Protectionism in Trade

International business must face the reality that this is a world of tariffs, quotas, and non-tariff barriers designed to protect a country’s markets from intrusion by foreign companies. Although the World Trade Organization has been effective in reducing tariffs, countries still resort to measures of protectionism. Nations utilize legal barriers, exchange barriers, and psychological barriers to restrain entry of unwanted goods. Businesses work together to establish private market barriers while the market structure itself may provide formidable barriers to imported goods. The complex distribution system in Japan is a good example of a market structure creating a barrier to trade. However, as effective as it is in keeping some products out of the market, in a legal sense it cannot be viewed as a trade barrier.

Protection Logic and Illogic:

Countless reasons to maintain government restrictions on trade are espoused by protectionists, but essentially all arguments can be classified as follows: (1) protection of an infant industry, (2) protection of the home market, (3) need to keep money at home, (4) encouragement of capital accumulation, (5) maintenance of the standard of living and real wages, (6) conservation of natural resources, (7) industrialization of a low wage nation, (8) maintenance of employment and reduction of unemployment, (9) national defense, (10) increase of business size, and (11) retaliation and bargaining. Economists in general recognize as valid only the arguments for infant industry, national defense, and industrialization of underdeveloped countries. The resource conservation argument becomes increasingly valid in an era of environmental consciousness and worldwide shortages of raw materials and agricultural commodities. A case might be made for temporary protection of markets with excess productive capacity or excess labor when such protection could facilitate an orderly transition. Unfortunately such protection becomes long term and contributes to industrial inefficiency while detracting from a nation’s realistic adjustment to its world situation.

Most protectionists argue the need for tariffs on one of the three premises recognized by economists whether or not they are relevant to their products. Proponents are likely also to call on the maintenance of employment argument because it has substantial political appeal. When arguing for protection, the basic economic advantages of international trade are ignored. The fact that the consumer ultimately bears the cost of tariffs and other protective measures is conveniently overlooked. Sugar and textiles are good examples of protected industries in the United States that could not be justified by any of the three arguments, and US government protections of both industries are eroding quickly.

To give you some idea of the cost to the consumer, consider the results of a recent study of 21 protected industries. The research showed that US consumers pay about $ 70 billion per year in higher prices because of tariffs and other protective restrictions. On average, the cost to consumers for saving one job in these protected industries was $170,000 per year, or six times the average pay (wages and benefits) for manufacturing workers. Those figures represent the average of 21 protected industries, but the cost is much higher in selected industries. In the steel industry, for example, co-countervailing duties and antidumping penalties on foreign suppliers of steel since 1992 have saved the jobs of 1,239 steel workers at a cost of $835,351 each. Unfortunately, protectionism is politically popular, but it rarely leads to renewed growth in a declining industry. And the jobs that are saved at a very high cost, which constitutes a hidden tax that consumers unknowingly pay.

Protectionism of essential items like food products implemented in temporary phases can be beneficial to the home country. But if it is implemented for trade benefits the implementing country may suffer in transacting with other Global countries.