Protectionism and the Global Economy

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Protectionism and the Global Economy

• Elizabeth Bicocco

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Protectionism

• Defined as any attempt to restrict the free flow
  of imports into a country.

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Protectionist Measures

• Tariffs Tax on imports
• Import Quotas Limit on the number of imports
• Export Restraints Exporting country limits the
  number of exports

• Domestic Legislation Certain percentage must be
  domestically produced
• Anti-Dumping Predatory Pricing
• Regulatory Standards Health and environmental
  standards

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Why protect?

• Protect domestic production and thus protect and
  create jobs, but this is expensive and there are
  better ways.
• Help strategic (infant) industries temporarily so
  that they can compete in the global economy or
  recoup investments. These can quickly become
  dependent and are often indefinite instead of
  temporary

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Continued.

• Unfair trade which levels the playing field
  because other trading partners are protectionist
  or there are foreign monopolies. Beggar thy
  neighbor principle.
• National Security first written about by Adam
  Smith which protects national defense industries.
• National heritage and pride which protect culture.

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Case Study French Farmers

• France was importing 60 of their oil seeds from
  the U.S. which were duty free. The E.C. wanted
  more domestic production and created agricultural
  subsidies. These farmers started producing more
  oil seeds than the grains they were producing.
  There was a 25 production loss in the U.S. and 2
  billion dollars to U.S. soybean producers.

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Case Study Continued

• In the 1992 Uruguay Round, the U.S. and the E.C.
  agreed to the Blair House Agreement which agreed
  that only a certain percentage of European land
  would be used for oil seed production. In order
  to qualify for a subsidy, the farmers would have
  to leave about 50 of their land fallow.

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Who pays for this?

• The tax payer pays for this kind of protectionism
  because they pay twice, once as a consumer for
  the product and again for the subsidy as a tax
  payer. Consumers paid about 395 each for this
  agricultural subsidy which was extremely costly.

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Economic Gains and Losses

• This prevents specialization of countries in
  trade, the consumers get the rough end of the
  deal and sometimes pay twice, there is no
  economic rationale, not a long term efficient us
  of resources, and it more political than
  economic.
• Solution Support these industries directly

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Who wins?

• Import competing industry because they can charge
  higher prices
• The government because it collects revenue from
  tariffs.
• Sometimes foreign producers because through VERs
  they can raise prices and thus have a higher
  profit margin.

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Who loses?

• Consumers because they have less choice and
  availability along with high prices
• Business because it hurts those industries with
  comparative advantage
• Foreign Producers because they cannot export
  their product
• The economy as a whole because of the efficiency
  loss and protected industries remain inefficient
  because they have no reason to change. Also there
  is a growth of lobbying efforts which do not help.

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Who else loses?

• The global economy also loses because of the loss
  of specialization benefits, it encourages
  retaliation protectionism which can lead to a
  downward spiral in the global economy as a whole.
• Protectionism goes against comparative advantage.

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Tariffs

• There is an increase in price and a correlating
  decrease in quantity.
• There is a loss to consumers,but a gain to the
  domestic producers and the government.
• This can be a dead weight loss for a small
  country in which the entire burden goes to the
  consumer, but in a large country most or all of
  the burden goes to the producers because of
  competition.

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Import Quotas and VERs

• Changes supply, does very much the same as a
  tariff with one major difference, instead of
  revenue going to the government, it goes to the
  exporting industry.
• The foreign producer almost always gains.
• Temporary restraints are almost never temporary
  and most become indefinite.

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Case Study USA-Japan Auto Industries

• 1981 the U.S. asks Japan to stop the increase of
  Japanese cars into the U.S. because since the oil
  crisis, more Americans had been buying the more
  fuel efficient Japanese cars which decreased the
  domestic industries profits and increase
  unemployment. They placed a VER which cut imports
  by 8 but prices on imports increased.

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Case Study Continued

• 100,000 jobs were created, but not only did the
  price of foreign cars increase, but domestic
  prices also rose. The cost to consumers was about
  160,000 per job.
• The protection of one industry is at the cost of
  other industries which may have comparative
  advantage.

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Pros for Protectionism

• Create or save jobs
• Helps strategic or infant industries
• Noble, understandable cause
• Protects way of life, culture of a nation.

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Cons against Protectionism

• Expensive
• Creates inefficiency
• Encourages lobbying
• Encourages retaliation
• Damages competitiveness
• Wasteful