Galarido, Nely Grace International Political Economy

AB Political Science 4A Prof. Ramse C. Osano, Jr,

The Rise of Protectionism and Its Perils on the

Domestic Politics and International Relations

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Since World War II major progress has been made in liberalizing international trade and
in undoing the crippling protectionism of the interbellum years. There is broad consensus
among economists that free trade is in most cases both desirable and benecial. It is thus
puzzling to see that so many trade barriers persist. It is also striking that protectionism is most
prevalent in agriculture. The lack of progress in the latest WTO trade liberalization round
underscores there is limited willingness on the part of advanced and emerging economies to
reduce protection for agriculture.To make matters even more challenging for the prospects of
liberalizing trade in agriculture, there is the additional uncertainty that agriculture faces due to,
on the one hand, increased water scarcity and continued population growth, and, on the other
hand, a changing climate.

The expansion era was marked by a systematic and considerable reduction in barriers to
trade and capital movements: declining barriers stimulated international economic relations and
hence national productivity and income growth, and prosperity eased the further dismantling of
barriers. The successive GATT rounds of negotiations were the principal instrument of freeing
up trade, resulting in average tariffs on industrial products of less than 5 percent in the
European Community (EC), the United States, and Japan at the end of the Tokyo Round. The
rate of growth of both real GNP and of trade, however, declined after 1973, and a widespread
discussion of protectionist pressures followed. In part because of the continuing multilateral
trade negotiations and the fact that they prevented the unilateral raising of tariffs, these
pressures were generally for the erection of nontariff barriers (NTBs) and for nonborder
protection. For a variety of reasons to be discussed below, some of the most visible pressures
and public discussion were aimed at the imports of the developing countries (LDCs). Despite
these earlier efforts to adopt highly restrictive measures, there is a widespread perception that
protectionist pressures increased significantly in the 1970s, and that those pressures resulted in
a pronounced increase in protection in the form of NTBs against manufactured imports from
developing countries.

Forms of Protectionism

The approaches to protectionism vary widely between international institutions and

independent analysts. There is no consensus as to what defines the term. Crucially, however,
all surveyed institutions highlight two core elements: (1) the discrimination of foreign economic
operators, and (2) trade-restrictiveness. A further dimension that often complements these two
aspects is the extent to which public measures distort markets. Criteria that focus on whether
measures are trade restrictive have the appeal of being theoretically sound. It is, after all, the
trade effects that we are ultimately interested in. Furthermore, they allow us to compare
measures across sectors, instruments and types of trade flows. At the same time, a
determination of trade-restrictiveness typically requires an assessment of whether measures
reduce trade, an assessment that can become subjective unless the actual trade impact is
estimated. Moreover, quantitative assessments of the trade impact are associated with
substantial data-related and methodological challenges. Here are the following forms of
protectionism:

A tariff is a tax on foreign goods upon importation. Tariff rates vary according to the type
of goods imported. Import tariffs will increase the cost to importers, and increase the price of
imported goods in the local markets, thus lowering the quantity of goods imported. An import
quota is a type of protectionist that sets a physical limit on the quantity of a good that can be
imported into a country in a given period of time. This leads to a reduction in the quantity
imported and therefore increases the market price of imported goods. Quotas, like other trade
restrictions, are used to benefit the producers of a good in a domestic economy at the expense
of all consumers of the good in that economy. An embargo is the prohibition of commerce and
trade with a certain country, in order to isolate it and to put its government into a difficult internal
situation, given that the effects of the embargo are often able to make its economy suffer from
the initiative. Government subsidies (in the form of lump-sum payments or cheap loans) are
sometimes given to local firms that cannot compete well against foreign imports. These
subsidies are purported to "protect" local jobs, and to help local firms adjust to the world market.
And with the new trend, Supporters of anti-dumping laws argue that they prevent "dumping" of
cheaper foreign goods that would cause local firms to close down. However, in practice, anti-
dumping laws are usually used to impose trade tariffs on foreign exporters.

