Protectionism: evil; Economic Liberalization: good — an oversimplification
Protectionism is an economic policy to restrain certain trade through measures such as tariffs, quotas and regulations. It is often used to discourage imports of certain goods and to protect domestic markets in various ways.
Protectionism is often regarded as a barrier to free trade. The word seems to conjure up negative images of isolationism and subsidizing industries that could otherwise not compete fairly against others. (This can help indicate why some industries would strongly support protectionism for themselves.)
Deregulation attempts to free economic activity from binding rules from the state. As a basis of free trade amongst nations, the idea is to allow competition to ensure the most efficient practices prevail, which should average out and benefit everyone.
However, deregulation, when applied to wider parts of society can be at the expense of people in that nation or region if that deregulation means relaxation of environmental rules, health and educational services, etc. In the context of corporate globalization it also risks stifling domestically grown industries as multinational corporations are more likely to have the resources to outcompete local ones. (This hints at the powerful lure that the freeing of trade and liberalization of access to resources from regulation has to some proponents.)
Neither seems to answer the notion of fairness, though. Often those nations that promote free trade for all, want protectionism for themselves.
While free trade could be a possible way forward for fair trade, it can only be fair and free if large, developed nations do not continue protectionist practices for some of their industries, while hypocritically requiring (sometimes forcing) developing nations to abandon such measures, to the effect that it tips the trading balance unfairly in their favor.
Some aspects of how protectionism can be used by rich countries include
intervention in things like technology transfer, or distorting market functions
providing vast subsidies to local industries (for example, textiles, agriculture, footwear even intellectual property as this report3 mentions) while asking others to deregulate and become subject to the market’s natural force of supply and demand
one-sided trade agreements
even military expeditions to open and expand resource access4.
For young industries, protecting and nurturing them can be a positive step, and historically this is how practically all industrialized nations have developed.
It is a much more complex situation that this section could describe alone, but many examples and issues are discussed throughout this web site but the concern is that the same developed nations are pressuring developing nations to aggressively abandon any protectionism, before their economies are ready to enter the global markets (even though protectionism has helped the US and Europe to prosper5).
A common misconception in the mainstream (and even dissenting circles) is that one has to be either pro-market or against markets. However, less discussed is how power conflict affects the ideals of a market-based approach or what some of the fundamental problems are in a market or state approaches. Free Trade as an ideology or theory has many valuable and powerful points that have attracted countless supporters. The reality (or what politicians and others might call free trade) can be very different as was suggested in the criticisms of free trade6 section on this site. Hence, especially in the third world, the form of free trade being pushed by rich countries is coming under considerable criticism.
The following quote summarizes quite well that a fundamental issue, such as being pro-poor, transcends a limited debate of being simply pro-market or pro-state:
Adam Smith, often regarded as the founder or father of modern free market capitalism with his famous 1776 book, The Wealth of Nations describes England at that time undergoing a transformation and identifying how free markets in some scenarios were very beneficial to prosperity. He also described how mercantilism, big business as well as big government were often detrimental in many cases. Yet, while Imperial Britain may have claimed to take on free market ideology, the free trade imperialism that it was, was to the detriment of other nations, including America, that suffered under its policies of imperialism abroad, which allowed free trade to flourish somewhat domestically.
Depressions resulting in part from laissez faire capitalism and mercantilism led to many European nations turning to protectionism in order to keep competing between themselves. World Wars erupted when their rivalry got too intense and destructive. The American-funded rebuilt Europe, and even the emerging Asian Tigers, all followed protectionist measures, and once stable moved towards free markets.
It seems difficult to get the right balance between deregulation and protectionism especially between developed and developing nations. Too much deregulation of certain vital services, some of which could be seen as fundamental rights (such as health and education services) could lead to the inability to provide standards for the full range of the population and less protection for domestic industries against often larger or transnational corporations. On the other hand, too much protectionism could stifle innovation and even foreign investment. The reverse could sometimes occur as well, as many other issues come into play. For example, a regime that might be protectionist but not democratic may still ignore the needs of all the people.
Industrialized nations developed by protecting and nurturing their industries
J.W. Smith is quite critical of the current form of free trade and how it is pushed to poor countries:
Even the likes of China, South Korea, and others became more developed using measures to protect their industries and so on, with various forms of controls11.
