INTERNATIONAL TRADE
HACETTEPE UNIVERSITY
FACULTY OF ECONOMICS AND ADMINISTRATIVE SCIENCES
BUS 436
INTERNATIONAL BUSINESS MANAGEMENT
Associate Prof. Mahmut ARSLAN
PROTECTIONISM AND GOVERNMENT INTERVENTIONS
Prepared By;
Kadir Kutay YILMAZ-20212368
Aytuğ ÖZTÜRK-20212478
12.3.2007
International Trade 2
Arguments In Favor Of Protectionism 4
NATIONAL SECURITY 4
INFANT-INDUSTRIES 4
Case Study: US-EU Trade Relations 5
DAMPING 5
Case Study: Turkey-U.S Trade Relations 6
STRATEGIC TRADE POLICY 7
UNEMPLOYMENT 7
Case Study: U.S-China Trade Relations 7
BALANCE OF PAYMENTS ADJUSTMENTS 8
Case Study: U.S-Japan Trade Relations 8
Arguments Against Protectionism And Government Interventions 9
CONSUMERS EXPLOTATION 9
RESOURCE WASTING 9
LOOK AFTER RANT 9
UNDERDEVELOPED TECHNOLOGY AND LOSING COMPETITION 9
Case : Turkish Auto Industry 10
INFANT INDUSTRY 10
ANTI-DAMPING 10
Case : United States Steel Industry 11
UNEMPLOYMENT 12
IMPACT AND REACTION 13
WELFARE 13
CONCLUSION 13
Bibliography 14
International Trade
International trade means in short the flow of goods and services from one country to another. Generally we consider import and export under the international trade but it doesnt have to be the case. Internatioanl trade includes several other transactions such as:
• Banking
• Insurance trade
• Tourism
• International transportation
In last ten years( 1995-2005 ) it is considered that overall World Trade has been increasing rapidly both in exports and imports. Overall World Trade in exports has reached to 10.4 trillion dollars in 2005 from 5.3 trillion dollars in 1995 whereas it has reached to 10.8 trillion dollars from 5.3 trillion dollars in imports. We can infer from these numbers that the overall International Trade capacity has nearly doubled itself during the period of 1995-2005. Nowadays, International Trade represents a significant share of GDP in most countries and particularly for traders such as United States, Japan or other developed countries. Here i want to give a pie chart illustration of these countries’ shares in International Trade.
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For countries there are actually 2 alternatives to maintain foreign trade policy. These alternatives are;
❖ Free Trade
❖ Protectionism
However our main subject is protectionism and government interventions, i am going to give some information about free trade as well.
The first body of thought devoted to International Trade is called ‘Mercantilism’ and emerged in the seventeenth and eighteenth century in Europe. Mercantilists advocated the economical development by the enrichment of nations thanks to the external commerce that allows releasing a surplus of the commercial balance. The State has an essential role in the development of national wealth, while adopting protectionist policies, establishing notably tariffs and encouraging exportations. But later on Adam Smith made a criticism on mercantilist view and changed economic thinking about International Trade by his book called ‘Wealth of Nation’. And since then classical economists have been encouraging Free Trade.
With a brief definition; Free Trade is importing and exporting goods and services without any governmental regulations and restrictions. There are several important reasons why nations use Free Trade as a foreign trade policy. And the major reason can be classified as follows:
➢ World Production can be maximized by international specialization and Free Trade
➢ Free Trade is a positive sum game that every nation which participates to International Trade gains from trade
➢ Free Trade provides the effective usage of World Resources
➢ It encourages the competition in internal market
➢ It enables foreign cash flows move from country to another much more easily
But, no matter how strong the Free Trade view is in theory, in application we cant come across with International Trade of goods and services that have no governmental restrictions. Therefore, we can contribute to that every nation’s governments will intervene International Trade with few or many regulations in order to attain various goals which can be counted as economical, social and political. Generally government interventions to foreign trade aim to prevent or restrain free flow of goods and services(by tariffs,quotas), but sometimes their goals can be seemed to encourage some economic activities( such as export or foreign currency gaining transactions).