To a large degree, these two approaches overlap. Tariffs both discriminate against
foreign economic operators and restrict trade. There are, however, instances in which the two
approaches differ. Export subsidies discriminate against foreign operators but do not restrict
imports. Another important dimension of protectionism that several (but not all) of the surveyed
institutions highlight, is the extent to which public measures distort markets. Ultimately, the
Board regards a discrimination approach as the most suitable to frame issues related to
protectionism. Non-discrimination requirements also infringe less on countries’ sovereignty or
“policy space”, since they insist only that laws and regulations be applied equally to foreign and
domestic economic operators. Consequently, this approach also has a strong ethical foundation
that many can embrace both inside and outside the trade community.

Advantages of Protectionism

‘ Protectionism stops import dependency. This is when a country depends on another for
key products, without which it could not function. A good example is the US & Middle Eastern oil
—without it, America can’t function properly. This is bad because it means America cannot act
politically independently (we must consider the impacts of our actions on Saudi Arabia). Also, it
gives other countries leverage over us. The same logic applies to any other country. Basically,
political independence requires economic independence—protectionism preserves both. The
only advantage I see results from temporary action. Temporarily, governments might protect
noncompetitive industries to win time to re-skill people for other jobs and build up more
competitive industries. Also to establish strong social protection which does not exist in certain
countries, including the U.S. In the meantime the consumer pays the bill. Protectionism rises
cost of living, reduces the choices for consumers, and leads to rent-seeking and a form of
corporate welfare that benefits local business by restricting competition - with a tendency to sell
the products at artificial high prices. Protectionism is highly inefficient, expensive, potentially
dangerous, and exacerbates the very underlying problems which motivated protectionism in the
first place.
Disadvantages of Protectionism

Loss of economic welfare: Tariffs create a deadweight loss of consumer and producer
surplus. Welfare is reduced through higher prices and restricted consumer choice. The welfare
effects of a quota are similar to those of a tariff – prices rise because an artificial scarcity of a
product is created.Extra costs for exporters: For goods that are produced globally, high tariffs
and other barriers on imports act as a tax on exports, damaging economies, and jobs, rather
than protecting themRegressive effect on the distribution of income: Higher prices from tariffs hit
those on lower incomes hardest, because the tariffs (e.g. on foodstuffs, tobacco, and clothing)
fall on products that lower income families spend a higher share of their income.Production
inefficiencies: Firms that are protected from competition have little incentive to reduce their
production costs. This can lead to X-inefficiency and higher average costs.Trade wars: There is
the danger that one country imposing import controls will lead to retaliatory action by another
leading to a decrease in the volume of world trade. Retaliatory actions increase the costs of
importing new technologies affecting LRAS. Students should mention game theory when
discussing the risks of retaliation with countries embroiled in trade disputes.Negative multiplier
effects: If one country imposes trade restrictions on another, the resultant decrease in trade will
have a negative multiplier effect affecting many more countries because exports are an injection
of demand into the global circular flow of income

Conclusion

Protectionism is still widespread, especially in agriculture. The Doha round negotiations,

for instance, have underscored the difficulty of making progress in terms of liberalizing
agricultural trade. There remain significant differences in relative protection of the agricultural
sector among countries that are very similar in terms of GDP per capita. Trade protection may
actually improve a country's welfare, which is one reason why there might be tacit support in
many countries for protectionist measures, especially in agriculture. Our analysis casts a new
light on trade policy, that is not necessarily merely a function of the trade-o
s between interest groups. To the contrary, the optimal trade policy is very much determined by
the specific nature of the uncertainty that countries face: the domestic and foreign shocks that
they are exposed to, as well as their size and correlation, and how these interact with the
countries' respective comparative advantage. As our analysis shows, trade policy is not solely a
matter of the particulars of a country's comparative advantage, or of the power of its interest
groups. Under uncertainty in the form of domestic and international productivity shocks, and
with heterogeneous risk-preferences across consumers and forms, we show that competitive
equilibria need not be socially optimal. In such a world, trade policy has a potential, welfare-
improving role to play, as it allows countries to reduce their exposure to domestic or foreign
shocks. The particular stance that countries will take on this issue depends on the respective
size and correlation of those shocks, and on their interaction with the countries' comparative
advantage.