Protectionism And Tariffs Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

Protectionism is a term used to describe action that a national government takes to affect the importation of goods or services in the interest of sheltering domestic producers or service providers from international competition. Traditionally, the most common form of protection has been the tariff, which constitutes a tax levied against imported goods.

Protectionism And Politics

Protectionism represents an economic conundrum; while economically problematic, once in place, protectionism proves remarkably robust. It has been a staple of economic theory since David Ricardo first articulated the theory of comparative advantage: under most conditions, states will maximize their aggregate wealth if they concentrate exclusively on the production of goods that, according to their allocation of assets (traditionally labor, land, and capital), they are most efficient at producing. This specialization is encouraged through the market principles associated with free trade. Under such conditions of maximum competition, producers have the greatest incentive to produce efficiently, and consumers are afforded the widest array of choice at the most reasonable cost.

However, while free trade tends to maximize a state’s aggregate wealth, the elimination of import protection distributes costs and benefits unevenly. The benefits of removing protection are, generally speaking, broad but latent. That is, a large number of consumers—and already-efficient producers—benefit, but these benefits are often marginal to any given individual. By contrast, the costs associated with the removal of import protection tend to be concentrated and manifest. For producers in inefficient sectors of the economy, the reduction or elimination of import protection can be sufficient to shut down industries and cost jobs. Given this asymmetry of costs and benefits, despite the aggregate benefits associated with free trade, democratically elected officials are predicted to gratify the policy demands of an intensely preferential minority over a less preferential majority. Protectionism is also made more robust insofar as advocates of import protection enjoy manifest rhetorical advantages. The economic benefits of free trade are fairly technical and hence engage the imagination of a modest segment of the population. By contrast, the tangible, real-life costs of people losing jobs and factories closing are more readily understood, both intellectually and emotionally.

Reasons For Protectionism

Protectionism is not an inherent bad. In addition to the significant costs borne by individuals who stand to lose profits and jobs, there are other considerations that factor into states’ decisions to protect domestic producers. One is the so-called infant industry argument. One of the problems faced by late industrializing states is that it is difficult for new firms to break into industrial markets. These new firms face larger advertising costs, for example, than do established firms that enjoy more brand recognition. They also face disadvantageous economies of scale, or cost per unit of output. Firms that already enjoy established market shares can generally produce each unit at a lower cost than can firms seeking to enter such markets. As a result, late-industrializing states (e.g., Germany during the third quarter of the nineteenth century) often choose to shelter new “infant” industries from foreign competition until they are mature enough to reasonably compete with more established foreign competitors.

While free trade tends to maximize a state’s aggregate wealth, there are often considerations other than wealth maximization that might serve a country’s interests. National security is an example. Historically, nations have been loath to create disincentives for agricultural production, even when they do not have comparative advantage in such production. The economic advantages of shifting production to more efficient sectors and instead importing foodstuffs can render a nation vulnerable to blockade during times of war. The same logic applies to the production of munitions. Nations that rely on foreign countries to produce their armaments run the risk that the supply of munitions, not to mention their capacity to develop state-of-the-art weaponry, could be shut off during times when they are most needed.

Types Of Protectionism: Tariffs And Nontariff Barriers

Tariffs are the most visible form of import protection. Historically, they were used not only to protect domestic producers, but also, particularly before the widespread use of the income tax, as sources of national revenue. During the Progressive Era in the United States, the so-called scientific tariff was the basis of what was known as fair trade. Under fair trade, tariff levels are set at a level that equalizes production costs between domestic producers of a given commodity and more efficient foreign producers. While the effect is superficially more just, fair trade undercuts the logic of the theory of comparative advantage.

Countries historically have set differential tariff rates, with the best rates on a particular commodity offered to most favored nations (MFN).The MFN principle can operate in one of two ways. Under the conditional MFN principle, state A enters into a trade agreement with state B whereby state B is granted state A’s lowest tariff on a particular commodity. State A then offers this same MFN rate to noncontracting parties in exchange for the same concessions that state B has granted. Under the unconditional MFN principle, however, all states with which state A has entered into a trade agreement are considered most favored nations and are thus granted the MFN rate on all of state A’s commodities. As such, each time state A enters into an agreement with one MFN, the MFN rate extends to all of state A’s trade partners. A concession to one is a concession to all.

The unconditional MFN principle has been the foundation of the World Trade Organization (WTO) since its founding in 1947 as the General Agreement on Tariffs and Trade (GATT). The WTO operates according to rounds—episodic periods of negotiations designed to extend the scope of MFN concessions. The early rounds of the (then) GATT negotiated industrial tariff reductions on a commodity-by-commodity basis. With the Kennedy Round (1964–1967), however, and the introduction of the Swiss formula, tariffs reductions were negotiated across the board. During the Tokyo Round (1973– 1979), member nations negotiated the reduction of less-visible nontariff barriers; these include import licenses, quotas, voluntary export restrictions, and subsidies.

Until the Uruguay Round (1986–1993), the GATT had been concerned only with industrial commodities. The Uruguay Round and Doha Round (2001–) have been dedicated to reducing protectionism in the contentious agricultural and tertiary (i.e., services) sectors, as well as in commodities, particularly textiles, deemed most advantageous to developing nations, most of which failed to enjoy the enormous benefits achieved by industrialized nations through the GATT and WTO.

Bibliography:

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