protectionism can it be justified evaluating the effects of trade policy measures
TRANSCRIPT
Protectionism: Can It Be Justified? Evaluating The Effects of Trade
Policy Measures
A case study of the United States of America
The question whether we should have free
trade or protection is not an honest one,
however, the real question should be “what
kind and what level of protection could be
desired.” The reality of the fact is that it is not
likely that there will ever be a world of free
trade. In every country there are various
ways through which, imports are regulated
and exports are promoted, even where
there are suspension of import quotas and
export subsidies are barred. In the United
States, limitations are placed on the
importation of goods such as textiles, beef
and sugar, hence, over the years the primary
instrument of trade policy has been the tariff.
However, following series of the General
Agreement on Tariffs and Trade (GATT)
negotiations in Geneva and other locations1,
the average rate of duty on manufactured
goods in the United States of America (U.S.)
was reduced from over 40 per cent in 1947
to less than 4 per cent by the end of the
Uruguay round in 1994, because a larger
proportion of U.S. imports became free.2
(Caves, Frankel and Jones 2002).
Over 20 years ago Etzion (1983) suggested
that the implementation of the right kind of
protection would bring about a limitation in
import that would be temporary at first
before then translating into a downward
slide. This type of policy he said would allow
industries that are under threat a specific
period to restructure and also and also
ensure that an industry would become
independent of the weaning process.
Protectionism Protectionism is simply the creation of barriers
to trade. It comes in various methods and
the most common are:
Tariffs (or import duties): which is a tax levied
on the importation of goods from abroad
hence making them more expensive and
THE REALITY OF THE FACT IS THAT IT
IS NOT LIKELY THAT THERE WILL
EVER BE A WORLD OF FREE TRADE
PROTECTIONISM: CAN IT BE JUSTIFIED? EVALUATING THE EFFECTS OF TRADE POLICY MEASURES
less competitive when compared to
domestic goods3.
Quotas: are certain limits placed on the
amount of certain products and services that
can be imported from abroad.
Non-Tariff Barriers: this happens when
countries impose certain bureaucratic
bottlenecks or administrative procedures to
make to make the importation of goods a
cumbersome affair. Studies have shown it is
likely that the introduction of protectionism is
rather political than economic. However, it is
difficult to separate the economic and the
political factors, so why then do countries
introduce protectionism?
Trade Protection in the United
States
Without any doubt the United States imports
much of its consumer produce a lot more
than any other country. Imported consumer
goods stock American departmental stores
starting from electronics and cars from
Japan, to apparel from China and the
Americans love it. On the other hand, as a
result of the competition generated from
these imports most U.S. producers are not
quite happy. Hence, policy makers have
continued to evolve new avenues to protect
U.S. producers from unwanted import
competition (Baldwin and Magee 2000).
In the United States the government protects
local industries from import competition
through the use of various trade barriers
which are applied on imported goods
purchased by American consumers. The
decision to impose trade barriers is highly
political as policies are influenced through
the interactions of politicians and economic
interest groups4. The continued success of
this system is because a large number of
Americans don’t know that they are being
taxed. Today, global sourcing or outsourcing
overseas has been restricted through state
and federal legislation and has become a
growing threat to the U.S. competitiveness
and taxpayers. Protectionism of this kind
poses an actual threat to technological
revolution and international division of labour
which has led to the introduction of new
goods and services which has helped in
improving the lives of Americans and other
people throughout the world.
THE DECISION TO IMPOSE TRADE
BARRIERS IS HIGHLY POLITICAL AS
POLICIES ARE INFLUENCED THROUGH
THE INTERACTIONS OF POLITICIANS
AND ECONOMIC INTEREST GROUPS
PROTECTIONISM: CAN IT BE JUSTIFIED? EVALUATING THE EFFECTS OF TRADE POLICY MEASURES
Trade Policy Measures and their
Effects
Tariffs
Tariffs are the most straightforward trade
policy and it has remained the oldest
primary source of government revenue5.
