Why do governments implement protectionist measures?
Introduction
Different countries across the globe have different policies and laws that allow; that guide them in their business operations to avoid clash with the same laws. Protectionist is one of the measures that various governments have used to ensure that external influences do not hamper their internal mechanisms. Protectionism refers to economic policy aimed at restraining trade between states through various methods such as restriction of quotas, levying of tariffs of imported goods and other government regulations aimed at ensuring that there is fair competition between the products produced locally and the imports. Therefore, this paper delineates on the whole concept of protectionism and specifically on reasons why various governments adopt to this mechanism.
Formulation of protectionist policy
These policies are formulated and implemented through a legal process. Different countries have different forms of government and different procedures of formulating these policies. For instance, in country like UK elected politicians make of the key decision, therefore they have direct responsibilities to formulate policies at the national level. This case is different in US where cabinet ministers who are appointed outside the house are given this mandatory (Daly, 2007). Therefore, government plays a significant role in the economy of a country. It has the responsibilities to defense foreign affairs, trade, social policies, industrial policy as well as agriculture. These responsibilities are therefore formulated and implemented by the government machinery.
Implementation of these protectionism measures also depends on the type of government. Various governments have different kinds of structures and policies. Some are democratic while others are non democratic. With the advent of 21st century many countries across the world have become democratic and therefore provide freedom to their citizens. Some are democratic but have limited the freedom of free press such as Russia while others are democratic in the context of elections and capitalism but are dominated by one party such as China (Leeson, 2008). Therefore, all these factors play a fundamental role in the government decision to implement perfectionist measures. Government plays various roles in terms of market perspective. Government provided a division of what its responsibilities are and which are not (Kim, 2013). For instance, it is the duty of the government to put in place measures and policies that ensures that there is provision of incentives to citizens, to come up with subsidies, to increase production and at the same time ensure that the market or trade is regulated to avoid overexploitation and unfair competition (Elvestad & Nilssen, 2010).
History of protectionism
Protectionism was associated with mercantilism theory which postulated that it was of benefit to maintain a trade balance and import substitution. During these period, a theorist Adam smith, warned against increase of interest among industry for their own benefit at the cost of the consumer (Krugman, 1997). Many companies always pass the cost to the consumer who pays in terms of increased prices. Therefore, by adapting to protectionism, consumers were geared to be saved from carrying the burden of the industries in terms of increase in prices.
Types of protectionism
There are many types of protectionism that governments can use. One of them is tariffs. Tariffs are always levied at customs duty on imports. They are aimed at benefiting the local or domestic producers that export their products abroad. It provides the government pre-income through the taxes. Most of the countries will therefore, levy high tariffs of imports to ensure that they are not imported. Imported goods therefore increase their prices that make the consumers to pay high amount of money to purchase the products (Zbornik et al 2012). Import quotas are also one of the policies used. This policy provides a limit on the quantity of the products and encourages domestic producers that produce at higher prices. Mostly benefits the private sectors as opposed to the government (Rickford, 2010).
Government can also use subsidies to domestic production. Subsidies are meant to reduce the prices of the products of certain goods. They do not favor any specific firm or industry as they apply to all the states.
Export bounties are yet another way in which governments use to protect themselves from foreign interference. This is subsidy that encourages export for a specific industry however it is not used because of the world trade organizational rules. Retaliatory actions are yet another way where by countries argues against each other on the real and imagined actions that are caused by other countries. Therefore, countries fail to export their products to certain countries based on these real and management actions.
Anti-dumping is also another policy or type of protectionism action. Foreign countries may try to destroy competition through selling of goods below prices in their home countries. This therefore kills the other industries as they are not likely to grow. For instance, if products that are imported from a foreign country are selling lower than those from domestically produced products, then the government may implement these protectionism measures (Marcel et al 2013). Voluntarily export restraints are also used whereby an exporting country avoids more direct action. This was illustrated by Japanese car markers in relation to US. Arguments that they were counter reproductive for US since higher and expensive profitable models were exported from Japan.
Quarantine regulations are also used and are mostly experienced in plants and foods products and aim at preventing diseases from spreading across borders. A good example is the, ban of Salmon in Australia, ban of use of hormones in the production of livestock in US and EU. They claimed that use of hormones was harmful and therefore unsafe. Other policies include import license, technical standards, administrative delays and campaigns aimed at telling people to buy locally manufactured goods. Governments always use this to ensure that they promote locally produced goods by telling the consumers to buy the locally produced goods (Abida, 2013). This practice is common in UK and America during the 1970s and 1980s.
