Strategic Reasons Why Countries Undertake Protectionist Measures Essay
- Length: 8 pages
- Sources: 8
- Subject: Economics
- Type: Essay
- Paper: #81201891
Excerpt from Essay :
Strategic Reasons why countries
Protectionist Theories and Measures
Exchange Rate Manipulation
International patent systems
Protectionism is a concept through which governments and states exercise control over the trading patterns of the country and use measures that in turn are expected to help the domestic industry develop.
The main argument that we shall be following for this essay is that Free trade can only be "free" when nations and states are at the same level. Forcing economies to open up can only cause chaos and ruin for those economies. Therefore some measures of protectionism are valid and should be allowed to countries without there being any penalizing measures.
The notion behind this theory, since earlier day's lies in the fact, that government officials have long been of the opinion, as explained by the following paragraph (Lighthizer, 2008):
"For almost 100 years after the Civil War, the Republican Party (led by men like Lincoln and McKinley) was overtly protectionist. Theodore Roosevelt, a hero of John McCain's, wrote that "pernicious indulgence in the doctrine of free trade seems inevitably to produce fatty degeneration of the moral fiber." (Lighthizer, 2008)
This statement explains the old-fashioned elements in the society at the time where free trade was seen as synonymous to societal dysfunction. The politicians at the time saw free trade as a process which would encourage greed and that would worsen the conditions of the nation by encouraging businessmen to be greedy and expand their capacities much beyond the realm of their control.
However as time progressed and much economic theory in favor of free trade was published, the works of David Ricardo on the theory of competitive and absolute advantage made the case for free trade. As far as the role of America in promoting free trade is concerned the following excerpt puts it aptly as:
"Politically, at least, in the long-term the memory of the Smoot-Hawley tariff has kept Americans committed to a free-trade policy. For more than 60 years, a guiding principle of U.S. international economic policy has been those tariffs and other trade barriers should be reduced, that trade wars must be avoided at all costs, and that the best way to achieve those goals is through multilateral negotiations. Thus, the United States took the lead in establishing the General Agreement on Tariffs and Trade that reduced global tariffs in the decades following World War II, and spearheaded major GATT rounds of multilateral trade liberalization, including the Kennedy Round, Tokyo Round, and Uruguay Round. In recent years, the free-trade consensus has begun to weaken. One must look back to 1929 to find protectionist rhetoric as heated as that commonly heard today. Throughout most of the postwar era, protectionists were embarrassed to call themselves protectionists. Today, however, prominent politicians such as Republican presidential candidate Pat Buchanan and Senator Ernest Hollings (D-S.C.) wear the label proudly"
In the contemporary world of today, where the world trade organization exists as a proponent to free trade, forcing countries, regardless of their economic stature are required to remove any form of protectionist measures. In a similar vein, the controversy of protectionism vs. free trade still rages among the economists and policy-makers of the world, where critics of free trade indicate that the developed countries have gone through their era of development and are now taking undue advantage of the situation, by forcing open economies of the world, that can barely survive on their own. Introducing free market regimes in such regions and forcing free trade upon them will serve only to deteriorate their domestic industry further and create a balance of payments deficit that can be detrimental to that nation's economic health. (Riley, 2006)
Protectionist Theories and Measures
Before we go onto discuss the theory of protectionism, it is necessary to understand that although various strategies of imposing protectionists measures are available to governments and to policy-makers the interdependence and nature of trade has become so integrated that protectionist measures imposed by one economy are bond to have retaliatory effects. That is to say that if country A imposes restriction on goods coming in from country B, B is also going to impose some sanctions on A. (Lipsey & Chrystal, 2007)
The reasons for this are simple. Globalization has led to increased outsourcing of materials as well as finished goods and services so that all countries depend on each other for trade and for other economic reasons. The impact that a single policy introduced by one nation in the world can have a string of repercussions and impact on many other nations in greater at this time than it was at any other time in history, and these interdependencies are increasing, subjecting countries to more volatility on the back of .increased exposure to global risks.
As far as the theories regarding protectionism are concerned, it finds its roots in mercantilist theories where the theories said that countries should be self-sufficient and focus on developing their local strength. Trading would take this away from them as countries would have to rely on other countries to sustain themselves. Moreover, Adam Smith, who focused on perfectly competitive economies, also indicated that the costs of free trade outweighed the benefits in that they increased the difficulties and would in turn harm the consumer as companies sought ways to expand their wealth. (Moffatt, n.d.)
According to (Kaempfer, Tower, & Willett, 2002):
"Explaining trade protectionism has been one of the most fruitful areas for the application of public choice analysis. Economists have long faced a conundrum. If our theory is correct that seldom do deviations from free trade improve economic efficiency, why is it that in the real world free trade is the exception rather than the rule? Public choice analysis provides the answer. In common practice, economists ascribe the property of aggregate economic efficiency to any policy moves that create sufficient gains so that the winner could compensate the losers with something left over, i.e., to any policy which expands the utility possibility frontier beyond the initial equilibrium. In practice, however, such compensation is seldom paid; a policy that expands the utility possibility frontier often makes some worse off. From the standpoint of political economy, policies that potentially raise everybody's utility have much less appeal than policies that actually make everybody better off. " (Kaempfer, Tower, & Willett, 2002)
Some of this is apparent in the arguments for protectionism, where experts argue that free trade means companies will look to sell where there is a higher profit margin. In turn consumers who cannot afford the high prices that are backed with nominal costs will suffer.
Therefore in order to protect their economies and in order to increase import substitution and to gain a favorable balance of trade, countries impose protectionist measures which are discussed as follows:
The various ways in which countries seek to protect their economies are:
Tariffs increase the price of the imported items so that they become uncompetitive in the economy. The increase in price means that the local goods are relatively cheaper, and for products that have an elastic demand curve, the quantity demanded of imported products goes down leaving the local industry to fill in the gaps. (Moffatt, n.d.)
As far as countries which have floating exchange rates are concerned, export tariffs will also have the same effects. How this occurs is that once exports are made more expensive, these stay inside the economy, available for local consumption, serving the purpose of limiting trade.
Tariffs used to be a popular strategy that restricted imports but they are very visible elements of a government's protectionist policies and lead to increase in the risk of other countries also imposing these tariffs. Given that the export of one country is the import of the other, and that the same two countries might be involved in more than one trade item, the repercussions can be felt more profoundly. (Gwartney, Stroup, Sobel, & MacPherson, 2008 )
Consider the example where Country A exports cotton to country B. And Country B. exports salt to country A, when Country A restricts flow of country B's salt the overall income of the economy of B. will suffer and lead to lesser income available to the general population, decreasing GDP and hence decreasing the aggregate demand in the economy so that it would in turn impact the cotton demand in B, thereby reducing the imports of cotton from A, leading to a fall in income of country A as well without there being any visible retaliatory measures.
While import tariffs work on increasing the price of imports directly, import quotas tend to restrict the quantity of goods imported so that the price of the restricted quantity goods increases automatically. The difference in the impact of this quota is that while in terms of the government imposing a direct tax and earning revenue from it the price increases and hence the profit increases due to the increased price of the…