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Protectionism is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations. Proponents argue that protectionist policies shield the producers, businesses, and workers of the import-competing sector in the country from foreign competitors. However, they also reduce trade and adversely affect consumers in general (by raising the cost of imported goods), and harm the producers and workers in export sectors, both in the country implementing protectionist policies and in the countries protected against.
There is a consensus among economists that protectionism has a negative effect on economic growth and economic welfare,while free trade, deregulation, and the reduction of trade barriers has a significantly positive effect on economic growth. Some scholars have implicated protectionism as the cause of some economic crises, most notably the Great Depression. However, although trade liberalization can sometimes result in large and unequally distributed losses and gains, and can, in the short run, cause significant economic dislocation of workers in import-competing sectors, free trade has advantages of lowering costs of goods and services for both producers and consumers.
A variety of policies have been used to achieve protectionist goals. These include:
In the modern trade arena, many other initiatives besides tariffs have been called protectionist. For example, some commentators, such as Jagdish Bhagwati, see developed countries' efforts in imposing their own labor or environmental standards as protectionism. Also, the imposition of restrictive certification procedures on imports is seen in this light.
Further, others point out that free trade agreements often have protectionist provisions such as intellectual property, copyright, and patent restrictions that benefit large corporations. These provisions restrict trade in music, movies, pharmaceuticals, software, and other manufactured items to high-cost producers with quotas from low-cost producers set to zero.
Historically, protectionism was associated with economic theories such as mercantilism (which focused on achieving positive trade balance and accumulating gold), and import substitution.[ citation needed ]
In the 18th century, Adam Smith famously warned against the "interested sophistry" of industry, seeking to gain an advantage at the cost of the consumers.Friedrich List saw Adam Smith's views on free trade as disingenuous, believing that Smith advocated for freer trade so that British industry could lock out underdeveloped foreign competition.
Some have argued that no major country has ever successfully industrialized without some form of economic protection.Economic historian Paul Bairoch wrote that "historically, free trade is the exception and protectionism the rule".
According to economic historians Douglas Irwin and Kevin O'Rourke, "shocks that emanate from brief financial crises tend to be transitory and have a little long-run effect on trade policy, whereas those that play out over longer periods (the early 1890s, early 1930s) may give rise to protectionism that is difficult to reverse. Regional wars also produce transitory shocks that have little impact on long-run trade policy, while global wars give rise to extensive government trade restrictions that can be difficult to reverse."
One paper notes that sudden shifts in comparative advantage for specific countries have led some countries to become protectionist: "The shift in comparative advantage associated with the opening up of New World frontiers, and the subsequent “grain invasion” of Europe, led to higher agricultural tariffs from the late 1870s onwards, which as we have seen reversed the move toward freer trade that had characterized mid-nineteenth-century Europe. In the decades after World War II, Japan's rapid rise led to trade friction with other countries. Japan's recovery was accompanied by a sharp increase in its exports of certain product categories: cotton textiles in the 1950s, steel in the 1960s, automobiles in the 1970s, and electronics in the 1980s. In each case, the rapid expansion in Japan's exports created difficulties for its trading partners and the use of protectionism as a shock absorber."
According to some political theorists, protectionism is advocated mainly by parties that hold far-left, far-right or left-wing economic positions, while economically right-wing political parties generally support free trade.
According to economic historian Douglas Irwin, a common myth about US trade policy is that low tariffs harmed American manufacturers in the early 19th century and then that high tariffs made the United States into a great industrial power in the late 19th century.A review by the Economist of Irwin's 2017 book Clashing over Commerce: A History of US Trade Policy notes:
Political dynamics would lead people to see a link between tariffs and the economic cycle that was not there. A boom would generate enough revenue for tariffs to fall, and when the bust came pressure would build to raise them again. By the time that happened, the economy would be recovering, giving the impression that tariff cuts caused the crash and the reverse generated the recovery. 'Mr. Irwin' also attempts to debunk the idea that protectionism made America a great industrial power, a notion believed by some to offer lessons for developing countries today. As its share of global manufacturing powered from 23% in 1870 to 36% in 1913, the admittedly high tariffs of the time came with a cost, estimated at around 0.5% of GDP in the mid-1870s. In some industries, they might have sped up development by a few years. But American growth during its protectionist period was more to do with its abundant resources and openness to people and ideas.
According to Irwin, tariffs have serve three primary purposes in the United States: "to raise revenue for the government, to restrict imports and protect domestic producers from foreign competition, and to reach reciprocity agreements that reduce trade barriers."From 1790 to 1860, average tariffs increased from 20 percent to 60 percent before declining again to 20 percent. From 1861 to 1933, which Irwin characterizes as the "restriction period", the average tariffs increased to 50 percent and remained at that level for several decades. From 1934 onwards, which Irwin characterizes as the "reciprocity period", the average tariff declined substantially until it leveled off at 5 percent.
