Chapter 6 Other Forms of Protectionism

Transcription

1 Chapter 6 Other Forms of Protectionism I. Why Protectionism? Protectionism consists of economic policies that restrict trade between countries to promote "fair competition" between imported and domestically produced goods. For instance, the United States may feel that China is undervaluing its currency to make exports cheaper. To counter this, the US may impose a tariff on certain goods imported from China. Tariffs and quotas are familiar forms of protection, but there are other more hidden forms, as well. Most of the time, protectionism stems from a desire to help improve the profits of domestic manufacturers by artificially making them more competitive with imported goods. In addition, policymakers may be concerned that cheap imports are responsible for a weak job market. They may believe that things can be improved with the creations of more domestic manufacturing jobs by given domestic producers some protection from foreign competition. In other cases, a government may only be seeking to protect a single strategic industry. For example, many countries imposed tariffs on Chinese photovoltaic solar panels after the country began dumping them into the global market following a slowdown in demand and a general situation of over-supply. The goal was to protect domestic solar panel operations and ensure energy security in the future. These are international industry wars being fought out via the use of protectionist policies. Protectionism has a broad definition that encompasses a numerous different economic policies designed to restrict trade and boost domestic manufacturers. From new taxes to import restrictions, these policies are implemented by both emerging markets and developed economies alike, and can have a negative impact on global free trade. Some of the most popular protectionist policies include (excluding tariffs and quotas which we have discussed in a previous lecture): Domestic Subsidies - Subsidizing costs or providing cheap loans to domestic companies can increase their competitiveness against imports. Exchange Manipulation - Intervening in the foreign exchange (forex) market to lower a currency's valuation can raise the cost of imports and lower the cost of exports. Administrative Barriers - Excessive government regulations can place huge burdens on imports, making it difficult to sell them in domestic markets. Procurement Policies -This refers to government purchases to favor domestic producers. There's little question among economists that protectionism is harmful, with costs that far outweigh benefits over the long run. Comparative advantage provides much of the rationale for this argument. Comparative advantage says that two countries can benefit from free trade, even

2 if one is more efficient than the other in the production of all good. Here are reasons why two countries that trade freely with each other and be better off than if they remain in a state of no trade (autarky). Figure 1 The Principle of Comparative Advantage Free Trade Leads to More of Both Production and Consumption An important reason to avoid protectionism is because there are cost reducing benefits of using comparative advantage coupled with free trade. For instance, suppose that China can produce 10 toys and 10 appliances per physical labor hour, while the U.S. can produce only 3 appliances or 6 toys per physical labor hour. China has an absolute advantage in BOTH goods, but the U.S.

3 has a comparative advantage in toys and can trade them with China for appliances. Without trade, the opportunity cost per appliance in the US is 2 toys, but that cost can be reduced to 1 toy (at the lowest limit) by trading with China. Another important concept is the notion of the terms of trade (TOT). You can see this for both countries in Figure 1 above. For country 1, the TOT is the absolute value of the slope of the green line. This slope lies somewhere between the absolute values of the slopes of the two production possibilities frontiers. 1 The TOT is just given by TOT = Exports/Imports and for Country 1 this is the slope of the green line (in absolute value). For country 2 the TOT is the inverse of the TOT for country 1. Thus, a rise in the terms of trade for country 1 means a fall in the terms of trade for country 2. If one benefits more the other benefits less. Which raises anther question to be answered. What determines the equilibrium TOT? Notice that comparative advantage says nothing about demands for good X and good Y in either country. We have somehow left out demand from our analysis. To determine the slope of the green line in Figure 1 we need demands for both products X and Y in both countries 1 and 2. Taking this further will not be particularly valuable to our purposes. However, just pointing to the strengths of the relative demands in the two countries is perhaps somewhat simplistic. In real life, a multitude of factors may shape these terms of trade ratios between countries. Indeed, I do not see any reason why that a large and powerful country may not dictate to some degree these terms of trade in its own favor. But, classical free trade would rule out such sovereign duress from our consideration. Well, these concepts can seem counterintuitive to non-economists, but they are nevertheless extremely important for politicians and perhaps for international investors to understand in considering the ramifications of protectionist policies on a country's long-term economic growth. Since comparative advantage and free trade has been shown to benefit all, any movement away from free and unhindered trade (i.e. protectionism) reduces the chances that all will benefit from trade. This means that there will be winners and losers and politics is likely to decide who these winners and losers are. Global Trade Alert purports to keep track of discriminatory trade protection throughout the world and it maintains numerous indicators of the degree of global protection and among countries separately. In the figure below it is clear that new protectionism has dropped substantially from its high in If their numbers are reliable, there has been a significant drop in new 1 If the TOT goes outside the slopes of the PPFs, then one country or the other will refuse to trade since it would be cheaper to remain in autarky.