Even though, there are mixed reactions about protectionism among various economists, still many governments use them to achieve their set objectives. For instance, mainstream economist such as Paul Krugman argued that protectionism is harmful as it deters economic freedom. Therefore he agitated for abolition of such measures and instead advocated for free trade. He asserted that protectionism deterred economic growth because it restricted free movement of products from one state to another (Maier, 2008). Nevertheless, there are various reasons as to why government implements these protectionism policies.
Reasons for implementation of the measures
They implement protectionism measures to support their own domestic industries. Most governments are passionate about uplifting their local industries. They want to protect and also trigger innovation locally therefore, they use these policies to block other countries from interfering in their markets (Mankiw, 2008). For instance, tariffs are raised on the imports products from foreign markets with the aim of deterring them from accessing the local markets. This therefore, gives room for the domestic industries both private and government owned to carry out their activities and take advantage of the markets. Therefore, such industries are able to expand and create employment to local people as well as generate revenue from the government.
Free trade is viewed as destroying or has failed to create jobs for the locals. Therefore, many government uses protectionism measures to create jobs for the local people. Many companies are reluctant from employing workers from outside countries for fear of brain drain (Enderwick, 2011). Therefore, they use such measures as protectionist to ensure that local industries create jobs for the locals and help to stimulate growth of the economy as well as help to raise the standards of living.
Some economists and elites tend to view protectionism as a counter productive undertaking. It allows the country to exploit on its capabilities and therefore avoiding any form of interference from the foreign countries (Krugman, 1987). Cheap products imported from developed countries tend to kill the local industries as most of the consumers buy these cheap products. Therefore, this is a problem that undermines the local economy as it deters realization of the home country economy. Therefore, countries implement this measures is to trigger positive growth and development.
Protectionism is also implemented by government to increase their revenue collections. For instance, when the government charged tariffs for imports, it helped the government to get higher income through the taxes. Therefore, protectionism is effective when the country has an intention of attracting additional taxes from the foreign companies that are exporting their products (Bhagwati, 2005). This has been one of the strategies that most developing countries have adopted to raise their revenues. They have increased there rate of tariffs charged on imports which has increased their level of tax. However, this kind of policy has some negatives as it promotes smuggling practices among the countries that practice it.
Protectionism is also implemented by some country as a strategy to protect the infant industries. It is very difficult for infant companies to grow and compete favorable with giant companies with already established reputation. Therefore, this strategy is implemented in countries to ensure that such infant industries can grow and provide opportunities for the local people in the country (DiLorenzo, 201). Some have argued that development country are holding back on the development of other countries through importing their products to such countries developing to ensure that they do not grow and develop their own industries. Therefore, government may be sensitive about such issues and therefore, use protections policy to deter the importation of products or rather bilateral and intention trade between them and other countries. Using political clout and influence from the government has enabled infant industries to grow and remain competitive (Xinhua, 2012). Depending on market forces and free terms of trade has proved not successful to many infant countries. Therefore interventions from the government are paramount in ensuring that these young and infant companies, grows and survives in market full of competitors.
Government implemented protectionist measure as a national defense mechanism. Industries which need support must be supported by the government. This is also supported by Adam smith who claimed that to avoid economic exploitation, it was necessary for the government to defend its own companies. A good example of countries that have adopted these strategies is Japan in its coal and rice industry.
Reciprocity is also another measure that some countries use to level the playing ground is the other country breaks rules, and acts in a negative manner. This strategy is often used in the situation where the countries breaks the rules or the agreements that they have signed (Chand & Tung, 2011). A good, example of a company that applied this strategy was Smoot-Hawley act of 1930 in USA.
Some government implements this protectionist measure because they believe that unrestricted trade is not favorable to domestic policies for social good. Therefore, to protect their citizens from harm, such government formulates laws that restrict what these companies can and cannot do in their pursuit of profits. There are various laws that are formulated that ensure that these citizens are protected from the unscrupulous activities of the foreign countries. Ex ample of these laws includes collective bargaining whereby the two countries bargains on the terms of sale and reaches a consensus. Before doing the business, they also negotiate issues concerning, child labor, competition, environmental protection, intellectual property, equal, opportunity, minimum wage and occupational, safety and health among many others (Ha-Joon, 2003). These are some of the things that compel the government to implement these policies. For instance, if the company or the country that wants to engage in this free trade does not enhance and protect environment, then the government has the right to protect its citizens from the environmental implications or effects that are caused by the company minimum wage is also another reason for protectionists. Some of the companies or countries engaging in international trade may be offering low wages that are not in tandem with the input of the employees (Magee, 1976). Therefore, in such circumstances then the government has no obligation rather to impose these protectionist measures to protect its citizens for such exploitations.
