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Trade Protectionism

Trade protectionism is a term that refers to all government trade policies deliberately enacted to assist specific domestic industries and protect them from competition from foreign producers. Usually, it is achieved by making foreign products more expensive than locally produced ones, imposing trade barriers, or assisting domestic producers by lowering the cost of production. Trade protectionism is an economic concept that encompasses several methods that include the use of tariff taxes that are imposed on imports, quota ceiling intended to limit the supply of foreign products, regulatory obstacles such as the use of standards and specifications that make it difficult for importance to access the domestic market.

Governments use various arguments in support of trade protectionism. For instance, it has been used to preserve jobs and market share in countries where some industries are not ready to face competition. Workers lobby governments to obtain protections that reduce imports, thereby, preserving some jobs by reducing imports. Moreover, both developed and developing countries use trade protectionism to shield infant industries from international competition. Producers in newly established industries in a given country can argue that they lack comparative advantage in the use of innovative technology and production efficiency. They can then pressure the government to impose trade restrictions. Similarly, other governments may, in turn, use protectionism to achieve a level playing field, a measure that will work against foreign businesses whose government exercise protectionism. Other arguments in favor of trade protectionism include correcting trade deficits, achieving a balance of payments, and ensuring national defense especially in Industries involved in weapon manufacturing.

Trade protectionism is, therefore, a defense measure. Although it may prove to be effective in the short run, it has destructive consequences that become evident in the long run. Countries around the world have used various trade restrictions to grow new domestic industries by shielding them from foreign competitors. With time, the domestic companies develop their own comparative advantages. In the short term, protectionist measures may also help to increase domestic job opportunities. Industries protected by subsidies, quota, and tariffs will hire locally. However, this advantage is neutralized when other countries impose protectionist measures in retaliation. On the other hand, trade protectionism has several disadvantages. Eliminating competition weakens domestic industries that no longer see the need to innovate. Eventually, locally produced products become more expensive and of poor quality than those produced by foreign competitors

Greenville and MacAulay (2005) have analyzed the effects of trade protectionism and in particular the impact of tariffs on steel industries in the US and Australia. The results of their research show that trade protection imposed by President Bush in 2002 to limit the importation of processed steel from Australia made coated steel sheet more expensive in the US compared to other parts of the world. The US, a large importing country, imposed tariff quota on Australian steel exports. This, in turn, generated significant external effects. First, exports from Australia to the United States fell significantly in the period that followed as a result of these safeguard measures (Greenville & MacAulay, 2005). Second, in the global steel market, the total surplus fell by $US 32.9 million. The US steel producers benefited the most because their surplus rose by $US62.78 million while consumer surplus decreased by $US104.08 million. In other countries, the opposite occurred, consumers gained through an increase in their surplus while producers lost. Producers in both Japan and Australia diverted exports from the US to other importing regions. As a result of the relatively more elastic demand for steel in these regions, the two countries created more demand in the alternative markets that absorbed all the exports. In the end, the total surplus in both Australia And Japan increased. The findings presented by Greenville and MacAulay (2005) indicate that trade protection through tariffs and quota does not provide the most efficient policy in restructuring a particular industry. Rather, the focus should be on market reforms.Trade Protectionism

 

 

 

Reference

Greenville, J., & MacAulay, T. G. (2005). Tariffs and steel: US safeguard actions. Australian journal of agricultural and resource economics49(3), 321-