Apart from income generation in the United
States its other function had been to protect
specific domestic industries. The primary
objectives of tariffs are the resultant effects;
a tariff would increase the cost of imported
goods that are received by the U.S.
producers hence protecting the United
States producers from the low prices resulting
from import competition. On the other hand,
consumers pay for this protectionism which is
completely hidden, but at the same time it
raises the cost of these good far above what
they should normally be if there had been
subject to the forces of competition.
Estimate shows that what the American
consumer pays in form of “protection tax” is
equal to more than 6 per cent the income of
the national sales tax, with consumers of
apparel, leather luggage and footwear
paying 17.2 per cent, 14.4 per cent and 7.3
per cent respectively6. In theory, Fig 1.2 (see
appendix) illustrates how a specific tariff
affects the price of a commodity, let’s say
wool, between Home and Foreign country, it
would be the point where a specific tariff per
unit of wool is introduced. Analysis shows
world price equilibrium at Pw in the absence
of a tariff and unless PT exceeds P*T by $t
importers would be unwilling to ship goods to
Foreign. On the other hand, wool demand
would be in excess in Home and supply
would be in excess in Foreign where no wool
is being shipped7. Introduction of tariff raises
PT and lowers P*T = PT – t. A move from point
1 to 2 on the MD curve indicates a higher
supply in Home at higher prices while the
demand for import by consumers remains
low. A shift from point 1 to 3 on the XS
indicates a drop in prices in Foreign which
lead to increase demand and a reduction in
supply8. The above indicates the normal
effects of tariffs.
Import Quotas
An import quota is the limitation placed on
certain imported goods and they are most
times imposed through the issuance of
licences to certain interest groups or
individuals. In the United States the
importation of cheese is restricted, certain
companies are accorded the rights based
on a maximum quota to import a certain
amount of cheese per year and the quantity
allowed each firm is based on its past
records9. However, for goods which are in
high demand such as apparel and sugar10,
these quotas or licences are allocated by
the United States Government to the
PROTECTIONISM: CAN IT BE JUSTIFIED? EVALUATING THE EFFECTS OF TRADE POLICY MEASURES
exporting countries government11. Taking
brief analysis of the importation of sugar in
the United States, it is clear to see that the
allocation of import quotas to foreign
governments who pass on these import
licences to its citizens means that profits
generated by these licences are earned by
foreigners. This rent is guaranteed because
the governments of the United States has
secured domestic prices which has more
than doubled the American prices above
that of the world market12. The primary
effects of the current sugar policy include:
the stability of domestic U.S. prices although
expensive; the local consumption of sugar in
the U.S. is reduced; while the consumption of
corn sweetener consumption has increased.
Finally, an unstable but low world sugar price
than would normally exist under effective
market competition.
The United States policy of import quota
which supports high-cost producers robs low-
cost producers in less developed countries
the important export markets and the export
earning potentials. Investors in less
developed countries have termed the US
sugar policy as anti-developmental because
while they are trying to add value to exports
they are constantly penalized by a system of
rising tariffs in America13.
Voluntary Export Restraints
A VER’s effect on any given market is as a
result of the fact that they hinder the ability
of companies to interact in perfect
competition and not necessarily because
they are set at restrictive levels. A VER is a
variant on the import quota, it is a quota
imposed by an exporting country rather than
an importing one14. The oldest well known
case of VER was entered into with the
Japanese government in May 1981 in the
wake of the recession of the American car
industry with the close support of the Regan
administration. From that time onwards only
1.68 million Japanese cars15 were allowed
into the U.S. each yearly16. It was later
increased 1.85 million cars in 1984, and then
to 2.30 million in 1985, before its termination
in 1994 (Benjamin 1999). The resultant effect
of this was an increase in the prices of
Japanese cars, hence increasing car sales
by U.S. firms, and in turn there was a rise in
their profits. This entire scenario played out at
the expense of the auto consumers in the
U.S.17. The major effects that were felt during
a four-year period between 1986-1990 during
which these quotas were in operation was a
THE OLDEST WELL KNOWN CASE OF
VER WAS ENTERED INTO WITH THE
JAPANESE GOVERNMENT IN MAY 1981
IN THE WAKE OF THE RECESSION OF
THE AMERICAN CAR INDUSTRY WITH
THE CLOSE SUPPORT OF THE REGAN
ADMINISTRATION.