Protectionism is the economic policy of restraining trade between nations, through methods such as high tariffs on imported goods, restrictive quotas, a variety of restrictive government regulations designed to discourage imports and anti-dumping laws in an attempt to protect domestic industries in a particular nation from foreign take-over or competition.
In protectionism; it is important to note, however, that government pursue political rationality when trying to regulate trade, but in some cases government officials apply trade policies that they believe will have the best chance to benefit the nation and its citizens or their personal political longevity. Government would also like to help struggling companies and industries without penalizing those that are doing well by regulating trade, yet this aim is often impossible especially if other countries retaliate against a government’s protectionist actions.
Arguments In Favor Of Protectionism
There are many arguments in favor of protectionism and i am going to discuss some of them which i consider much more crucial for World Trade.
NATIONAL SECURITY
One of the most common arguments in favor of protectionism is National Security. According to this argument, Free Trade creates dependence on foreing trade by inreasing the import. A country which prefers to import from foreigners instead of producing on its own is said to take big risk. For example; in unordinary circumstances, especially during war importer country’s trade partner may reject to send the goods to the importer and this can cause big problems for that country. Therefore, if possible in all kinds of goods, but if not at least in industries which have strategic importance for the country, government shouldnt be dependent completely on foreigners.
INFANT-INDUSTRIES
The infant-industry argument presumes that the initial output costs for a small-scale industyr in a given country may be so high as to make its output noncompetitive in world markets. Eventual competitiveness is not the reward for endurance but the consequence of the efficiency gains resulting from the economies of large-scale production. Therefore, the host government needs to protect an infant-industry long enough for its fledgling companies to gain economies of scale and for their employees to translate experience into higher productivity. These achievements will enable a company to manufacture efficiently, thereby positioning it to compete internationally. And at this point, the government can then compensate the costs of trade protection through benefits like higher domestic employment, lower social costs and higher tax revenues. Although it is reasonable to expect production costs to decline over time, they may never fall enough to create internationally competitive products. This risk poses two problems for government trying to protect an infant-industry:
▪ First, they must identify those industries that have a high probability of success.
▪ Second, even if policy makers can determine those infant-industries likely to succeed, it does not necessarily follow that companies in those industries should receive government assistance.
To sum up; the infant-industry argument holds that a government should shield an emerging industry from foreign competition by guaranteeing it a large share of the domestic market until it is able to compete on its own. Many developing countries use this argument to justify their protectionist policies.
Case Study: US-EU Trade Relations
Europe Union and the United States trade a growing range of goods and services, and their respective gains highlight the benefits of free trade. But, disaggreements still regularly disturb their relationship. This case is going to explain why EU protected some small banana growers(infant-industries) against other Latin or South American firms.
|US-EU TRADE,2000 |IN U.S $BILLIONS |% CHANGE FROM 1999 |
|U.S Exports of Goods to the EU |159 |+9,1% |
|U.S Imports of Goods from the EU |220 |+13,0% |
|U.S Exports of Services to the EU |93 |+5,0% |
|U.S Imports of Services from the EU |82 |+18,5% |
|Total of U.S Exports of Goods and Services to the EU |255 |+7,6% |
|Total of U.S Imports of Goods and Services from the EU |302 |+14,4% |
One recent conflict among US and EU occurs in the trade of banana. In 1993, the European Union adopted a trade policy that directly favored the small banana growers in various countries in Africa, the Caribbean and Pacific. Consequently, this policy indirectly imposed trade barriers on the cheaper bananas grown in Latin America. In 1993, the EU passed a communitywide banana import policy that gave specific countries privileged access to the European market. Essentially, this system preserved market share for bananas grown within the EU by politically powerful farmers -that is, Greece and the off- continent areas of the Canary Islands(Spain), Martinique and Guadeloupe(France) and Madeira(Portugal). In addition, it awarded preferential market access to ‘traditional bananas’ from African, Caribbean and Pacific countries, many of which were former British or French colonies. The EU claimed that small banana growers in these countries would suffer without such help and the lower-priced banana imports from Latin America and South America, produced largely under the direction of U.S multinational food companies, were penalized with volume restrictions and higher import taxes.
