Protectionism

What is Protectionism?

Protectionism, a term that often stirs up debates among economists, refers to the practice of restricting imports from other countries through various means such as tariffs and import quotas. But what exactly does this mean for our economies? Are these measures truly beneficial or do they come with hidden costs?

The Pros and Cons of Protectionism

Proponents argue that protectionist policies shield domestic producers, businesses, and workers from foreign competition. However, opponents contend that such policies reduce trade and negatively impact consumers in general. This article delves into the complexities surrounding protectionism, exploring its historical context and current implications.

The Economic Impact of Protectionism

There is a consensus among economists that protectionism has a negative effect on economic growth and welfare, while free trade and the reduction of trade barriers have significantly positive effects. Some scholars even attribute protectionism as one of the causes behind major economic crises, such as the Great Depression.

The Types of Protectionist Policies

Protectionist policies come in various forms, including tariffs and import quotas, protection of technologies and patents, restrictions on foreign direct investment, administrative barriers, anti-dumping legislation, direct subsidies, export subsidies, exchange rate control, and international patent systems. These measures are designed to protect domestic industries from foreign competition but often raise questions about their effectiveness.

Two Strands of Argument

Two main arguments exist regarding protectionism in trade: one suggests that patents can form part of a system of exploitable relative advantage, while the other argues that adhering to a worldwide system of patents confers ‘good citizenship’ status despite ‘de facto’ protectionism. These perspectives highlight the complexity and nuance involved in understanding protectionist policies.

Historical Context

The historical context of protectionism is rich with examples from various countries. For instance, Adam Smith’s views on free trade have been criticized for being disingenuous, while economic historians argue that protectionism is the rule, not an exception. Regional and global wars can lead to extensive government trade restrictions, further complicating the landscape of international commerce.

The United States’ Experience with Protectionism

In the United States, a common myth suggests that low tariffs harmed American manufacturers, leading to high tariffs making the country a great industrial power. However, Mr. Irwin debunks this notion, suggesting that it was American resources and openness to people and ideas that drove growth. The US imposed high tariffs for over 150 years until 1934, with rates averaging 50% from 1861-1933. Historian Paul Bairoch describes the US as a ‘mother country of modern protectionism’ until WW II.

Global Perspectives on Protectionism

In Europe, trade policies became increasingly liberal during the 19th century, with countries like the Netherlands and Denmark moving towards free trade prior to 1860. Average duties on manufactured products had declined to 9-12% on the Continent, a far cry from the 50% British tariffs and numerous prohibitions of the immediate post-Waterloo era.

Protectionism in Other Countries

Some European powers remained highly protectionist, such as the Russian Empire and Austro-Hungarian Empire. The Ottoman Empire also became increasingly protectionist after previously having liberal free trade policies during the 18th to early 19th centuries. Countries in Western Europe began to liberalize their economies after World War II and the interwar period of protectionism.

Protectionism Today

Today, countries like Canada have protected producers with a system of supply management since 1971, leading to stable markets but higher prices for consumers. Most Latin American countries adopted protectionism following independence, fearing foreign competition would stomp out their newly created states. Argentina’s Juan Perón erected a system of almost complete protectionism in the 1940s, cutting off the country from the international market and stifling agricultural production and exports.

The Impact on Global Trade

Protectionist policies can be used to raise government revenue and access intellectual property, including essential medicines. However, critics argue that these measures harm people they aim to help, with mainstream economists supporting free trade. Free trade creates more jobs than destruction due to specialization in comparative advantage.

The Link Between Protectionism and War

Protectionism has been linked to war, particularly among European countries in the 17th-18th centuries and during the American Revolution. The Opium Wars were fought over free trade. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) establishes minimum standards for intellectual property regulation but allows compulsory licenses at a nation’s discretion.

Conclusion

The debate over protectionism is far from settled, with economists largely agreeing that it has a negative effect on economic growth and welfare. While some argue that protectionist policies can help domestic industries develop in the short-term, the long-term benefits of free trade are undeniable. As we navigate the complexities of global trade, it’s crucial to weigh these arguments carefully.