EC6201 International Economics

Economic Insight 2
Pek Yang Xuan
Articles

Surge in Protectionism Threatens to Deepen World-Wide Crisis

The Wall Street Journal, 12 Jan 2009
http://online.wsj.com/article/SB123171020324471871.html#printMode

Despite Global Recovery, Protectionism Unabated - Report

The Wall Street Journal, 17 Feb 2010
http://online.wsj.com/article/BT-
CO-20100217-717921.html?mod=WSJ_World_MIDDLEHeadlinesEurope

Introduction

As countries around the world struggle to salvage their lagging economies in the wake of the global
recession, the specter of protectionism hovers above most economies. The articles discuss this trend of
countries putting in place protectionistic measures that, although seemingly beneficial in the short term,
may ultimately be to the detriment of the nations.

Because the articles were written approximately a year apart, it offers valuable insight as to the
development of protectionism from the beginnning of 2009 to the beginning of 2010: the articles mention
that far from removing the protectionistic measures and upholding the principles of free trade as per
agreements made in 2009, most countries remain unwilling to let up on their beggar-thy-neigbor policies
which could not only hurt their own economies, but also damage global trade.

Economic Concepts

1. Free Trade and its Benefits

Defined as the cross-border transaction of goods and services that is free of government interference, free
trade ideally confers economic, political and social benefits to every party who participates in it, raising
standards of living everywhere by allowing the cross-border importation of a great variety of goods that
might otherwise be unavailable to domestic consumers, because the country does not possess the necessary
natural endowments, or because it is simply not economically practical for the country to produce that
good. [For example, although 18% of the US' total land area is arable, less than 1% is used for growing
crops. (Source: CIA World Factbook - United States)]

This is also known as the Theory of Comparative Advantage, where overall world output and welfare
increase as a consequence of countries specialize in the production of goods which they are able to produce
at a lower opportunity cost than other countries.

2. Beggar-thy-Neighbor

An expression that describes policies that provide benefits to one country at the expense of others, beggar-
thy-neighbor is a subset of protectionism. Examples are countries devaluating their own currency, which
would boost demand for its exported goods, and constructing tariff barriers, to discourage the inflow of
imports from foreign countries.

3. Dumping

The term 'dumping' refers to the unfair trade practice of goods being exported by a country at a price
lower than that in the domestic market. This often occurs as in the case of a less developed country (with
lower costs of production) exporting its goods to a more developed country. (Exceptions include the US
"dumping" its chicken feet in the Chinese market.)
 EC6201 International Economics
Economic Insight 2
Pek Yang Xuan

As mentioned in the earlier article, "global economic integration was expected to make dumping cases
obsolete" due to firms setting up shop in many countries. However this is clearly not the case; the article
then mentions how there have been 85 antidumping complaints - half of which were filed against China,
currently the world's largest exporter.

Interesting Observations

1. Why Protectionism: Objections to Free Trade

Free trade, for all the socioeconomic benefits it brings about, has long been a topic on which leaders,
political parties and even entire countries maintain polarized opinions. The greatest objections leveled
against free trade by critics are : (1) Unfair Trading Practices (2) Loss of jobs through foreign imports and
(3) Balance of Trade Deficit.

(1) This includes practices such as dumping, or more generally, whenever countries are able to exploit a
field of production at which they have maximal economic efficiencies (similar to Comparative Advantage).
This is a problem for many developed countries because their costs of production in the primary and
secondary industries are much higher than in developing countries, which are able to export their goods
to their more developed counterparts at a lower price than it is available from local producers. The
governments in the developing countries may even offer subsidies for the goods being sold in the US in
order to gain a larger market share.

(2) While jobs in the sectors of the economy directly competing against their foreign counterparts would
almost certainly suffer, jobs are also created in the export-oriented sectors of the economy. Economically
More Developed Countries (EMDCs) should realise that in terms of raw cost they cannot compete against
. Instead of imposing levies and quotas, they might consider making a sectoral shift away from these
manufacturing industries towards higher-skilled industries where they could capitalize on their higher
levels of technology and more advanced research and development.

(3) Balance of trade is also represented as NX = X - M. It has been mentioned that "We must always
take heed that we buy no more from strangers than we sell them, for so should we impoverish ourselves
and enrich them."1 Many countries (notably, the US with a deficit of 40.2 billion USD) today face the
problem of buying more than they sell; this results in a deficit (where imports outweigh exports) that poses
a threat to the economic stability of any country. Consequences include the depreciation of the importing
countries' currency while the exporting country, if it is enjoying a surplus (where X > M) would experience
appreciating currency.

All these are reasons that contribute to countries' decisions to "close" their "doors" on the global economy
in favor of "protecting" local producers.

2. Methods of Protectionism: Quotas and tariffs

As part of efforts to protect their local economies from influx of potentially cheaper foreign goods,
governments often impose tariffs and levies in order to limit the import of goods that may be threatening
local producers. These taxes on imported goods serve to bring up the market equilibrium price for these
foreign goods and thus lower the quantity demanded for the good - the exact opposite of what subsidies do.
They are also a form of income for the government, which may use the collected revenue to invest in the
local economy.

On the other hand, quotas (a cap on the number of imported goods) generate no income for the
government, and act by simply limiting the absolute number of goods being brought into the country. As

1. Discourse of the Common Weal of this Realm of England, 1549

 EC6201 International Economics
Economic Insight 2
Pek Yang Xuan
a protectionistic measure, quotas are much more effective in limiting the absolute number of goods being
imported into a country, because rich transnational companies may capitalize on their economies of scale
to pay the tariffs and still continue importing goods whereas they cannot exceed the upper bound in any
case.

1 Burning Question

1. Role of G20 in regulating fiscal policies globally

In today's globalized world, global cooperation is more necessary than ever in solving global economic
problems because their impacts reverberate through the world economy (e.g. Financial crisis of 2008 - 09).
Hence I would like to find out about the exact role that G20, and other similar groups, play in solving such
problems. When political leaders reach a conclusion together, how much weight does this conclusion carry?
Considering that these countries together account for 80% of the world economy, their collective clout is
significant indeed. It would also be interesting to observe such an institution's development as the world
economy begins to recover; would the nations' standpoints begin to diverge as, once again, they compete
against one another to recover the quickest?

Conclusion

"There is no such thing as free trade," says a CEO of one of the firms in the Steelworkers Union, which is
campaigning for protectionism. Indeed, I believe that though there are endless benefits to free trade, it is
only an ideal we can aspire to but never achieve because nations will always consider their own self-interest
above global interest; which government would compromise the favor of the electorate for an intangible
"global good"?

However, trade wars (as a result of retaliation) are a very real risk in today's highly connected global
economy. That is why in today's globalized world, global cooperation is more necessary than ever. The only
way to minimize the effects of global protection would be to construct global frameworks which legally bind
nations . This is however unfeasible in the near future.

Sources

Free Trade versus Protectionism

http://www.fff.org/freedom/0191b.asp

CIA World Factbook - United States

https://www.cia.gov/library/publications/the-world-factbook/geos/us.html

G-20: New Clout, New Responsibilities

http://www.worldpress.org/Europe/3430.cfm