Economist Paul Bairoch documented that the United States imposed among the highest rates in the world from around the founding of the country until the WWII period, describing the United States as "the mother country and bastion of modern protectionism" since the end of the 18th century and until the post-World War II period.The industrial takeoff of the United States occurred under protectionist policies 1816-1848 and under moderate protectionism 1846–1861, and continued under strict protectionist policies 1861–1945. Between 1824 and the 1940s, the U.S. imposed much higher average tariff rates on manufactured products than did Britain or any other European country, with the exception for a period of time of Spain and Russia. Indeed Alexander Hamilton, the nation's first Secretary of the Treasury, was of the view, as articulated most famously in his "Report on Manufactures," that developing an industrialized economy was impossible without protectionism because import duties are necessary to shelter domestic "infant industries" until they could achieve economies of scale. In the later 1800s, higher tariffs were introduced on the grounds that they were needed to protect American wages and to protect American farmers.
The Bush administration implemented tariffs on Chinese steel in 2002; according to a 2005 review of existing research on the tariff, all studies found that the tariffs caused more harm than gains to the US economy and employment.The Obama administration implemented tariffs on Chinese tires between 2009 and 2012 as an anti-dumping measure; a 2016 study found that these tariffs had no impact on employment and wages in the US tire industry.
In 2018, EU Trade Commissioner Cecilia Malmström stated that the US was "playing a dangerous game” in applying tariffs on steel and aluminum imports from most countries, and stated that she saw the Trump administration's decision to do so as both “pure protectionist” and “illegal”.
Europe became increasingly protectionist during the eighteenth century.Economic historians Findlay and O'Rourke write that in "the immediate aftermath of the Napoleonic Wars, European trade policies were almost universally protectionist," with the exceptions being smaller countries such as the Netherlands and Denmark.
Europe increasingly liberalized its trade during the 19th century.Countries such as Britain, the Netherlands, Denmark, Portugal and Switzerland, and arguably Sweden and Belgium, had fully moved towards free trade prior to 1860. Economic historians see the repeal of the Corn Laws in 1846 as the decisive shift toward free trade in Britain. A 1990 study by the Harvard economic historian Jeffrey Williamson showed that the Corn Laws (which imposed restrictions and tariffs on imported grain) substantially increased the cost of living for unskilled and skilled British workers, and hampered the British manufacturing sector by reducing the disposable incomes that British workers could have spent on manufactured goods. The shift towards liberalization in Britain occurred in part due to "the influence of economists like David Ricardo", but also due to "the growing power of urban interests".
Findlay and O'Rourke characterize 1860 Cobden Chevalier treaty between France and the United Kingdom as "a decisive shift toward European free trade." 6, and table 5, p. 42)."This treaty was followed by numerous free trade agreements: "France and Belgium signed a treaty in 1861; a Franco-Prussian treaty was signed in 1862; Italy entered the “network of Cobden-Chevalier treaties” in 1863 (Bairoch 1989, 40); Switzerland in 1864; Sweden, Norway, Spain, the Netherlands, and the Hanseatic towns in 1865; and Austria in 1866. By 1877, less than two decades after the Cobden Chevalier treaty and three decades after British Repeal, Germany “had virtually become a free trade country” (Bairoch, 41). Average duties on manufactured products had declined to 9–12% on the Continent, a far cry from the 50% British tariffs, and numerous prohibitions elsewhere, of the immediate post-Waterloo era (Bairoch, table 3, p.
Some European powers did not liberalize during the 19th century, such as the Russian Empire and Austro-Hungarian Empire which remained highly protectionist. The Ottoman Empire also became increasingly protectionist.In the Ottoman Empire's case, however, it previously had liberal free trade policies during the 18th to early 19th centuries, which British prime minister Benjamin Disraeli cited as "an instance of the injury done by unrestrained competition" in the 1846 Corn Laws debate, arguing that it destroyed what had been "some of the finest manufacturers of the world" in 1812.
The countries of Western Europe began to steadily liberalize their economies after World War II and the protectionism of the interwar period.
Since 1971 Canada has protected producers of eggs, milk, cheese, chicken, and turkey with a system of supply management. Though prices for these foods in Canada exceed global prices, the farmers and processors have had the security of a stable market to finance their operations. Doubts about the safety of bovine growth hormone, sometimes used to boost dairy production, led to hearings before the Senate of Canada, resulting in a ban in Canada. Thus supply management of milk products is consumer protection of Canadians.