4 protectionist measures and trade protection is slowing considerably. Reduction in global protection would require that the green area exceed the red area in the figure. II. Examples of Other Types of Protection Export and transfer of technology restrictions Export taxes are actually still tariff-based and are designed to retain local resources for use within the home country. China has used export duties to limit the export of certain highly valued natural resources and needed manufactures. Some of these export taxes were recently reduced. Export taxes of nitrogen fertilizer, phosphorus fertilizer and natural graphite will be eliminated and that of nitrogen-phosphorus-potassium compound fertilizer and steel billet will be reduced. Steel billets can be seen here. They are used to make steel rebars for reinforced concrete in construction. Exports can also be restricted by law and for national security reasons. Taiwan has long restricted the transfer of technology for certain types of semiconductor products. See here for a more detailed picture of some restrictions on transfers and export of dual use products and high technology goods. Rules of Origin Rules of origin are the criteria needed to determine the national source of a product. Their importance is derived from the fact that duties and restrictions in several cases depend upon the source of imports. These measures are designed to guarantee that countries do not sidestep restrictions on trade by moving goods first to countries that enjoy trading preferences. For example, a business may try to take advantage of NAFTA rules and reduced its

5 taxes and red tape by first exporting to Mexico and then exporting from Mexico to the US. Strict rules of origin require that such trade be honestly stated and confirmed by government authorities. This is done by the issuance of certificates of origin. Sanitary and phytosanitary conditions These are measures intended to protect a country's people, animals, and plants, as well as the general domestic environment, from diseases, pests, or contaminants. It allows countries to set their own standards. But, it also says regulations must be based on science. They should be applied only to the extent necessary to protect human, animal or plant life or health. And they should not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail. WTO member countries are encouraged to use international standards, guidelines and recommendations where they exist. However, members may use measures which result in higher standards if there is scientific justification. They can also set higher standards based on appropriate assessment of risks so long as the approach is consistent, not arbitrary. The agreement still allows countries to use different standards and different methods of inspecting products. Therefore, there is leeway to argue for restraint. Phytosanitary refers to the sanitary condition of plants especially in agriculture. Import licenses These types of measures can be defined as administrative procedures requiring the submission of an application or other documentation (other than those required for customs purposes) to the relevant administrative body as a prior condition for importation of goods. Many times this involves the exclusive right to import being given to a particular organization or business. This is often used to prevent the development of parallel imports, where one business illegally imports the same product outside of the channels of the registered agent of the exporter. Thus, Microsoft may designate its own legal agent in Taiwan to do its importing and no other business can import or sell Microsoft products in Taiwan. In the field of law such extra-agent transactions are called gray market transactions. Export subsidies Export subsidy is a government policy to encourage export of goods and discourage sale of goods on the domestic market through direct payments, low-cost loans, tax relief for exporters, or government-financed international advertising. Foreign exchange market controls and manipulation This is a very big topic where the currency of a country is manipulated so that exports are promoted and imports are restrained. The US government requires that the US Treasury study all trading countries and name those countries that are engaging in currency manipulation. The Treasury has yet to name China as a currency manipulator, since doing so would require actions that China might reciprocate and make the US worse off. We will discuss currency wars later in the course. "Buy national" policies Some economists such as Paul Krugman have seen a benefit for using buy-domestic restrictions for government purchases. His views are mainly relevant to government procurement, which may not be allowed in some cases under the WTO's plurilateral Government Procurement Agreement. The US is a party to this agreement, as is the EU, South Korea, and Chinese Taipei, among numerous other parties. Buy national is sometimes seen as

6 supporting economic nationalism. Krugman feels that Buy National is reasonable for government since unrestricted purchases would benefit foreign countries without them having to pay. Actually, one could argue that with the US running persistent government deficits, foreign lenders would be engaging in a type of import-export bank function where they lend money to the US government and part of this is earned back by their businesses selling to the US government. When government explicitly or implicitly pressures firms and consumers to buy national we have a clear case of protection. Discussion Questions: 1. How might the actions of the US Defense Department constitute a form of protectionism? 2. An exchange rate is just like any other price in the economy and therefore the government has the right to control it for the public good. Evaluate this claim. 3. Why are NTMs particularly difficult to eliminate? 4. We are a small economy and therefore we need to protect ourselves from powerful competition. Evaluate this claim. 5. Many companies protected from foreign competition by NTMs are also protected from domestic competition, as well. Explain. 6. How are domestic companies protected by government procurement rules? 7. How can safety and health regulations be used to protect domestic interests? 8. What is the meaning of absolute advantage? What is comparative advantage?