Even though, there are various reasons as to why government uses protectionism, this strategy has some drawbacks that need to be checked by the government. Some of these drawbacks includes resources are likely to be directed in the wrong industry leading to increase in consumer cost (Sicilia & Cruikshank, 2000). Business will also focus on lobbying of government for assistance rather than on competitiveness and this is likely to compromise the business. Additionally, it contributes to economy distortion as some of the countries are not able to receive some of the products affecting their economy .The scale of world wide ,economy also reduces as most of the products are not supplied in areas where they are highly demanded. Therefore, some countries may have high supply of certain goods and lack in some. Therefore, this causes a disturbance in the economy.
Conclusion
In conclusion, it is apparent that, various reasons compel government to implement protectionist measures. The major reasons are to protect their infant industries, promote their industries, and need to create jobs, as a retaliatory action and to ensure that they protect their citizens from harmful products. These are prudent benefits that have seen these countries manage to avoid some of the challenges that come from free trade. However, there are some challenges that arise from such arrangements. Some of this drawback of implementing this protectionist measures is that they distorts the economy and denies other countries from accessing some of their products. Therefore, it prudent that, and amicable solutions be pride. For instance, such organizations such as IMF, World Bank, GATT should play their role of monitoring and overseeing these international agreements to ensure that they are effected and adhered to. IMF oversees fixed system of exchange rate while Word bank helps in promoting development, GATT overseas trade. They can be of value if they execute their overseas roles. In these arrangement to ensure that trade is carried out well without unfair competition.
Reference list
Abida, M 2013, ‘The Regional Integration Agreements: A New Face of Protectionism.’
International Journal of Economics & Finance, Vol. 5 no. 3, pp. 183-195.
Bhagwati, J 2005, “CEE:Protectionism”. Concise Encyclopedia of Economics. Library of Economics and Liberty. Retrieved 2008-09-06
Chand, M, & Tung, R 2011, ‘Global competitiveness, consumer choice and ‘country of origin’ effect: an exploratory East-West study. ‘ Asia Pacific Business Review, Vol. 17 no. 3, pp. 265-280.
Daly, H 2007, ‘Ecological Economics and Sustainable Development, Selected Essays of Herman Daly.’ Northampton MA: Edward Elgar Publishing
DiLorenzo, T 2012, ‘Frederic Bastiat (1801 – 1850): Between the French and Marginalist Revolutions’, accessed at [Ludwig Von Mises Institute 2012-04-13]
Elvestad, C, & Nilssen, F 2010, ‘Restricting imports to the Russian food market: simply an act of protectionism?’ Post-Communist Economies, Vol. 22 no. 3, pp. 267-282.
Enderwick, P 2011, ‘Understanding the rise of global protectionism.’Thunderbird International Business Review, Vol. 53 no. 3, pp. 325-336.
Ha-Joon, C 2003, “Kicking Away the Ladder: The “Real” History of Free Trade” (Washington, DC: Foreign Policy In Focus, December 30, 2003)
Kim, K 2013, ‘Rising Protectionism in Emerging Countries.’ SERI Quarterly, Vol. 6 no. 1, pp. 50-56
Krugman, P 1997, ‘The Accidental Theorist.’ Slate.
Krugman, P 1987, “Is Free Trade Passe?”. The Journal of Economic Perspectives 1 (2): 131– 144. JSTOR 1942985.
Leeson, P 2008, ‘How Important is State Enforcement for Trade? ‘ American Law & Economics Review, Vol. 10 no. 1, pp. 61-89.
Magee, S 1976, ‘International Trade and Distortions In Factor Markets.’ New York: Marcel- Dekker.
Maier, P 2008, ‘A Wave of Protectionism? An analysis of economic and political considerations. ‘World Economics, Vol. 9 no. 2, pp. 69-96.
Mankiw, N 2008, “Smart Taxes: An Open Invitation to Join the Pigou Club” (PDF). Retrieved 2008-09-06.
Marcel, R et al 2013, ‘National policy measures. Right approach to foreign direct investment flows. ‘ Theoretical & Applied Economics, Vol. 20 no. 2, pp. 103-112.
Rickford, J 2010, ‘Protectionism, Capital Freedom, and the Internal Market.’In: Bernitz, Ulf, editor; Ringe, Wolf-Georg, editor; Company Law and Economic Protectionism: New Challenges to European Integration, 2010.; Oxford University Press Language.
Sicilia, D, & Cruikshank, J 2000, The Greenspan Effect, p. 131. New York: McGraw-Hill.
Xinhua, T 2012, “Trade-oriented Economy Boosts Growth, Employment”. CRI English. Retrieved 26 May 2012.
Zbornik, R et al 2012, ‘Specificity of protectionism in the global economic crisis.’ (english) .
No. 6, pp. 77-90.