In Quebec, the Federation of Quebec Maple Syrup Producers manages the supply of maple syrup.
According to one assessment, tariffs were "far higher" in Latin America than the rest of the world in the century prior to the Great Depression.
There is a broad consensus among economists that protectionism has a negative effect on economic growth and economic welfare, while free trade and the reduction of trade barriers has a positive effect on economic growth.
Protectionism is frequently criticized by economists as harming the people it is meant to help. Mainstream economists instead support free trade.The principle of comparative advantage shows that the gains from free trade outweigh any losses as free trade creates more jobs than it destroys because it allows countries to specialize in the production of goods and services in which they have a comparative advantage. Protectionism results in deadweight loss; this loss to overall welfare gives no-one any benefit, unlike in a free market, where there is no such total loss. According to economist Stephen P. Magee, the benefits of free trade outweigh the losses by as much as 100 to 1.
A 2016 study found that "trade typically favors the poor", as they spend a greater share of their earnings on goods, as free trade reduces the costs of goods.Other research found that China's entry to the WTO benefitted US consumers, as the price of Chinese goods were substantially reduced. Harvard economist Dani Rodrik argues that while globalization and free trade does contribute to social problems, "a serious retreat into protectionism would hurt the many groups that benefit from trade and would result in the same kind of social conflicts that globalization itself generates. We have to recognize that erecting trade barriers will help in only a limited set of circumstances and that trade policy will rarely be the best response to the problems [of globalization]".
According to economic historians Findlay and O'Rourke, there is a consensus in the economics literature that protectionist policies in the interwar period "hurt the world economy overall, although there is a debate about whether the effect was large or small."
Economic historian Paul Bairoch argued that economic protection was positively correlated with economic and industrial growth during the 19th century. For example, GNP growth during Europe's "liberal period" in the middle of the century (where tariffs were at their lowest), averaged 1.7% per year, while industrial growth averaged 1.8% per year. However, during the protectionist era of the 1870s and 1890s, GNP growth averaged 2.6% per year, while industrial output grew at 3.8% per year, roughly twice as fast as it had during the liberal era of low tariffs and free trade.One study found that tariffs imposed on manufactured goods increase economic growth in developing countries, and this growth impact remains even after the tariffs are repealed.
According to Dartmouth economist Douglas Irwin, "that there is a correlation between high tariffs and growth in the late nineteenth century cannot be denied. But correlation is not causation... there is no reason for necessarily thinking that import protection was a good policy just because the economic outcome was good: the outcome could have been driven by factors completely unrelated to the tariff, or perhaps could have been even better in the absence of protection."Irwin furthermore writes that "few observers have argued outright that the high tariffs caused such growth."
According to Oxford economic historian Kevin O'Rourke, "It seems clear that protection was important for the growth of US manufacturing in the first half of the 19th century; but this does not necessarily imply that the tariff was beneficial for GDP growth. Protectionists have often pointed to German and American industrialization during this period as evidence in favor of their position, but economic growth is influenced by many factors other than trade policy, and it is important to control for these when assessing the links between tariffs and growth."
A prominent 1999 study by Jeffrey A. Frankel and David H. Romer found, contrary to free trade skeptics' claims, while controlling for relevant factors, that trade does indeed have a positive impact on growth and incomes.
There is broad consensus among economists that free trade helps workers in developing countries, even though they are not subject to the stringent health and labor standards of developed countries. This is because "the growth of manufacturing—and of the myriad other jobs that the new export sector creates—has a ripple effect throughout the economy" that creates competition among producers, lifting wages and living conditions.The Nobel laureates, Milton Friedman and Paul Krugman, have argued for free trade as a model for economic development. Alan Greenspan, former chair of the American Federal Reserve, has criticized protectionist proposals as leading "to an atrophy of our competitive ability. ... If the protectionist route is followed, newer, more efficient industries will have less scope to expand, and overall output and economic welfare will suffer."
Protectionists postulate that new industries may require protection from entrenched foreign competition in order to develop. This was Alexander Hamilton's argument in his "Report on Manufactures",[ citation needed ] and the primary reason why George Washington signed the Tariff Act of 1789.[ citation needed ] Mainstream economists do concede that tariffs can in the short-term help domestic industries to develop, but are contingent on the short-term nature of the protective tariffs and the ability of the government to pick the winners. The problems are that protective tariffs will not be reduced after the infant industry reaches a foothold, and that governments will not pick industries that are likely to succeed. Economists have identified a number of cases across different countries and industries where attempts to shelter infant industries failed.