PROTECTIONISM: CAN IT BE JUSTIFIED? EVALUATING THE EFFECTS OF TRADE POLICY MEASURES
14 per cent increase in the prices of
Japanese cars sold in the United States to an
average of about $1,200 higher (in 1983
dollars)18.
According to Berry, Levinsohn and Pakes
(1999) contrary to popular opinion, the effect
of the VER program was basically between
1986 to 199019. It became apparent that the
1981-82 recession added with high interest
rates had depressed car sales greatly hence
this quota at the outset did not reduce the
sale of Japanese cars in the United States.
The impact of the VER program started
having some impact in early 1986, due to
economic recovery, a decline in interest
rates, and plummeting gasoline prices which
stimulated fresh demand on cars (Berry,
Levinsohn and Pakes 1999).
Conclusion
Taking a closer look at the effects of these
trade policies reveal that in all case
scenarios they benefit producers and hurt
consumers while tariffs and import quotas
have the tendency of benefiting large
countries that have the ability to push down
world prices. It is without any doubt that in
the last half of last century the United States
has successfully reduced import tariffs
substantially however other restraints
imposed by its government still form
substantial restriction to world trade. It is
uncertain what amount of the remaining
restriction can actually be justified with
respect to economic models of national
welfare.
Final Thought
“Protectionism will do little to create jobs and if foreigners retaliate, we
will surely lose jobs.” ALAN GREENSPAN
PROTECTIONISM: CAN IT BE JUSTIFIED? EVALUATING THE EFFECTS OF TRADE POLICY MEASURES
References
BALDWIN, R. and MAGEE, C., 2000. Is Trade Policy for
Sale? Congressional Voting on Recent Trade Bills.
Public Choice. 105, pp. 79-101
BENJAMIN, D., 1999. Voluntary Export Restraints On
Automobiles. Property and Environment Research
Center, 17(3), Fall 1999
BERRY, S., LEVINSOHN, J., and PAKES, A., 1999.
Voluntary Export Restraints on Automobiles:
Evaluating a Trade Policy Evaluating a Trade Policy.
American Economic Review, 89(3), pp. 400-430.
BHAGWATI, J., 1998. Protectionism: The Concise
Encyclopaedia of Economics; the Library of
Economics and Liberty [online] Available from;
http://www.econlib.org/library/Enc/Protectionism.ht
ml [Accessed 3rd December 2005]
CAVES, R., FRANKEL, J., and JONES, R. 2002. World
Trade and Payments; An Introduction, 9th ed.
Boston: Pearson Education
ETZIONI, A., 1983. Some Protectionism. The New York
Times: Washington D.C. [online] Available from;
http://www.gwu.edu/~ccps/etzioni/B150.pdf
[Accessed 5th December 2005]
KRISHNA, K., 1989. Trade Restrictions as Facilitating
Practices. Journal of International Economics, 26 (3-
4), pp. 251-270.
KRUGMAN, P., and OBSTFELD, M., 2006. International
Economics; Theory and Policy, 7th ed. Boston:
Pearson Education
STOECKEL, A., PEARCE, D., and BANKS, G., 1990.
Western Trade Blocs. Canberra, Australia: Center for
International Economics
The Trade Partnership Protectionism in America:
Watch Your Wallet: Consumers for World Trade;
Washington D.C. [online] Available from;
http://www.cwt.org/learn/CWT%20Protection%20Ta
x%20Study.pdf [Accessed 5th December 2005]
U.S. International Trade Commission, The Economic
Effects of Significant U.S. Import Restraints, Third
Update 2002, Inv. No. 332-325, Pub. No. 3519, June
2002, Tables 3-6, 6-6, 6-14, and 6-16
VIRATA, G., 2004, Effects of US Sugar Policy on
Developing Countries. [online] Available
http://internationalecon.com/virata/Effects%20of%2
0US%20sugar%20policy%20on%20developing%20co
untries.pdf [Accessed 5th December 2005]
PROTECTIONISM: CAN IT BE JUSTIFIED? EVALUATING THE EFFECTS OF TRADE POLICY MEASURES
Appendix
Fig. 1.1: Average tariff collected on dutiable imports
in U.S.: Average tariff rates in %
Source: Caves, Frankel and Jones (2002)
Fig. 1.2
Source: Krugman and Obstfeld 2006.