But even in the 19th century, industries were protected as core countries were industrializing. Furthermore, all Western European core economies had higher industrial protection than Brazil, China and India today when they had similar per capita income levels as noted by Yilmaz Akyüz, former Director of Division on Globalization and Development Strategies at UNCTAD. Akyüz goes at length to look at how tariffs have been used in positive ways for industrialization, but how the rich nations are now kicking away that ladder that helped them progress, and making poor countries abandon such practices. He is quoted at length several times below:
If history can be any indicator, developing nations of today could benefit from some aspects of protectionism until they are at the point where they have a good foundation from which to start deregulating certain aspects (not always all) and trade more freely with other nations and regions with a similar foundation, adhering to rules of fairness and some forms of regulation that would ultimately benefit everyone, not just greedy elites!
But, as hinted to further above, economics does not act alone. Military power and politics also come into the mix. Akyüz again:
Hans Rosling, Professor of International Health, and a founder of an organization to improve use and understanding of information, Gapminder, looks at the past 150 years of development contrasting US, UK, China, India and Japan, looking at how life expectancy (an indicator of health) and average income per person changed over the years.
While it doesn’t specifically talk about protectionism and liberalization, it is interesting to note in the 1970s when US and UK liberalized even more, their growth rate slowed (but still grew), while China’s and India’s increased, and then exploded in the 1990s after liberalization. (It may be that after a certain level of industrialization, growth will begin to level.) What the video doesn’t show (and it wasn’t its purpose) is that the effect of UK and USA’s geopolitical power over the past 150 years is also a factor in growth, so bearing in mind Akyüz’s observations, this video can be of interest:
Power politics continue to play out today, as Akyüz continues:
For poor countries careful and temporary protectionism can help nurture industries
In some regards, economic policies could be more destructive than weapons of mass destruction, as Akyüz also notes (p.15) that the application of the non-linear Swiss formula [a way to reduce higher tariffs by greater rates] in current WTO negotiations could take harmonization between developed and developing countries much further than was ever achieved under imperial rule or gunboat diplomacy.
Akyüz describes at length the importance of different stages of development and their needs:
Akyüz notes a number of different stages (p.18):
An early stage of industrialization, exploiting natural resources and typically requiring unskilled labor
This occurs as technologically more advanced activities are undertaken
Increased internal integration
This follows on from the continual diversification, through a dense set of linkages among sectors
When this finally occurs, there is almost a completion of a circle, where there is again a move towards sectoral specialization, but this time at the top end of the technology ladder.
Support and protection for industries varies at different stages (pp.18-19):
During the initial expansion in resource-based and labor-intensive manufactures, the support and protection provided to industry will likely be phased out after a relatively short period of learning and expansion in world markets, since such sectors tend to be technologically less demanding.
As traditional industries mature and become competitive, a new generation of infant industries would need to emerge and establish themselves. Indeed, an effective industrialization strategy should recognize that currently successful industries may, over time, confront difficulties in competing in international markets as domestic wages rise, low-cost competitors emerge, and the limits of learning and productivity growth are reached.
Hence, more dynamic and skill—and technology-intensive industries would need to be promoted simultaneously as resource-based and labor-intensive manufacturing successfully carries the economy forward.
Such an approach underpinned successful modern industrializers such as Korea…. Rather than seeking to maintain competitiveness by keeping down wage costs or protecting traditional industries with high tariffs, they chose to upgrade rapidly as a way of raising productivity, exports and incomes.
Entry into maturer markets against entrenched competitors can be slow and expensive, and an uphill battle if left entirely to free market forces. Support tools such as industrial tariffs, various forms of subsidies, may be required, sometimes for longer periods compared to less demanding, resource-based and labor-intensive manufacturing.
As new and more dynamic industries emerge, the traditional ones are phased out and may even be left entirely to countries at earlier stages of development. This pattern of modern industrialization has been dubbed the flying geese paradigm.
Yet, as Akyüz stresses (p.20) where these processes have been used (e.g. Japan on its way to industrialization), these are not market-driven; there is policy intervention in the form of infant industry support and export promotion in an attempt to even the playing field with more advanced economies.
Overlapping industries on the way to industrialization then seems to be the pattern.
