFN) clause. Foreign policy motivations sometimes did influence negotiations for treaties, either speeding them up (Great Powers had some clout versus smaller countries) or retarding them (for instance, the breakdown of negotiations between France and Italy in 1887 was a step in a long-term realignment of Italian alliances toward Germany). In the over-whelming majority of cases, however, trade treaties were determined by the demands of domestic exporters. They needed access to foreign markets, which could only be gained through reciprocal concessions for other trading partners.

The lobbying by domestic producers of import-competing goods (the political economy of tariffs) is the most frequently given reason for protection. Interests can organize by sector (the iron and steel industry, wheat growing) or by factor (land, labor, capital). In the former, most common, case, the lobby allegedly represents all employees of the sector. Political action is nevertheless subject to the risk of free riding (i.e., shirking by potential members, who can profit from the lobby's activity without committing themselves). Thus, all other things being equal, the smaller the number of potential members, the easier the lobby is to organize and the more effective it will be. Consequently, organizations of consumers, potentially interested in free trade, have long been weak relative to producers' lobbies. Indeed there were no associations of consumers in nineteenth-century Europe, whereas producers lobbies, such as the German Bund der Landwirte (Agrarian League, established in 1893), were quite well organized and influential. According to a well-established tradition in many Continental countries, some producers' lobbies literally dictated the trade policy, at the expense of consumers and of other, weaker producers. The return to protection in the 1880s in Germany and Italy was the outcome of a bargain between cereal-growing Junkers and heavy industry. Wilhelmian Germany was called the "empire of rye and iron," although small-scale livestock producers also gained from protection. France followed this pattern, although bureaucrats had more power in the implementations of guidelines and, most crucially, in the negotiations of treaties than in Italy or Germany.

The United Kingdom is the paramount example of the alternative model of organization of interests. Parties represented factors of production, such as land (Tories), capital (Whigs), and labor (Labour), and thus trade policies were part of their agendas. The issue played a major political role on two occasions. In the early 1840s the Anti–Corn Law League, organized and funded by Manchester cotton industrialists, waged a strong campaign against the duty on wheat. It succeeded because the Tories split on the issue and lost power for a long period. Trade policy resurfaced as a major political issue in the late 1890s, when the movement for fair trade campaigned for reciprocity (i.e., the raising of duties on imports from countries that taxed British imports). This proposal became the main point in the Tory manifesto for the 1906 elections, but the party was clearly defeated.

Daniel Verdier argues that these differences among countries in the organization of interests reflect the features of the political systems, such as the loyalty of parliamentarians to their own party and the interest of voters in trade policy. Nevertheless, these characteristics, especially the latter, depend on economic features, most notably the mobility of factors among sectors. A specialized worker has little scope for changing sectors, and is thus more likely than an unskilled worker to join an industry lobby. Vice versa, sectorally mobile factors would more likely gather in major parties.

It is thus likely that all three factors—international relations, the need for revenue, and lobbying—contributed to shape trade policy in the nineteenth century. Their relative importance changed among countries and over time. More work, both with in-depth case studies and comparative statistical analysis, is needed to assess which cause prevailed.

See alsoTrade and Economic Growth.

bibliography

Bairoch, Paul. "European Trade Policy, 1815–1914." In Cambridge Economic History of Europe, edited by Peter Mathias and Sidney Pollard, vol. 8, pp. 1–160. Cambridge, U.K., 1989.

Gerschenkron, Alexander. Bread and Democracy in Germany. 1943. Reprint, with a new foreword by Charles S. Maier, Ithaca, N.Y., 1989.

Irwin, Douglas A. Against the Tide: An Intellectual History of Free Trade. Princeton, N.J., 1996.

Kitchen, Martin. The Political Economy of Germany, 1815–1914. London, 1978.

Lake, David A. Power, Protection, and Free Trade: International Sources of U.S. Commercial Strategy, 1887–1939. Ithaca, N.Y., 1988.

List, Friedrich. The National System of Political Economy. Translated by W. O. Henderson. London and Totowa, N.J., 1975. Originally published, 1841.

Marsh, Peter T. Bargaining on Europe: Britain and the First Common Market, 1860–1892. New Haven, Conn., 1999.

Olson, Mancur. The Logic of Collective Action: Public Goods and the Theory of Groups. Cambridge, Mass., 1971.

Ricardo, David. Principles of Political Economy and Taxation. London, 1817. Reprint, as volume 1 of The Works and Correspondence of David Ricardo. Cambridge, U.K., 1951.

Smith, Adam. An Enquiry into the Nature and Causes of the Wealth of Nations. 1776. Reprint, New York, 1965.

Smith, Michael Stephen. Tariff Reform in France, 1860–1900. Ithaca, N.Y., 1980.

Verdier, Daniel. Democracy and International Trade: Britain, France, and the United States, 1860–1990. Princeton, N.J., 1994.

Webb, Steven B. "Agricultural Protection in Wilhelminian Germany: Forging an Empire with Pork and Rye." Journal of Economic History 42, no. 2 (1982): 309–326.

Giovanni Federico

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