Economists such as Paul Krugman have speculated that those who support protectionism ostensibly to further the interests of workers in the least developed countries are in fact being disingenuous, seeking only to protect jobs in developed countries.Additionally, workers in the least developed countries only accept jobs if they are the best on offer, as all mutually consensual exchanges must be of benefit to both sides, or else they wouldn't be entered into freely. That they accept low-paying jobs from companies in developed countries shows that their other employment prospects are worse. A letter reprinted in the May 2010 edition of Econ Journal Watch identifies a similar sentiment against protectionism from 16 British economists at the beginning of the 20th century.
Protectionism has also been accused of being one of the major causes of war. Proponents of this theory point to the constant warfare in the 17th and 18th centuries among European countries whose governments were predominantly mercantilist and protectionist, the American Revolution, which came about ostensibly due to British tariffs and taxes, as well as the protective policies preceding both World War I and World War II. According to a slogan of Frédéric Bastiat (1801–1850), "When goods cannot cross borders, armies will."
Since the end of World War II, it has been the stated policy of most First World countries to eliminate protectionism through free trade policies enforced by international treaties and organizations such as the World Trade Organization.[ citation needed ] Certain policies of First World governments have been criticized as protectionist, however, such as the Common Agricultural Policy in the European Union, longstanding agricultural subsidies and proposed "Buy American" provisions in economic recovery packages in the United States.
Heads of the G20 meeting in London on 2 April 2009 pledged "We will not repeat the historic mistakes of protectionism of previous eras". Adherence to this pledge is monitored by the Global Trade Alert,providing up-to-date information and informed commentary to help ensure that the G20 pledge is met by maintaining confidence in the world trading system, deterring beggar-thy-neighbor acts and preserving the contribution that exports could play in the future recovery of the world economy.
Although they were reiterating what they had already committed to, last November in Washington, 17 of these 20 countries were reported by the World Bank as having imposed trade restrictive measures since then. In its report, the World Bank says most of the world's major economies are resorting to protectionist measures as the global economic slowdown begins to bite. Economists who have examined the impact of new trade-restrictive measures using detailed bilaterally monthly trade statistics estimated that new measures taken through late 2009 were distorting global merchandise trade by 0.25% to 0.5% (about $50 billion a year).
Since then, however, President Donald Trump announced in January 2017 the U.S. was abandoning the TPP (Trans-Pacific Partnership) deal, saying, “We’re going to stop the ridiculous trade deals that have taken everybody out of our country and taken companies out of our country, and it’s going to be reversed.”
The balance of trade, commercial balance, or net exports, is the difference between the monetary value of a nation's exports and imports over a certain time period. Sometimes a distinction is made between a balance of trade for goods versus one for services. The balance of trade measures a flow of exports and imports over a given period of time. The notion of the balance of trade does not mean that exports and imports are "in balance" with each other.
Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, tariffs and subsidies on traded goods to achieve that goal. These policies aim to reduce a possible current account deficit or reach a current account surplus. Mercantilism includes measures aimed at accumulating monetary reserves through a positive balance of trade, especially of finished goods. Historically, such policies frequently led to war and also motivated colonial expansion. Mercantilist theory varies in sophistication from one writer to another and has evolved over time.
The Tariff Act of 1930, commonly known as the Smoot–Hawley Tariff or Hawley–Smoot Tariff, was a law that implemented protectionist trade policies in the United States. Sponsored by Senator Reed Smoot and Representative Willis C. Hawley, it was signed by President Herbert Hoover on June 17, 1930. The act raised US tariffs on over 20,000 imported goods.
A tariff is a tax on imports or exports between sovereign states. It is a form of regulation of foreign trade and a policy that taxes foreign products to encourage or safeguard domestic industry. Traditionally, states have used them as a source of income. Now, they are among the most widely used instruments of protectionism, along with import and export quotas.
The Tariff Act of 1890, commonly called the McKinley Tariff, was an act of the United States Congress, framed by Representative William McKinley, that became law on October 1, 1890. The tariff raised the average duty on imports to almost fifty percent, an act designed to protect domestic industries from foreign competition; protectionism, a tactic supported by Republicans, was fiercely debated by politicians and condemned by Democrats.
Free trade is a trade policy that does not restrict imports or exports. It can also be understood as the free market idea applied to international trade. In government, free trade is predominantly advocated by political parties that hold liberal economic positions while economically left-wing and nationalist political parties generally support protectionism, the opposite of free trade.
The law of comparative advantage describes how, under free trade, an agent will produce more of and consume less of a good for which they have a comparative advantage.