Akyüz then accuses the WTO negotiations of failing to consider these intricacies in tariff discussions, instead going for simplistic and blanket reductions which may harm poorer countries that may require higher tariffs in some situations for certain periods of time. Furthermore,
As an alternative then, Akyüz suggests (p.28) that allowing countries to have a bit more say over their policies within a framework of an average bound tariff as opposed to a line-by-line prescription per industry/product, would have a number of benefits:
Policy flexibility while maintaining multilateral positions;
Encourage countries to view tariffs as a temporary instrument by ensuring infant-industry protection succeeds in establishing competitive industries;
Encourage country trade negotiators to take a long term view rather than focusing on immediate needs of their industries.
Rich countries preaching liberalization to poor countries
As noted on this site’s criticisms of free trade20 section, the elite, even of poorer countries, often pressure poorer countries to liberalize and enter the global market before they are ready. Akyüz also notes this, adding the cost of doing so:
What Akyüz is noting is that from one flawed basis, more conclusions are drawn, and then from that, even more, and so on, leading to a number of conclusions — and worse, policy prescriptions — that have little bearing on reality. It is similar to the game Chinese whispers, or the snow ball effect where one basis leads to another which appears to reinforce itself. When it is too big, the original is often forgotten and less likely to be questioned.
Adjustment policies are then introduced to get poor countries to liberalize. As seen on this site’s section on Structural Adjustment22, these policies have been devastating, leading to further poverty for many millions. Such costs are often minimized as Akyüz notes:
Given the enormous cost in lives and poverty of adjustment costs imposed on most of the Third World24, and given that the WTO implies that the trade benefits outweigh these costs, then the third world should be the first world by now, as these policies have been prescribed for decades.
Fundamentally, Akyüz notes (p.34), the real question is whether a sound analysis of trade liberalization can be undertaken in models premised on the neoclassical tradition. The answer seems to be no. However, worse than that, given the neoclassical tradition is the mainstream in economics, the implications for the third world are chilling:
In other words, there may be growth, but no progress in the technological sense or development in the more general sense. Also, the above, in effect, describes a similar pattern of inequality as seen in colonial times. One can understand a bit more why some call the current global system a form of neo-colonialism or neo-mercantilist/monopoly capitalism.
Rich countries practicing protectionism at home when it suits
At the beginning of March, 2002, U.S. President George Bush announced tariffs on imported steel from the European Union. He said We’re a free-trading nation, and in order to remain a free-trading nation, we must enforce law. And that’s exactly what I did. I decided that imports were severely affecting … an important industry. This is quite remarkable a series of sentences, because on the one hand he is supporting free trade but on the other hand, he wishes to protect his industries (which can be an understandable concern), which goes against the notions of free trade! In Europe, this of course has raised a lot of concern, especially when the U.S. has been most vocal in the international arena about getting other countries to open up their markets and embrace free trade.
Bush said the US steel industry which has been hit by rising bankruptcies would be protected a little bit against cheap imports. But the EU, according to the British paper, The Guardian, says26 that the problems facing the US steel industry come not from imports, which have been declining, but from its failure to make itself competitive during the 1990s.
This highlights important concerns not only about the impacts of protectionism, but also the impacts of free trade, as both in their most literal forms can affect different segments of society in various ways. If other nations27 decided to impose such tariffs on U.S. or other imports, then there would be even more trade wars. On the one hand, there is an important need to protect developing industries, and create stable internal market economies, while on the other hand, protecting inefficient industries in the heat of competition can have detrimental international ramifications.
The U.S. Farm Bill that followed, likewise has also been a protectionist policy. The developing world has often criticized the double standards of rich regions such as Europe and the United States of demanding (and even forcing) free market ideology and liberalization of the economies of poor countries, but protecting their own industries. One major area of concern has been agriculture which impacts the developing world considerably. In fact while the E.U. rightly pointed out that the U.S. was being protectionist, the E.U. itself has long been highly protectionist itself. Oxfam captures some of this:
New York Times columnist and professor, Paul Krugman, a free market supporter, and often a harsh critic of anti-corporate globalization protest movements, has been quite critical of U.S. policies, which he describes quite bluntly as being protectionist:
Chief researcher of the international development organization Oxfam, Kevin Watkins, has been very critical of U.S., European and Japanese trade policies, even charging them with hypocrisy for preaching free trade but practicing mercantilism:
Watkins lists a number of other areas, besides the AGOA that are beset with problems of hypocrisy, and concludes that nihilism and blind pursuit of US economic and corporate special interest represents an obstacle to the creation of an international trading system capable of extending the benefits of globalization to the world’s poor.
