<4.3 PROTECTIONISM VS FREE TRADE>

--PEER TASK INTRODUCTION--

To add some context to this debates we will be using the case of 'HK Wine' who are new Hong Kong-based wine vinyard who are appealing to the WTO for a tariff to be placed on imported wine. Part 1: Firstly, open their application letter by clicking HERE and identify which 'arguements for protectionism', they are using in paragraph by paragraph. Then enter your findings into the padlet below for peer review (Min.imum 3). Part 2: Finally, read your peer's answers and score them 'relatively' out of 5 based on the following...

Grade 5: Excellent / Outstanding

Grade 4: Proficient / Strong

Grade 3: Satisfactory / Adequate

Grade 2: Developing / Weak

Grade 1: Unsatisfactory / Poor

--ARGUMENTS 'FOR' PROTECTIONISM--

--QUALIFIED ARGUMENTS--

--INFANT INDUSTRY ARGUMENT--

"Is this a justified argument for protectionism?"

Yes!, an INFANT INDUSTRY is a NEW DOMESTIC INDUSTRY that has NOT HAD TIME TO ESTABLISH ITSELF AND ACHIEVE EFFICIENCIES IN PRODUCTION and therefore CAN'T COMPETE with the already established competitor firms from abroad, which have lower costs due to economies of scale. Therefore, for the infant industry to stand a chance it too must achieve economies of scale and so needs protection from imports until it grows to a size where protection is no longer needed.

"Are there any limitations to its effectiveness?"

Firstly, governments have the difficult task of identifying those specific industries that it will likely have a CA in. Secondly, those supported industries must sincerely attempt to achieve economies of scale and not simply rely on government protection, and finally, in order to uphold the principles of free trade, the government should cease support when the industry has matured and is no longer an infant. (Which is not always the case)

--NATIONAL SECURITY ARGUMENT--

"Is this a justified argument for protectionism?"

Yes, certain industries are essential for NATIONAL DEFENSE (such as AIRCRAFT, WEAPONS, CHEMICALS, etc...), and should be protected so that a country can produce them itself. In times of war or a national emergency, a country should not have to depend on imports for its defence. Moreover, there may be dangers in having ‘unfriendly’ nations specialise in weapons production.

"Are there any limitations to its effectiveness?"

While there is some merit to this argument, a problem is that it can be used by industries that have an indirect use in defence (such as the steel industry) to try to acquire protection against foreign competition.
The national defence argument is a non-economic one, and so decisions should be made on political and military, not economic, grounds. Yet it is sometimes difficult to draw the line between what is essential for national defence and what is not. In the United States, goods like candles, gloves, umbrellas, plastics and others receive protection on the grounds that they are needed for national defence.

--HEALTH/SAFETY/ENVIRONMENTAL--

"Is this a justified argument for protectionism?"
Many countries maintain HEALTH, SAFETY, and ENVIRONMENTAL standards that all imported products must meet before they are allowed to enter. Each country sets its own standards, and governments are justifiably concerned that imported goods may fall short of these.
"Are there any limitations to its effectiveness?"
However, there is a concern that these standards may sometimes be used as a form of ‘HIDDEN PROTECTIONISM’ to keep certain goods out if they are competing with domestically produced goods (see 'ADMIN BARRIERS TO TRADE')

--LDC DIVERSIFICATION ARGUMENT--

"Is this a justified argument for protectionism?"

Yes, In the case of some countries, specialisation according to comparative advantage may not be appropriate, and countries may be better off DIVERSIFYING their production and exports. This often APPLIES TO DEVELOPING COUNTRIES that are very highly specialised in producing and exporting one or a few primary commodities (for example, Cuba in sugar, Ecuador in bananas, Ethiopia in coffee). To be able to diversify, countries may have to use trade protection policies to keep out imports of goods they would like to produce themselves. For example, if a country would like to diversify into production of computers, it will have to impose barriers on imports of computers; alternatively, the government could provide subsidies to domestic computer producers.

"Are there any limitations to its effectiveness?"

This argument applies only to developing countries. Moreover, it is based on the expectation that the long-term economic benefits of diversification, involving more economic growth and development, will be greater than the short-term costs in terms of inefficiencies caused by protection. However, there may be a risk involved in that governments may not know which products or industries are the most appropriate to select for protection that will allow for successful diversification. (Similarities with the 'Infant-industry' argument)

--QUESTIONABLE ARGUMENTS--

--ANTI-DUMPING--

"Is this a justified argument for protectionism?"

Yes, DUMPING refers to the practice of SELLING A GOOD in INTERNATIONAL MARKETS AT A PRICE THAT IS BELOW WHAT IT IS SOLD ON THE DOMESTIC MARKET. Dumping is considered to be an UNFAIR TRADE PRACTICE and is ILLEGAL according to international agreements. Nonetheless, it is a practice that continues to be used. According to the anti-dumping argument in favour of trade protection, IF A COUNTRY SUSPECTS THAT A TRADING PARTNER IS PRACTISING DUMPING, it should HAVE THE RIGHT TO IMPOSE TARIFFS or QUOTAS in order to limit imports of the subsidised, or dumped good.

"Why is it questionable?"

