The chief protectionist measures, government-levied tariffs, raise the price of imported articles, making them less attractive to consumers than cheaper domestic products. Import quotas, which limit the quantities of goods that can be imported, are another protectionist device.
A tariff is a tax on foreign goods upon importation. Tariff rates 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.
An import quota is a type of protectionist that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time. This leads to a reduction in the quantity imported and therefore increases the market price of imported goods. Quotas, like other trade restrictions, are used to benefit the producers of a good in a domestic economy at the expense of all consumers of the good in that economy.
Countries are sometimes accused of using their various administrative rules (eg. regarding food safety, environmental standards, electrical safety, etc.) as a way to introduce barriers to imports.
An embargo is the prohibition of commerce and trade with a certain country, in order to isolate it and to put its government into a difficult internal situation, given that the effects of the embargo are often able to make its economy suffer from the initiative.
Government subsidies (in the form of lump-sum payments or cheap loans) are sometimes given to local firms that cannot compete well against foreign imports. These subsidies are purported to “protect” local jobs, and to help local firms adjust to the world markets.
Supporters of anti-dumping laws argue that they prevent “dumping” 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.
Externalities, Market Failure and Import Controls
Protectionism can also be used to take account of externalities and dealing with de-merit goods. Goods such as alcohol, tobacco and narcotic drugs have adverse social effects and are termed de-merit goods. Protectionism can safeguard society from the importation of these goods, by imposing high tariff barriers or by banning the importation of the good altogether.
Countries may wish not to over-specialise in the goods in which they possess a comparative advantage. One danger of over-specialisation is that unemployment may rise quickly if an industry moves into structural decline as new international competition emerges at lower costs.
The government may also wish to protect employment in strategic industries, although clearly value judgments are involved in determining what constitutes a strategic sector. The recent trade dispute arising from the decision by the United States to introduce a tariff on steel imports is linked to this objective. The US steel tariff was declared unlawful by the WTO in July 2003 and eventually the United States was pressurized into withdrawing these tariffs in the late autumn of 2003.
Tariffs are not usually a major source of tax revenue for the Government that imposes them. In the UK for example, tariffs are estimated to be worth only £2 billion to the Treasury, equivalent to only around 0.5% of the total tax take. Developing countries tend to be more reliant on tariffs for revenue.
Economic Arguments against Import Controls
Protectionism – hurting customers
Tariffs, non-tariff barriers and other forms of protection serve as a tax on domestic consumers. Moreover, they are very often a regressive form of taxation, hurting the poorest consumers far more than the better off. In the EU for instance, the nature of existing protection means that the heaviest taxes tend to fall on the necessities of life such as food, clothing and footwear.
According to Professor Jagdish Bhagwati, “the fact that trade protection hurts the economy of the country that imposes it is one of the oldest but still most startling insights economics has to offer.”
The folly of protection has been confirmed by a range of studies from around the world. These indicate that that it has brought few benefits but imposed substantial costs. Among the main criticisms of protectionist policies are the following:
- Market distortion: Protection has proved an ineffective and costly means of sustaining employment.
- Higher prices for consumers: Trade barriers in the form of tariffs push up the prices faced by consumers and insulate inefficient sectors from competition. They penalise foreign producers and encourage the inefficient allocation of resources both domestically and globally. In general terms, import controls impose costs on society that would not exist if there was completely free trade in goods and services. It has been estimated for example that the recent tariff and other barriers placed on imports of steel into the US increased the price of every car produced there by an average of $100
- Reduction in market access for producers: Export subsidies, depressing world prices and making them more volatile while depriving efficient farmers of access to the world market. This is a major criticism of the EU common agricultural policy. In 2002 the EU sugar regime lowered the value of Brazil, Thailand and South Africa’s sugar exports by over $700 million – countries where nearly 70 million people survive on less than $2 a day.
- Loss of economic welfare: Tariffs create a deadweight loss of consumer and producer surplus arising from a loss of allocative efficiency. Welfare is reduced through higher prices and restricted consumer choice.
- Regressive effect on the distribution of income: It is often the case that the higher prices that result from tariffs hit those on lower incomes hardest, because the tariffs (e.g. on foodstuffs, tobacco, and clothing) fall on those products that lower income families spend a higher share of their income. Thus import protection may worsen the inequalities in the distribution of income making the allocation of scarce resources less equitable
- Production inefficiencies: Firms that are protected from competition have little incentive to reduce production costs. Governments must consider these disadvantages carefully
- Little protection for employment: One of the justifications for protectionist tariffs and other barriers to trade is that they help to protect the loss of relatively low skilled and low paid jobs in industries that are coming under sever international competition. The evidence suggests that, in the long term, tariffs are a costly and ineffective way of protecting such jobs. According to the DTI study on trade published in 2004, since 1997 UK employment in textiles manufacturing has fallen by 45%, in clothing manufacture by nearly 60%, and in footwear manufacturing by around 50% – and this despite the protection afforded to European Union textile manufacturers. The cost of protecting each job runs into hundreds of thousands of Euros for the EU as a whole. Might that money have been spent more productively in other ways? Often there is a huge opportunity cost involved in imposing import tariffs.
- Trade wars: There is the danger that one country imposing import controls will lead to “retaliatory action” by another leading to a decrease in the volume of world trade. Retaliatory actions increase the costs of importing new technologies
- Negative multiplier effects: If one country imposes trade restrictions on another, the resultant decrease in total trade will have a negative multiplier effect affecting many more countries because exports are an injection of demand into the global circular flow of income. The negative multiplier effects are more pronounced when trade disputes boil over and lead to retaliation.
The diagram below shows the welfare consequences of imposing an import tariff
In a new study of the benefits of global trade and investment published in May 2004, the UK Department of Trade of Industry outlined their opposition to import controls (protectionism)
Higher taxes and higher prices
Protectionism imposes a double burden on tax payers and consumers. In the case of European agriculture, the cost to tax payers is about €50 billion a year, plus around €50 billion a year to consumers via artificially high food prices – together the equivalent of over £800 a year on the annual food budget of an average family of four.
Furthermore huge distortions in international agriculture markets prevent the world’s poorest countries from trading in the products they are best able to produce. Continuing barriers to trade are costing the global economy around $500 billion a year in lost income.
Protectionist policies rarely achieve their aims. They can be costly to administer and they nearly always provide domestic suppliers with a protectionist shield that encourages inefficiencies leading to higher costs.
Protectionism is a ‘second best’ approach to correcting for a country’s balance of payments problem or the fear of rising structural unemployment. And import controls go against the principles of free trade enshrined in the theories of comparative advantage. In this sense, import controls can be seen as examples of government failure arising from intervention in markets.
Economic nationalism is a term that has become used more frequently in recent years. It is used to describe policies which are guided by the idea of protecting a country’s home economy, i.e. protecting domestic consumption, jobs and investment, even if this requires the imposition of tariffs and other restrictions on the movement of labour, goods and capital. Economic nationalism may include such doctrines as protectionism and import substitution.
Examples of economic nationalism include China’s controlled exchange of the yuan, and the United States’ use of tariffs to protect domestic steel production. The term gained a more specific meaning in 2005 and 2006 after several European Union governments intervened to prevent takeovers of domestic firms by foreign companies. In some cases, the national governments also endorsed counter-bids from compatriot companies to create ‘national champions’. Such cases included the proposed takeover of Arcelor (Luxembourg) by Mittal Steel (India). And the French government listing of the food and drinks business Danone (France) as a ‘strategic industry’ to pre-empt a potential takeover bid by PepsiCo (USA).