Rich countries using protectionism as trade bargaining chip
The albeit flawed 2005 G8 Summit31, the accompanying Make Poverty History Campaign and the Live 8 concerts raised a little bit more awareness about the unfairness in First world subsidies and tariff protection for certain industries which end up harming poorer nations.
However, there seems to be a risk that up-coming WTO discussions will see tariffs and subsidies being used as a bargaining chip: an offer by rich countries to possibly remove some of theirs in return for poor countries to agree to perhaps a similar level of reduction. While that might sound fair and equal, it is the wrong type of equality because, as Akyuz has detailed (and quotes at length above), different countries at different stages of development and for different industries will require different levels of tariffs and other forms of protection/nurturing. Media spin that typically accompanies such trade discussions may not make this important clarification, which will be important noting.
Akyuz notes this concern as well, also observing that rich countries use other techniques such as claims of dumping and meeting certain high standards, while designed as a tool to allow protectionism (corporate welfare) to continue:
Can developing countries avoid rich country strangle-hold?
A strategy for developing countries may be in deciding which industries to nurture (temporarily) and which sectors to further liberalize sooner.
As Akyüz mentioned further above, a number of realities can impact the otherwise appealing free trade ideas, including externalities, incomplete markets, imperfect and asymmetric information, monopolies or imperfect competition.
Akyüz also added that even if liberalization was followed in the manner the rich countries asked, it is not guaranteed that it will result in progress for all within a nation. Higher income could result, but social inequalities could remain. The US and UK are arguably the most liberal in their domestic economic policies, and while there are clear advantages in some sectors, social inequalities33 and related problems are generally higher in these economies than most other industrialized nations.
Developing countries may have a case for nurturing some of their industries rather than opening their economies to competition with multi-nationals. However, in some scenarios this could also be inefficient.
For example, mobile phone companies are helping people throughout Africa to connect to each other and even stimulate economic activity. For most African countries it perhaps makes sense to let such businesses in, rather than trying to develop their own, due to lack of resources and technological base. Yet, at the same time, if this is followed, how will African nations break out of that chain? What if African nations could be more economically efficient with this technology?
There is often talk of technology transfer and partnerships between a multinational company and a local business/industry. However, would a multinational want to create real competition for itself and risk shutting itself out of a market, or having to compete with a local business that might be better placed to respond to the local customs and culture?
Political factors will also be prevalent. For example, many nations will see food security as crucial and even if other countries may be more efficient producers of some food items, a nation may decide to grow some of their own and support their farmers. Even if this seems inefficient from an economic perspective, factoring in geopolitics and actions by the rich nations such as food dumping34, manipulative foreign aid and first world farm subsidies35 may make other nations factor in political terms.
The idea of breaking away from dependency, especially from the first world, was prevalent during the wave of anti-colonialism and the breaks for freedom post World War II. At the same time, many economists argue that inter-dependency through trade can also be a good thing; nations trading that which they are not themselves efficient at producing, and when done in a fair and just environment, leads to cooperation.
However, many developing countries are suspicious of first world nations’ intentions, whether it is geopolitics, help with debt, foreign aid, or more.
Could regional free trade, whereby trade is amongst nations of similar levels of development, be an even better option in that context?
These and many other options all need consideration by policy makers in developing countries. However, they need to make those decisions in an accountable manner. Even though many developing countries are democracies, or democratizing, there are many problems such as corruption, inappropriate influence from outside (including from rich countries), lack of resources, and so on. In so many cases, as discussed in this site’s sections on debt36, G837, and foreign aid38, rich nations and institutions end up leading or dictating the manner in which developing countries should develop, leading to less accountable, and often inappropriate, decisions.
Much of the above has been written many years ago. During 2009 and 2010, a global financial crisis39, starting in the US, has hinted at a shift in economic and geopolitical power. Some emerging nations such as China, India and Brazil have gained more voice, and developing countries on the whole have gained more courage to speak up against unfair policies from wealthy nations.
At the same time, reactions to the crisis has led many of these wealthier nations to urge countries not to resort to protectionism even though they themselves are resorting to such measures to try and stimulate their economies or fight off growing political discontent (see previous link for more information).
The sound bytes and summary agreements (between the wealthier countries and richer emerging nations) again ignore whether protectionism is equally bad or good for different countries at different levels of development and whether business as normal is applicable during a crisis of such magnitude. The next few years will be important to see how the effects from the global financial crisis change or maintain the status quo for poorer countries.