Download Effects of Trade Protectionism to the Country

EASTERN ACADEMIC FORUM
Effects of Trade Protectionism to the Country
JIA Shuyi
Global Information Centre of Zhejiang Businessmen, Zhejiang University of Technology, Hangzhou,
P.R.China, 310023
[email protected]
Abstract: There is no doubt that trade protectionism has been on the rise. Every economic crisis is
associated with trade or investment protectionism. As the global economic slowdown deepened, a new
wave of economic nationalism and trade protectionism has surfaced. There has been a long debate about
whether trade protectionism is benefit to the country or not. It is often argued that protectionism is good
for the country. Those arguments are rhetorical appealing to and arousing public sentiment.
Protectionism doesn’t advance public welfare. In fact, public welfare stands to be hurt by trade
protectionism. In this paper, it is going to express my understanding of trade protectionism from aspects
of its costs, benefits and impacts as well as historical evidence to prove that trade protectionism is not
benefit to the country.
Keywords: Trade protectionism, Economic, Debt crisis, Financial crisis, War
1 General Views of Trade Protectionism
International trade has been growing faster than growth of world gross domestic products, and countries
with freer trade policies benefit more than countries with restricted policies. (Abboushi, 2010) Although
nowadays countries rely on one another to a greater extent and have set up clearer rules, political and
social factors still far more outweigh the economic incentives. Yet, trade protectionism continues to be
exercised in response to pressure from select industries and political constituencies.
Protectionism is the economic policy of restraining trade between states and countries through methods
such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations
designed to allow "fair competition" between imports and goods and services produced domestically.
(James, 2012) The protection of national trade policy is to actively interfere with the import and export
of goods, using various measures to restrict imports of goods, protection of domestic markets and
domestic production, so that goods from foreign competition; give preferential treatment to domestic
and export subsidies, to encourage the expansion of exports. But, think about it, once imported goods
have been restricted, supply will decrease, with same domestic production which might even be not
enough for domestic demand, what left for exporting?
People may ask what impact protectionism will have on the global economy. In my opinion, every
country would turn into a closed economic body if all countries only bought their own products. We
would face the crisis in isolation and be defeated. Trade protectionism would surely hurt the economies
to a greater extent, and then pass the crisis on. (Zhang, 2009)
When reviewing the big recession in the 30th of last century, all admit that the Smoot-Hawley act,
which tried to transfer the crisis to other countries, led to international trade conflicts, harmed
international trade, and exacerbated every country's recession.
2 What Trade Protectionism Costs?
Classical Liberal philosopher John Stuart Mill astutely observed in the last century that "Trade barriers
are chiefly injurious to the countries imposing them". It is still true today as it was then, reasons are as
follows:
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2.1 Lost jobs
Advocates are always touting preaching that trade protectionism is to make people buy domestic goods,
promote domestic consumption, help domestic enterprises and so that to help create jobs. Nevertheless,
my view is just the opposite.
Protectionist policies raise tariffs on imported goods and impose quotas on the amount of goods
governments permit to enter into a country. Trade protectionism not only restricts the choice of
consumer goods, but also contributes greatly both to the cost of goods and to the cost of doing business.
(Miller & Elwood) Therefore, it not only doesn’t help increase domestic employment, but because of the
increasing raw material costs and retaliation of other countries make more American companies
bankruptcy and leading to more serious unemployment problem and in the end is “shooting yourself in
the foot”. Thus, in long term, under "protectionism" people end up poorer, with less money to buy things
they want and need, which reduces consumer spending power, makes company cut job positions and so
that cause jobs destroying. According to the US Department of Labor's own statistics, "protectionism"
destroys eight jobs in the general economy for every one saved in a protected industry.
2.2 Higher prices
It is said that Japanese consumers pay five times the world price for rice because of import restrictions
protecting Japanese farmers. European consumers pay dearly for European Community restrictions on
food imports and heavy taxes for domestic farm subsidies. American consumers also suffer from the
same double burden, paying six times the world price for sugar because of trade restrictions. (Miller &
Elwood) The US Semiconductor Trade Pact, which pressured Japanese producers to cut back production
of computer memory chips, caused an acute worldwide shortage of these widely used parts. Prices
quadrupled and companies using these components in the production of electronic consumer goods, in
various countries around the world, were badly hurt.
All these examples above show that once government makes import restrictions, the domestic supplydemand relation is going to change. Therefore, facing same demand, with significant decrease in supply,
prices will absolutely go up.