It is not so much whether it is unfair that is questionable; it's about whether the accusation is questionable. Many countries throw out the word without any proof and USE IT AS AN EXCUSE TO OFFER PROTECTION, and the DIFFICULTIES INVOLVED IN PROVING that dumping is perilous and often leads to RETALIATION and further accusations.

--UNFAIR COMPETITION--

"Is this a justified argument for protectionism?"

Yes, UNFAIR COMPETITION refers to practices that countries may use in order to gain a competitive advantage over other countries in order to UNFAIRLY INCREASE THEIR EXPORTS at the expense of other countries. Examples include
- - Administrative barriers or HIDDEN PROTECTION
  - UNDERVALUED CURRENCIES occur when governments 'manipulate' the value of their currency in terms of other currencies so that theirs remains relatively cheap and thus more competitive than it should be. (We will learn more about this in further units.)
- “The single biggest weapon used against us and to destroy our companies is devaluation of currencies, and the greatest ever at that is China. Very smart, they are like grand chess masters. And we are like checkers players. But bad ones.” Donald trump, June 20, 2016

"Why is it questionable?"

Again, similar to dumping, the problem occurs due to lack of credible proof, the use of it as an excuse, and the inevitable disputes and retaliatory action by both sides.

--CORRECT BOP DEFICIT--

A BOP DEFICIT occurs when the OUTFLOW OF MONEY from a country is GREATER THAN the INFLOW, and usually happens when there is an EXCESS OF IMPORTS OVER EXPORTS. If imports are greater than exports, it would seem that A WAY TO CORRECT THE PROBLEM WOULD BE TO IMPOSE BARRIERS TO THE ENTRY OF IMPORTS and therefore the need to make payments abroad.
WHY IS THIS A QUESTIONABLE ARGUEMENT?: DECREASED IMPORT EXPENDITURE, may well be COUNTERED BY FALLING EXPORT REVENUE, as TRADING PARTNERS WILL RETALIATE.

--PROTECT DOMESTIC JOBS--

According to this argument, restrictions on imports are needed to PROTECT DOMESTIC EMPLOYMENT. Import restrictions cause consumers to shift consumption away from imports and towards goods produced domestically. As domestic production increases, unemployment falls, since firms need to hire more labour in order to increase their supply of goods.
WHY IS THIS ARGUMENT QUESTIONABLE? The problem with this argument is that the LOWER UNEMPLOYMENT CREATED IN SOME DOMESTIC INDUSTRIES thanks to the added protection, may well be countered by RISING UNEMPLOYMENT in THE DOMESTIC ECONOMY'S EXPORT INDUSTRIES as those foreign exporting countries harmed by the protectionism may themselves RETALIATE and IMPOSE their own IMPORT RESTIRICTIONS, impacting the domestic industry's performance and employment levels.

--ARGUMENTS 'AGAINST' PROTECTIONISM--

--LOSERS FROM SECTION 4.2--

All the '-' stakeholders above.

--LOWER EXPORT COMPETITIVENESS--

This is often one of the strongest arguments against protectionism. If the DOMESTICALLY PROTECTED GOOD IS USED AS AN INPUT/RAW MATERIAL in the PRODUCTION OF A DOMESTIC EXPORT, then the HIGHER PRICE will RAISE THE COSTS OF PRODUCTION and ultimately RAISE ITS FINAL SELLING PRICE, making them LESS COMPETITIVE.

--TRADE WARS--

As is often the case in real life, when one country imposes any form of trade protectionism, THE PENALISED COUNTRY OFTEN RETALIATES by imposing its own form of barriers resulting in a LOSE-LOSE SITUATION.
A quick guide to the US-China trade war (BBC)

--CORRUPTION--

Like any form of government intervention aimed at reducing consumption of a particular product, BLACK MARKETS are often quick to develop, which inevitably uses up precious resources in the battle to police it.
How tariffs and corruption can ruin a growing economy (WP)
Making tariffs corrupt again (NYT)
Donald Trump’s Capricious Tariffs Open the Door to Corruption

--UNIT TASK PART 1--

--HK WINE (香港葡萄酒公司) ACTIVITY--

"Read the letter sent by the Hong Kong wine company to the WTO requesting protection in the form of a tariff. As you read Locate/highlight the type of arguments used, and explain its justification in a bit more detail. For example, the first paragraph uses the 'Infant Industry Justification,' which you should annotate, and then in your notes write something like this:

'This is a classical economic argument for temporary protection. The company claims it has the long-term potential to be efficient and globally competitive (potential comparative advantage), but it currently cannot compete with established foreign rivals who produce at a lower average cost due to their larger scale of production (economies of scale). A temporary tariff would shield the company while it "grows up," invests, and achieves the necessary scale to compete without protection.'

--UNIT TASK PART 2--

Despite HK WINE's valiant attempt to get a tariff, the WTO 'politely' refused. Now write this reply letter in which you address each of HK WINE's justifications in turn, explaining why they were refused.

EXAMPLE:

'The WTO cannot accept the infant industry justification in this case. Hong Kong lacks a fundamental comparative advantage in wine production due to its unsuitable climate for viticulture and its extremely high-cost environment for land and labor. Granting protection would not lead to future competitiveness; it would instead misallocate scarce resources away from sectors where Hong Kong genuinely excels, such as finance and services. This represents a significant opportunity cost for your economy, effectively subsidizing inefficiency.'

Page updated

Google Sites

Report abuse