In the last three decades, most world economies have expanded their production and increased their volumes in terms of trade. Most importantly, globalization, which encourages free trade among nations, has brought about rapid increases in trade volumes as well as availed cheap goods and services. Although international trade helps create a balance between demand and supply, more so in a free economy, trade disputes have increasingly emerged between nations. These disputes often emerge when one party feels that trade was conducted on unfair terms or the playing field was not level. Hence, the host nation may choose to enact some economic justification by instituting measures such as import control in order to protect its economic and sovereign rights, resulting in economic protectionism. This essay shall explain the rationale for governments in implementing protectionist policies and evaluate if these policies were successful or not.
Economic protectionism refers to all strategic policies imposed by governments in an attempt to restrict the free flow of trade between countries. First, a country may impose tariffs. These are import taxes meant to raise the prices of imported goods and services. Hence, as under the price mechanism, once the price goes up, demand for these products reduces, creating a higher demand for locally produced products. This strategy is two-way: it reduces the amount of goods imported whereas earning the government extra revenue (Krugman, 1987, 131-144). The Japanese government has put in place tariffs which encourage the consumption of locally produced rice. However, consumers are now forced to pay five times higher than they previously did. Secondly, the government may impose import quotas. These are laid-down rules stipulating the amount of imports allowable for a particular commodity. They either set a limit for the maximum value of imports or set a ceiling for the physical amount. For instance, in 2005, the Multi-Fiber agreement expired, leading to vast trade disruptions etween the European Union and China. Not only did these result in high unemployment rates among workers in the textile industry, but it also led to widespread losses in production companies and government revenue (Stokes, 2007, 2).
Thirdly, governments may impose bureaucratic controls on imports. These are often enacted via stringent safety regulations, extensive hold-ups, and imposing extremely difficult and hard-to-meet quality standards. For instance, the European Union has put several bureaucratic controls on dairy products and horticulture especially those from developing nations in an effort to nurture its local industries. In addition, the government may choose to allocate projects which demand heavy government spending on local firms. This preferential treatment harms overseas suppliers. For instance, the United States awards major supplies for defense equipment to local firms despite the fact that these would have been acquired cheaply if they were imported. Finally, governments may choose to offer financial aid to the local firms in terms of subsides or grants. For instance, the United States government often grants subsidies to its steel industry in order to shield it from the stiff competition in the world market, more so from Brazil (Schwartz, 2009, B6).
Although there are several justifications for imposing protectionist policies, there are major demerits as well. These can be best exemplified through government case studies. The United States-Brazil steel industry stalemate serves to highlight the impacts of economic protectionism. There are several arguments for the continuance of protectionist policies by the United States on its steel industry. First, by protecting the steel industry, the United States saves jobs for millions of its citizens. If the United States was to engage in direct competition with Brazil, it would be forced to lay off a large proportion of its workers in order to become competitive (Ikenson, 2002, 2-9). Secondly, sustained competition with Brazil would leead to an eventual collapse of the entire industry. This would render the United States highly dependent on foreign steel imports.
However, the enactment of high tariffs for Brazilian steel has led to a number of disadvantages. First, United States’ steel-reliant industries are not as competitive as other world industries which import cheaper steel from countries such as Brazil. They are forced to pay higher prices for goods that they could obtain cheaply from the world market. For instance, the United States car industry has been unable to shake off its Japanese competitors (Hartquist, 2007, 3-4). Ford, Chrysler and General Motors trail behind Toyota, Honda and Nissan in the world market. Despite stringent protectionist regulations to promote the United States’ car industry, it has failed to garner any substantial global grounds and has been forced to rely on local sales. Secondly, protectionist policies have a negative turnaround effect on countries’ economies. For instance, the United States’ car industry pays 30% import tariffs for Brazilian steel, forcing them to opt for locally produced steel which is 10% cheaper. Therefore, these costs are shifted to the consumer, who in turn opts to buy Japanese cars since they are far much cheaper. Eventually, the decline in business would force American car-producing firms to reduce production and lay off workers in order to wade through hard times, especially through the recent global recession. Hence, in the end, there is a widespread loss of employment, despite the fact that the government aimed at saving jobs (Sprueill, 2006, 1).
In conclusion, protectionist measures have successfully protected local and infant industries. However, they have led to various detrimental features such as lack of competitiveness and higher consumer prices. Therefore, whereas a country cannot discard the usage of such policies altogether, care should be taken not to bring about a cyclic turnaround effect which is harmful to the host nation.
Related Economics essays
- Three Distinct Processes of Globalization
- Ecological Economics and Sustainable Development
- Microeconomics is Concerned with the Study of Behaviour
- Shelf Space Price Discrimination
- Tiger Economy
- The Global Financial Crisis
- United States Federal Reserve System
- Gross Domestic Product
- Adam Smith to Economics
- Opportunity Cost