2.3 The debt crisis
Advocates of protectionism are alarmed at the deficit in the balance of payments' current account. When
trade deficit persists and grows, politicians begin to wield protectionism to battle the perceived injustice
in the country's trade relations. (Abboushi, 2010)
Taking the view to the western makes me feel that they are such a kind of self-contradiction. On one
hand, western banks are owed hundreds of billions of dollars by Eastern European and Third World
countries. On the other hand, trade restrictions by western governments, however, have cut off western
markets for these countries, making it virtually impossible for them to earn the hard currencies
necessary to repay their loans. This increases the very real possibility of a collapse of the world banking
system.
2.4 Higher taxes
On one side, governments invariably expand their Customs Department bureaucracies to force
compliance with their new rounds of trade restrictions. Those bureaucrats must be paid. On the other
side, for trading companies, Protectionist laws not only force you to pay more taxes on imported goods,
but also raise your general taxes as well. There is also the increasing expense of more red tape,
paperwork and more harassment of individual travelers passing through the borders.
3 Who is Behind Trade Protectionism?
In spite of evidence of damage caused by trade restrictions, pressure for more "protectionist" laws
persists. Who is behind this, and why? Talking about this, I have to mention that from my understanding,
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I feel that, to some extent, it is the wealthy people who are greatly involved in manipulation of national
economic policies.
Special-interest groups, who gain from "protectionist" laws, are big corporations, unions, and farmers'
groups – all of whom would like to get away with charging higher prices and getting higher wages than
they could expect in a free marketplace. These special interests have the money and political clout for
influencing politicians to pass laws favorable to them. Politicians in turn play on the fears of uninformed
voters to rally support for these laws. (Miller & Elwood)
Another point I have to make pertains to government’s motive. My concern is mainly point to a very
strong force – politics, not the international political relations but the domestic political pressures and
competition. To objectively say, politicians of all factions are of course vying for serving the interests of
the politically capable and aggressive interest groups. While this may be part of the nature of the
democratic political system where the government responds to the pressures of the politically active and
resourceful interest groups, the drawback is the loss incurred in the public, the large sections of the
population whose welfare is compromised by trade protectionism.
4 What We are Benefit from Trade Protectionism?
Senior Economist of Fraser Institute in Canada, Walter Block said "Protectionism is a misnomer. The
only people protected by tariffs, quotas and trade restrictions are those engaged in uneconomic and
wasteful activity. Free trade is the only philosophy compatible with international peace and prosperity".
Let’s see what we as ordinary consumers are benefit from trade protectionism. Increasing taxes and
higher prices with decreasing imports, life can still be going on, but will become more and more
troublesome with bigger and bigger cost. Think about it, if tennis shoes from China cost only 20 dollars
but 100 dollars if manufactured in the United States, why punish the poor for the sake of protection
domestic industries? Our freedom is being trampled into the dust by those protectionist policies, and we
are literally kind like being robbed, through taxes and higher prices, in order to line the pockets of a few
politically-privileged "fat cats".
4.1 “Buy American”
Lets’ turn back and think about “buy American”. What is “buy American”? What is “Made in U.S.A.”?
What those American multinational enterprises could do? Or is that mean those foreign enterprises in
US are safe? Have those people who support “Buy American” ever think about where the iphones in
their made from or where the Honda cars they drove made from? Will they stop buying those things?
Statistics shows that U.S. manufacturing accounts for only 13% of GDP, of which 7% is military. From
all U.S. material object products, 25% rely on imports and 40% of consumer goods rely on imports as
well. How many varieties and quantity of goods there are for Americans to buy and how Americans can
afford expensive American goods?
Or we can think about it in this way: are products of American multinational enterprise made overseas
belong to “American goods” or are products of foreign multinational enterprises made in the United
States belong to “American goods”? In the first case, US companies make money, but leave jobs to the
foreigner; in the second case, American people get jobs but money was made by foreign companies. No
wonder there are so many American multinational enterprises who have tried hard to oppose the “Buy
American” clause.
I still remember another example given from “The Washington Post”. In 2003, Indiana governor
canceled a 15 million contract with an India company in response to the state’s unemployment claims.
That contract was passes over to a US company charging of 23 million. Because the price rose by 53%,
the state cut 8 million spending to schools, hospitals, law enforcement agencies and other units. What
benefits brought to people in Indiana by this contract?
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4.2 A year without “Made in China”
Here, I want to mention a book which I read last year called A Year Without “Made in China” by Sara
Bonqiorni. On 2004’s Christmas, Sara suddenly realized that of 39 presents, 25 are “made in China”.
Meanwhile, the DVD, shoes, socks, toys, lamps and so on are also all from China. Facing a moment like
this, she can’t help but think that if without Chinese products, can Americans survive? Is the age of
globalization really have already quietly been into our life? So Sara came up with a decision that from
January 1st of 2005, led the family began to try not to buy any Chinese products in one year.
