Protectionism
Protectionism refers to a range of policies implemented by governments to shield domestic industries from foreign competition. This is typically achieved through the imposition of tariffs, which are taxes on imported goods, and various nontariff barriers, such as quotas and regulatory standards that favor local products. Advocates argue that these measures can strengthen a country's economic position by enhancing export potential and fostering local production. Historical debates surround the effectiveness of protectionism versus free trade, with economists like Adam Smith supporting open markets for their potential to drive efficiency and innovation, while Friedrich List highlighted the need for temporary protection for nascent industries in developing nations.
In recent decades, protectionist practices have evolved alongside globalization, prompting discussions on their relevance in a world increasingly characterized by interconnected economies. While international agreements, such as those governed by the World Trade Organization (WTO), typically discourage protectionist measures, many countries negotiate exceptions that allow for strategic use of tariffs and subsidies. The complexity of these dynamics is further complicated by factors such as agricultural policies, environmental regulations, and intellectual property rights, which can influence trade negotiations and domestic economic strategies. As globalization continues to shape the global economy, the discourse around protectionism is likely to grow more pertinent, reflecting diverse national interests and the challenges of maintaining fair trade practices.
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Protectionism
Protectionism is a set of policies aimed to protect domestic producers against foreign competitors by imposing tariff (import taxes on foreign goods) and nontariff barriers (policies that boost domestic exports) to trade. By doing so, states seek to strengthen their export potential and improve overall terms of trade. In other words, rather than relying on international markets to regulate economic growth, states interfere with the production processes of local firms to diversify domestic production, control the value chain, and manage consumer and producer surpluses, government revenues, and national welfare.
Although protectionism is formally prohibited for members of the World Trade Organization (WTO) because it introduces unfair advantages in trade, in practice, every member state negotiates sets of exceptions. Scholars debate whether protectionism is still possible in the era of globalization when the rise of preferential trade agreements and multilateral economic interdependence no longer permits economic isolation.
Background
Debates over the benefits of protectionism go back to the work of classic economists, such as Adam Smith (1723–90) and Friedrich List (1789–1846). The former claimed that free trade is beneficial for all actors engaged in trade if each specializes in the respective comparative advantage. Rather than trying to produce all goods in a single economy, governments should allow firms to allocate their resources and efforts into industries with greater productivity. Specialization and high productivity make more efficient use of resources and produce larger profits in comparison with policies of self-sufficiency. Free trade also fosters innovation and undermines monopolies since there are multiple players in the market. According to Smith, free trade is a recipe for economic growth with market principles of supply and demand guiding the distribution of resources.
However, List argued that free trade works for countries with already developed industrial sectors capable of withstanding international competition. List maintained that Smith's theory supported British economic interests at that time; eighteenth-century British producers needed new markets in which to sell their goods, so free trade was beneficial for them. List claimed that the policy of free trade was suicidal for domestic infant industries in the young German state of the nineteenth century. He feared that firms too small to face competition would simply go bankrupt as more advanced foreign goods appeared in the market. So, List recommended that the German government introduce temporary isolation from international markets to allow domestic firms to reach maturity and become capable of withstanding pressure from foreign firms.
Protectionism was prominent in the 1960s and 1970s when governments in developing countries promoted their nations' industrialization by substituting imports and closing borders to foreign goods that were already produced by domestic firms. High tariffs helped newly industrializing states to improve their terms of trade, increasing the comparative value of exports to imports. Protectionism also removed market imperfections and market failure in highly technological industrial sectors. New industries also created marginal social benefits with increases in employment, tax revenues, and social services. However, inefficiencies, monopolization, and overdependence on government subsidies caused some states to conduct export-oriented industrialization with governments supporting firms that produced goods of high demand in the international market.
Protectionism Today
Both import- and export-oriented industrializers have used protectionist measures. Tariff barriers entail various taxes on imported goods. Nontariff barriers include quotas and export restraints, export subsidies, antidumping measures, local content requirements, national procurement, and red tape barriers, including standard and technical regulation. Widespread membership in the WTO, which has over 165 member-states, prompted rounds of negotiations beginning in the 1990s, after which tariff barriers decreased significantly from over 30 percent in 1996 to below 3 percent by the mid-2010s. WTO members negotiate tariff rates and a set of exceptions they would like to retain after joining the organization in exchange for promising not to raise tariffs in the future without a penalty.
However, nontariff barriers are widely practiced in the twenty-first century. The Doha round of negotiations began in 2001 and lasted for twelve years, but left crucial topics unresolved. Developing countries wanted exceptions in three major areas: agriculture, environment, and intellectual property rights. According to their argument, protectionism in agriculture may not be conducive to trade, but it is poverty reducing and is justified since the European Union (EU) alone spends billions of euros each year on subsidies. In addition, farmers from the developing world must adhere to strict labor and quality standards to be able to sell their goods in the United States or the EU markets. Stringent requirements discriminate against foreign producers who may not have access to similar technological or financial assets, such as uninterrupted electricity or mandatory payment for workers' health insurance, but do produce comparable products. Developed countries also discriminate against agricultural goods, citing cultural heritage reasons. For example, Japan imposes high tariffs on foreign beef to protect its Kobe beef industry.
Environmental issues have also been the subject of intense negotiations. China and India have claimed to have the right to put development first and the environment second, just as developed countries did in the nineteenth and twentieth centuries. China, one of the largest polluters in the world, lifted 400 million people out of abject poverty. However, developed countries wanted to impose strict standards on the production processes of all goods to prevent global climate change. But these standards make goods more expensive, causing developing countries to lose cheap labor advantages.
Intellectual property is another stumbling block in trade negotiations. The European Union, the United States, and South Korea control the bulk of technological innovations in the world; if firms in developing nations would like to replicate technological innovations in, say, medicine or telecommunications, they have to pay money to firms that own the patents. However, developing countries, such as South Africa, resist paying high costs for copyrighted but life-saving medicines when they can produce less expensive generic versions for their own citizens. This issue reemerged as a significant topic of debate in the 2020s amid the COVID-19 pandemic. Some nations advocated for a temporary waiver of the trade laws to allow more companies to produce the vaccine, but developed nations largely blocked these efforts.
Debates over protectionism are likely to intensify as globalization continues. Shrinking investment opportunities may inspire protectionism, but governments must be wary of possible backlash from their trading partners, making everyone worse off in trade.
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