Protectionism

Encyclopedia : P : PR : PRO : Protectionism

Protectionism is the economic policy of restraining trade between nations, through methods such as high tariffs on imported goods, restrictive quotas, and anti-dumping laws in an attempt to protect domestic industries in a particular nation from foreign take-over or competition. This contrasts with free trade, where no artificial barriers to entry are instituted.

The term is mostly used in the context of economics, where protectionism refers to policies or doctrines which "protect" businesses and living wages by restricting or regulating trade between foreign nations:

Subsidies - ''To protect existing businesses from risk associated with change, such as costs of labour, materials, etc.
Tariffs - ''to increase the price of a foreign competitor's goods. ( Including restrictive quotas, and anti-dumping measures.) on par or higher than domestic prices.
Quotas - to prevent dumping of cheaper foreign goods that would overwhelm the market.
Tax cuts - ''Alleviation of the burdens of social and business costs.
Intervention - ''The use of state power to bolster an economic entity.

Protectionism has frequently been associated with economic theories such as mercantilism, the belief that it is beneficial to maintain a positive trade balance, and import substitution. There are two main variants of protectionism, depending on whether the tariff is intended to be collected (traditional protectionism) or not (modern protectionism).

Contents

1 Modern protectionism
2 Traditional protectionism
3 Current world trends
4 See also
5 References
6 External links

Modern protectionism

In the modern trade arena many other initiatives besides tariffs have been called protectionist. For example some commentators, such as Jagdish Bhagwati, see developed countries' efforts in imposing their own labor or environmental standards as protectionism. Also, the imposition of restrictive certification procedures on imports are seen in this light.

Recent examples of protectionism are typically motivated by the desire to protect the livelihoods of individuals in politically important domestic industries. Whereas formerly blue-collar jobs were being lost to foreign competition, in recent years there has been a renewed discussion of protectionism due to offshore outsourcing and the loss of white-collar jobs. Most economists view this form of protectionism as a disguised transfer payment from consumers (who pay higher prices for food or other protected goods) to local high-cost producers.

Traditional protectionism

In its historic sense, protectionism is the economic policy of relying on revenue tariffs for government funding in order to reduce or eliminate taxation on domestic industries and labor (e.g., corporate and personal income taxes). In protectionist theory, emphasis is placed on reducing taxation on domestic labor and savings at a cost of higher tariffs on foreign products. This contrasts with the free trade model, in which first emphasis is placed on exempting foreign products from taxation, with the lost revenue to be compensated domestically.

Traditional protectionism sees revenue tariffs as a source of government funding, much like a sales tax, that can be used to reduce other domestic forms of taxes. The goal of traditional protectionism is to maximize tax revenue from the purchase of foreign products with the goal of being able to reduce or eliminate other forms of domestic taxation (income taxes, sales taxes, etc.) as a result. Tariffs were the predominant source of tax revenue in the United States from its founding through World War II, allowing the country to operate through most of that period without income and sales taxes. Traditional protectionism remains highly dependent on large amounts of imports. It also requires tariffs to be kept at reasonable rates to ensure maximum government revenue.

Famous early protectionists in the United States included Alexander Hamilton (who set the country's financing on the tariff), Abraham Lincoln, and Theodore Roosevelt.

Traditional protectionists fault the free trade model as being reverse protectionism in disguise, that of using tax policy to protect foreign manufacturers from domestic competition. By ruling out revenue tariffs on foreign products, government must fully rely on domestic taxation to provide its revenue, which falls heavily disproportionately on domestic manufacturing. As Paul Craig Roberts notes: "[Foreign discrimination of US products] is reinforced by the US tax system, which imposes no appreciable tax burden on foreign goods and services sold in the US but imposes a heavy tax burden on US producers of goods and services regardless of whether they are sold within the US or exported to other countries."*[link]

While traditional protectionists differ from modern protectionists in that they are very much pro-import (based on their belief that a country should rely on imports as much as possible to pay the taxes), they nonetheless disagree with free traders in that they believe the primary focus should be on exempting domestic, rather than foreign manufacturing, from the various forms of taxation.

Current world trends

It is the stated policy of most First World countries to eliminate protectionism through free trade policies enforced by international treaties and organizations such as the World Trade Organization. Despite this, many of these countries still place protective and/or revenue tariffs on foreign products to protect some favored or politically influential industries, or to reduce the taxation demands on their internal domestic manufacturing, making their products more competitive. The elimination of these tariffs remains a contentious peg their currencies to the dollar and, thus, set prices of their exports lower than they would be if the market determined the relative prices of each currency.

Protectionist quotas can cause foreign producers to become more profitable, mitigating their desired effect. This happens because quotas artificially restrict supply, so it is unable to meet demand; as a result the foreign producer can command a premium price for its products. These increased profits are known as quota rents.

For example, in the United States (1981-1994), Japanese automobile companies were held to voluntary export quotas. These quotas limited the supply of Japanese automobiles desired by consumers in the United States (1.68 million, raised to 1.85 million in 1984, and raised again to 2.30 million in 1985), increasing the profit margin on each automobile more than enough (14% or about $1200 in 1983 dollars, about $2300 in 2005 dollars) to cover the reduction in the number of automobiles that they sold, leading to greater overall profits for Japanese automobile manufacturers in the United States export market (Berry et al. 1999).

References

Berry, S., Levinsohn. J. and Pakes, A. (1999). Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy. American Economic Review 89(3): 400-30. In: Benjamin, D.K. (1999) Voluntary Export Restriction on Automobiles. Bozeman, Montana: PERC - Property and Environment Research Center. [online] Available at: http://www.perc.org/perc.php?subsection=5&id=416. Retrieved April 2, 2006.

External links

Voluntary Export Restrictions on Automobiles http://www.perc.org/perc.php?subsection=5&id=416
FoEI Citizens' Guide To: What is trade? http://www.foei.org/trade/activistguide/whatis.htm
American Economic Alert http://www.americaneconomicalert.org
Economy In Crisis http://www.economyincrisis.org/
Paul Craig Roberts' critique of free trade http://www.vdare.com/roberts/050904_marx.htm
Pat Buchanan commentary on protectionism http://www.theamericancause.org/a-pjb-050418-freetrade.htm
Warren Buffet's proposal for use of Import Certificates (IC's) as an alternative to revenue tariffs http://www.berkshirehathaway.com/letters/growing.pdf
Phyllis Schlafly's 1996 review of free trade and protectionism within the United States http://www.eagleforum.org/psr/1996/mar96/psrmar96.html
[Protectionism and the Destruction of Prosperity] By Murray N. Rothbard - A critical view of protectionism