In the huge global economy, little trivial life is full of thought-provoking and funny pieces. Sara had to
pay $68 for a pair of “Italian” shoes for her 4-year old son; when wreak havoc of mice, should she
choose humane mousetrap but made in China or inhumane insecticides. In that year, Sara had to manage
her rebel husband, make her son who likes toys a lot often disappointed, and at the same time cannot
completely reject Chinese goods. So finally, one year later, Sara family was happy to meet “made in
China” again.
The author is a journalist, she uses her pen to write moving and fun life of her family and also left a
clear picture for China brought great consumers benefits to the world with an increasingly important
position. The book is not only show that the Chinese manufacturing industry giants are quietly changing
Americans’ life, but also emphasized the reality of globalization, and more important, where the world
economy will go to.
4.3 From historical data analysis
We would like to insight the U.S. trade data and U.S. economical growth rate.
Figure 1 U.S Trade Balance vs. U.S GDP
According to the Figure 1, we can easily draw a conclusion that although United States has been in
Trade deficit since 1970, it still has a relatively stable GDP growth rate. Free trade does not affect the
economic growth rate of a certain country.
5 Will Trade Protectionism Cause a War?
Sanctions and blockades are extremely dangerous and should be considered acts of war. By reviewing
historical cases about trade protectionism, I came up with such a question that what will be the most
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serious and worst consequences of protectionism. Will a trade war be the end?
Ludwig Von Mises said "What generates war is the economic philosophy of nationalism: embargoes,
trade and foreign exchange controls, monetary devaluation, etc. The philosophy of protectionism is a
philosophy of war".
Often, when the government of Country A sets up trade barriers against the goods of Country B, the
government of Country B will naturally retaliate by erecting trade barriers against the goods of Country
A. The result, in my opinion will be that a trade war causes both sides lose. What’s more, all too often, a
depressed economy is not the only negative outcome of a trade war. History is not lacking in examples
of cold trade wars escalating into hot shooting wars:
5.1 British tariffs provoked the American colonists to revolution, and later the Northern-dominated US
government imposed restrictions on Southern cotton exports – a major factor leading to the American
Civil War.
5.2 In the late 19th Century, after a half century of general free trade (which brought a half-century of
peace), short-sighted politicians throughout Europe again began erecting trade barriers. Hostilities built
up until they eventually exploded into World War I.
5.3 In 1930, facing only a mild recession, US President Hoover ignored warning pleas in a petition by
1028 prominent economists and signed the notorious Smoot-Hawley Act, which raised some tariffs to
100% levels. Within a year, over 25 other governments had retaliated by passing similar laws. But
what’s the result? World trade came to a grinding halt, and the entire world was plunged into the "Great
Depression" for the rest of the decade. The depression in turn led to World War II. (Miller & Elwood)
As mentioned in the class about why Japan suddenly attacked Pearl Harbor in 1941. Stopping all flow of
oil to Japan in early that year was a significant factor.
5.4 Ron Paul in his book “Liberty Defined” also said that policies of sanctions and blockades were “a
prelude to our unwarranted and illegal invasion and occupation of Iraq”. Iraq is a good case in point:
sanctions were imposed through the 1990s and then the real war followed.
Yet we see trade barriers being raised around the world by short-sighted politicians. Will the world
again end up in a shooting war as a result of these economically deranged policies? Can we afford to
allow this to happen in the nuclear age?
6 Conclusion
American is a free-market economy country and a world advocate of international trade free of
restrictions. However, significant protectionist measures have always been, and continue to be imposed
on trade in a variety of industries purportedly to protect those industries and public interest.
As Ron Paul in his book Liberty Defined said, “trade and friendship diminish chances of war with other
nations”. We cannot either say completely free trade is absolutely feasible, or totally abandon
protectionist policies, but at least, the argument about protectionism is good for the country is
reasonable.
Since the financial crisis began in 2008, G-20 countries have imposed 550 measures to restrict or
potentially distort trade. Such measures disrupt international supply chains, reduce economic activity
and dent the sense of common purpose that was needed to survive the economic crisis. Giving in to the
protectionist impulse can only make matters worse.
The welfare of protected interest groups may be advanced, but always at the expense of the larger
society.
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References
[1]. Abboushi, S. (2010). Trade Protectionism: Reasons and Outcomes. Competitiveness Review,
pp.384-394.
[2]. James, J. (2012, 3 7). http://josephjames007.blogspot.com/2012/03/free-trade-versus-protectionism
-in.html. Retrieved from Blog nang joseph.
[3]. Miller, V. H., & Elwood, J. R. (n.d.). http://www.isil.org/resources/lit/free-trade-protectionism.html.
[4]. Zhang, Y. s. (2009, 2 23). Is Protectionism a Threat to the World Economy?
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