Background
During Wuhan talks PM Modi and Xi Jinping underscored the significance of countering the headwinds of growing protectionism.
Protectionism
- 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 claim 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 universal 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 positive effect on economic growth.
- However, 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.
Protectionist policies
A variety of policies have been used to achieve protectionist goals. These include:
- Protection of technologies, patents, technical and scientific knowledge.
- Prevent foreign investors from taking control of domestic firms.
- Tariffs:
- Typically, tariffs (or taxes) are imposed on imported goods.
- Tariff rates usually vary according to the type of goods imported.
- Import tariffs will increase the cost to importers, and increase the price of imported goods in the local markets, thus lowering the quantity of goods imported, to favour local producers.
- Tariffs may also be imposed on exports, and in an economy with floating exchange rates, export tariffs have similar effects as import tariffs.
- However, since export tariffs are often perceived as “hurting” local industries, while import tariffs are perceived as “helping” local industries, export tariffs are seldom implemented.
- Anti-dumping legislation:
- “Dumping” is the practice of firms selling to export markets at lower prices than are charged in domestic markets.
- Supporters of anti-dumping laws argue that they prevent import of cheaper foreign goods that would cause local firms to close down.
- However, in practice, anti-dumping laws are usually used to impose trade tariffs on foreign exporters.
- Import quotas:
- To reduce the quantity and therefore increase the market price of imported goods.
- The economic effects of an import quota is similar to that of a tariff, except that the tax revenue gain from a tariff will instead be distributed to those who receive import licenses.
- Economists often suggest that import licenses be auctioned to the highest bidder, or that import quotas be replaced by an equivalent tariff.
- Direct subsidies:
- Government subsidies (in the form of lump-sum payments or cheap loans) are sometimes given to local firms that cannot compete well against imports.
- These subsidies are purported to “protect” local jobs, and to help local firms adjust to the world market.
- Export subsidies:
- Export subsidies are often used by governments to increase exports.
- Export subsidies have the opposite effect of export tariffs because exporters get payment, which is a percentage or proportion of the value of exported.
- Export subsidies increase the amount of trade, and in a country with floating exchange rates, have effects similar to import subsidies.
- Exchange rate control
- A government may intervene in the foreign exchange market to lower the value of its currency by selling its currency in the foreign exchange market.
- Doing so will raise the cost of imports and lower the cost of exports, leading to an improvement in its trade balance. However, such a policy is only effective in the short run, as it will lead to higher inflation in the country in the long run, which will in turn raise the real cost of exports, and reduce the relative price of imports
- International patent systems:
- There is an argument for viewing national patent systems as a cloak for protectionist trade policies at a national level.
- Two strands of this argument exist: one when patents held by one country form part of a system of exploitable relative advantage in trade negotiations against another, and a second where adhering to a worldwide system of patents confers “good citizenship” status despite ‘de facto protectionism’. Peter Drahos explains that “States realized that patent systems could be used to cloak protectionist strategies.
- There were also reputational advantages for states to be seen to be sticking to intellectual property systems. One could attend the various revisions of the Paris and Berne conventions, participate in the cosmopolitan moral dialogue about the need to protect the fruits of authorial labour and inventive genius…knowing all the while that one’s domestic intellectual property system was a handy protectionist weapon.
- Political campaigns advocating domestic consumption (e.g. the “Buy American” campaign in the United States, which could be seen as an extra-legal promotion of protectionism.)
- Preferential governmental spending, such as the Buy American Act, federal legislation which called upon the United States government to prefer US-made products in its purchases.
Impact
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
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Living standard
- A 2016 study found that “that trade typically favours the poor”, as they spend a greater share of their earnings on goods, and 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 policies will rarely be the best response to the problems.
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Growth
- 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.
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Developing world
- 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 labour 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”.
Current world trends
- 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.
- 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, detering beggar-thy-neighbour acts, and preserving the contribution that exports could play in the future recovery of the world economy
- Since then however, then-President-elect Donald Trump announced in November 2016 that he would abandon the TPP (Trans-Pacific Partnership) deal, placing the protectionist policies reflected in Trumponomics very much on the table, despite the wishes of all the other G20 nations
SOURCE: http://www.thehindu.com/todays-paper/we-are-engines-of-global-growth-xi/article23704314.ece