The figure above indicates the effect of tariff as it
increases home price and lowers Foreign while
quantity traded also plummets.
Where: P = Price, Q=Quantity, PW = Price of wool in
the absence of tariff, PT= Price of wool with the
introduction of tariff, P*T = Price in Foreign with the
introduction of tariff. QW = Quantity traded at free
trade, QT =Quantity traded with introduction of tariff.
PROTECTIONISM: CAN IT BE JUSTIFIED? EVALUATING THE EFFECTS OF TRADE POLICY MEASURES
Endnote
1 Partly because of these reductions, those interested in
protection have clearly introduced other means of achieving
similar ends such as quotas, voluntary export restraints, stringent
rules concerning dumping etc. 2 See Figure 1. in Appendix. 3 For every unit of good imported to a country there is a fixed
charge levied which is known as specific tariff while taxes
levied as a fraction of the value of the commodity imported is
known as Ad valorem tariffs. The desired effect in both cases is
to raise the cost of shipping the commodity to a country. 4 Interest groups provide campaign funds in return for public
policy actions that increase their economic rents. This rent
seeking activities are constrained by increased political
opposition from individuals and firms whose welfare is adversely
affected by the policy actions. 5 In the United States, before the introduction of income tax
nearly 80% of government revenue was generated through
tariffs. 6 Source: U.S. International Trade Commission, The Economic
Effects of Significant U.S. Import Restraints, Third Update 2002,
Inv. No. 332-325, Pub. No. 3519, June 2002, Tables 3-6, 6-6, 6-14,
and 6-16. 7 At this point the price in home will rise while prices in foreign
will fall until the price difference is $t. 8 At this point quantity traded drops from Qw to QT, while at QT
demand of Home import and Foreign export is in equilibrium
when PT – P*T = t 9 Based on this with a quota the government receives no
revenue, however the amount that would have accrued to
government is received by the holder of the import licence.
Giving licence holders the ability to buy imports and resell them
at a higher price in the domestic markets. 10 The United States sugar regime clearly discriminates against
Brazil, who is certainly the world’s most efficient sugar producer
and number one exporter. This costs Brazil, an estimated $494
million of potential earnings in 2002. In Ethiopia, Mozambique,
and Malawi the cost was $238 million since 2001. 11 Without any misconception import quota does not limit
import without raising prices, on the contrary when quotas are
applied the resultant effect is that at the initial price the
demand for the goods exceeds both domestic supply and
imports, hence the price bids up until the market clears. 12 Import quota restricted imports to about 1.4 million tons with
estimates showing that free trade would more than double
imports to 3.7 million tons. 13 2% for raw sugar imports, 5.5% for intermediate (semi-
processed) sugar, 20.1% for final (fully processed or refined)
sugar. 14 They are imposed at the instance of the importer in
agreement with the exporter to forestall other restrictions. 15 The Ministry of Trade and Industry gave each Japanese
manufacturer a separate sub-quota, allegedly based on past
sales, with no clear enforcement mechanism in place where
there is a violation. Cars produced in the U. S. by Japanese firms
(e.g., Hondas made in Ohio) did not count against the limits. 16 The agreement was initially scheduled to expire after 3 years. 17 Especially those who purchased Japanese cars during this
period, on the whole the American auto consumers suffered
the effects of the introduction of the export restraints. Suffering
a loss of some $13 billion, measured in 1983 dollars while the
entire economy, suffered a welfare loss totalling nearly $3
billion due to the restraints on Japanese car exports. 18 The higher prices for Japanese cars caused some consumers
to defer purchases altogether and others to switch to
American autos. 19 They also found that it had in effect no influence on observed
prices and quantities from 1981 through 1983, and little impact
in 1984 and 1985.
PROTECTIONISM: CAN IT BE JUSTIFIED? EVALUATING THE EFFECTS OF TRADE POLICY MEASURES
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