Import substitution industrialization (ISI) is a trade and economic policy which advocates replacing foreign imports with domestic production. ISI is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products. The term primarily refers to 20th-century development economics policies, although it has been advocated since the 18th century by economists such as Friedrich List and Alexander Hamilton.
The Canadian–American Reciprocity Treaty of 1854, also known as the Elgin–Marcy Treaty, was a trade treaty between Great Britain and the United States, applying to British possessions in North America including the Province of Canada, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland Colony. It covered raw materials and was in effect from 1854 to 1866. It represented a move toward free trade; it was opposed by protectionist elements in the United States. After the conclusion of the American Civil War in 1865, the protectionist elements were joined by Americans angry at tacit support by Britain for the Confederate States of America during the war, and the alliance was successful in terminating the treaty in 1866. The response in much of British North America was to form Canada (1867), which was expected to both open up many new economic opportunities inside Canada and unify the colonies against growing expansionist sentiments in the United States, associated with the Alaska Purchase.
Trade barriers are government-induced restrictions on international trade.
Company competition, or competitiveness, pertains to the ability and performance of a firm, sub-sector or country to sell and supply goods and services in a given market, in relation to the ability and performance of other firms, sub-sectors or countries in the same market. It involves one company trying to figure out how to take away market share from another company.
International economics is concerned with the effects upon economic activity from international differences in productive resources and consumer preferences and the international institutions that affect them. It seeks to explain the patterns and consequences of transactions and interactions between the inhabitants of different countries, including trade, investment and transaction.
Export-oriented industrialization (EOI) sometimes called export substitution industrialization (ESI), export led industrialization (ELI) or export-led growth is a trade and economic policy aiming to speed up the industrialization process of a country by exporting goods for which the nation has a comparative advantage. Export-led growth implies opening domestic markets to foreign competition in exchange for market access in other countries.
The infant industry argument is an economic rationale for trade protectionism. The core of the argument is that nascent industries often do not have the economies of scale that their older competitors from other countries may have, and thus need to be protected until they can attain similar economies of scale.
New trade theory (NTT) is a collection of economic models in international trade which focuses on the role of increasing returns to scale and network effects, which were developed in the late 1970s and early 1980s.
Tariffs have historically served a key role in the nation's foreign trade policy.Their purpose was to generate revenue for the federal government and to allow for import substitution industrialization by acting as a protective barrier around infant industries.. They also aimed to reduce the trade deficit and the pressure of foreign competition. Tariffs were one of the pillars of the American System that allowed the rapid development and industrialization of the United States. The United States pursued a protectionist policy from the beginning of the 19th century until the middle of the 20th century. Between 1861 and 1933, they had one of the highest average tariff rates on manufactured imports in the world. However American agricultural and industrial were cheaper than rival products and the tariff had an impact primarily on wool products. After 1942 the U.S. promoted worldwide free trade.
In economics, gains from trade are the net benefits to economic agents from being allowed an increase in voluntary trading with each other. In technical terms, they are the increase of consumer surplus plus producer surplus from lower tariffs or otherwise liberalizing trade.
In economics, the Metzler paradox is the theoretical possibility that the imposition of a tariff on imports may reduce the relative internal price of that good. It was proposed by Lloyd Metzler in 1949 upon examination of tariffs within the Heckscher–Ohlin model. The paradox has roughly the same status as immiserizing growth and a transfer that makes the recipient worse off.
An Eco-tariff, also known as an environmental tariff, is a trade barrier erected for the purpose of reducing pollution and improving the environment. These trade barriers may take the form of import or export taxes on products that have a large carbon footprint or are imported from countries with lax environmental regulations.
Protectionism in the United States is protectionist economic policy that erected tariff and other barriers to trade with other nations. This policy was most prevalent in the 19th century. It attempted to restrain imports to protect Northern industries. It was opposed by Southern states that wanted free trade to expand cotton and other agricultural exports. Protectionist measures included tariffs and quotas on imported goods, along with subsidies and other means, to ensure fair competition between imported goods and local goods.
One set of reservations concerns distributional effects of trade. Workers are not seen as benefiting from trade. Strong evidence exists indicating a perception that the benefits of trade flow to businesses and the wealthy, rather than to workers, and to those abroad rather than to those in the United States.
Parties of the left in government in adopt protectionist policies for ideological reasons and because they wish to save worker jobs. Conversely, right-wing parties are predisposed toward free trade policies.
Left-wing parties tend to support more protectionist policies than right-wing parties.
Left-wing governments are considered more likely than others to intervene in the economy and to enact protectionist trade policies.
Yet, certain national interests, regional trading blocks, and left-wing anti-globalization forces still favor protectionist practices, making protectionism a continuing issue for both American political parties.