(The latest version of this page is at Pattern Descriptions. An archived copy of this page is held at https://www.patternsofpower.org/edition02/3542.htm)
Wealthy countries often feel the need for protectionism, usually with the aim of saving a domestic industry. They can apply tariffs to imports, so that a domestic industry has a competitive advantage, but other countries might then retaliate with their own tariffs, as happened in the Great Depression of the 1930s.[1] Alternatively, countries can subsidise their own industries. As described later (3.5.4.5), new tariffs and subsidies should not now be introduced without World Trade Organisation (WTO) agreement – but countries defend their existing arrangements in the negotiations there.
Although particular industries are threatened by globalisation, there are compensating benefits in the lower cost for consumers and the additional business opportunities resulting from the increasing purchasing power in both rich and poor countries (3.5.4.1). It seems politically attractive to support protectionism, but it should not be forgotten that protecting one group of workers results in increased costs for everyone else in the rich country (3.3.7.1).[2] It is a form of redistribution of wealth that reduces the total wealth available and, as such, should be seen as a Political decision with Economic consequences. An honest politician would reveal the costs to the rest of the population at the same time as claiming credit for protecting a particular group.
The EU’s ‘single market’ is a negotiated free-trade area which has enabled its companies to operate on a larger scale, so that their prices are lower and they can compete with American companies. Despite having made an early start, though, there are many practical barriers to trade in the EU[3] and it subsidises agriculture with its Common Agricultural Policy (CAP).[4] The CAP’s aims include a desire to be self-sufficient in food (having experienced shortages during the world wars) and a desire to protect the countryside and its way of life from change. The result, though, is that Europeans pay more than necessary for their food and the CAP is politically contentious.[5]
Another type of argument against free trade comes from those who advocate trying to protect new industries in developing countries until they are strong enough to compete without assistance. This argument reappears in a later section, on helping developing countries (3.5.8.3), but there are counter-arguments: India, for example, only started to make rapid economic progress after Manmohan Singh liberalised its economy in the mid-1990s.[6]
© PatternsofPower.org, 2014
[1] On 29 February 2012, Theodore Phalan, Thomas Rustici and Deema Yazigi wrote an article entitled The Smoot-Hawley Tariff and the Great Depression which was available in April 2014 at http://www.fee.org/the_freeman/detail/the-smoot-hawley-tariff-and-the-great-depression. The article argued that:
“While economic historians generally believe the tariff was misguided and may have aggravated the economic crisis, the consensus appears to relegate it to a minor status relative to other forces. We believe many modern economists are wrong because flawed modeling leads to two systematic understatements of the tariff’s negative effects.”
[2] Leland B. Yeager explained the fallacy of protectionism in a section entitled Saving an Industry, in section 4 of Free Trade: America’s Opportunity, which was available in April 2014 from The Online Library of Liberty at http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php%3Ftitle=2038&layout=html.
[3] On 12 October 2012, The Economist published an article entitled Coming off the rails, which listed several impediments to cross-border trade in the EU – including different railway gauges. The article was available in April 2014 at http://www.economist.com/node/21564851.
[4] In 2012 the EU published an overview of its Common Agricultural Policy, which it described as a “partnership between Europe and Farmers”; it was available in April 2014 at http://ec.europa.eu/agriculture/cap-overview/2012_en.pdf.
[5] On 1 July 2013, the BBC published an article on reform of the CAP entitled Q&A: Reform of EU farm policy, which was available in April 2014 at http://www.bbc.com/news/world-europe-11216061.
[6] John Elliott’s article in Fortune magazine on 19 October 2007, entitled Manufacturing Takes Off, pointed out that protection didn’t work for India:
“What they [Nehru and Indira Gandhi] unwittingly created was an inward-looking, highly protected, and inefficient economy that did little for the poor, negated private-sector entrepreneurship, allowed public-sector inefficiency, and guaranteed infrastructure decay.”
The article focused on what India has been able to achieve since its economy was opened. It was available in April 2014 at http://money.cnn.com/2007/10/18/news/international/India_manufacturing.fortune/.