DAMPING
Economically damping is selling a product below its cost. Lets explain this argument with an example in detail. Lets assume that there is a firm which has monopoly power in its country and determine the product’s price by itself. If this firm sells its product in another country from a much more cheaper price then this action is called damping and it creates unfair competition in International Trade. Therefore, governments intervene foreign trade to protect domestic companies against the foreign companies which make damping by using higher tariffs on the foreigner’s products. In general this protection of domestic countries is called Anti-Damping. This argument also helps us explain the fair trade and equalizing the conditions of trade argument. In fact, both of these arguments try to provide a fair trade with equable conditions for both parties. An example of damping will be explained below between Turkey and United States.
Case Study: Turkey-U.S Trade Relations
The USA has always been one of the major trading partners of Turkey. The commercial relations between Turkey and the USA show a steady increase since 1980's. The trade volume between these two countries has been 9.5 billion dollars in 2004, among which 4.8 billion dollars were Turkish exports while 4.7 billion dollars were US exports. However, in the first 7 months of 2005, the trade figures changed in favor of US exports. Accordingly, Turkey has exported 2.7 billion dollars worth of goods to the USA, representing a 0.9% decrease as compared to the previous year; whereas the USA has exported 3.1 billion dollars worth of goods to Turkey, which is 9.6% more than the previous year. The share of Turkish exports in the total US imports is about 0.3%, whereas US exports represent 4.8% in the total Turkish imports.
|TURKISH-U.S. TRADE |
|(Billion U.S.$) |
|YEARS |EXPORTS |IMPORTS |BALANCE |
|1980 |0,127 |0,442 |-0,315 |
|1985 |0,505 |1,150 |-0,645 |
|1990 |0,968 |2,282 |-1,314 |
|1995 |1,514 |3,724 |-2,210 |
|1996 |1,639 |3,516 |-1,877 |
|1997 |2,027 |4,330 |-2,303 |
|1998 |2,233 |4,053 |-1,820 |
|1999 |2,437 |3,081 |-0,644 |
|2000 |3,135 |3,911 |-0,776 |
|2001 |3,120 |3,253 |-0,133 |
|2002 |3,229 |3,050 |0,179 |
|2003 |3,751 |3,495 |0,256 |
|2004 |4,848 |4,745 |0,103 |
|2004/07 |2,755 |2,854 |-0,099 |
|2005/07 |2,730 |3,127 |-0,397 |
Iron and steel, textile and apparel and jewellery are among the major exports items of Turkey to the USA. The USA, on the other hand, exports mainly aircraft parts, nuclear reactors and machinery, cotton, optical and technical instruments to Turkey.
Although Turkey’s exports regime is fully compatible with its commitments on subsidies under both the WTO and the EU, it is observed that the issue pertaining to antidumping and countervailing duties on Turkish products still continues to occupy the agenda of bilateral trade relations with the USA. Currently, the USA has been applying anti-dumping and countervailing duties against Turkish exports like iron and steel products and pasta. The legal arrangements made with respect to the protection of competition and governmental support on exports, provide sufficient ground for the elimination of these duties.
STRATEGIC TRADE POLICY
According to this argument governments provide private protection to specific industries in order to become industries which have just entered the market, produced a product first or hold technological advantage. Some companies get protection by R&D support, subsidies, tax exemption and cheap finance support. And by the help of these companies gain superiority in some sectors earn high profit and also make their country gain prestige.
UNEMPLOYMENT
According to advocates of protectionism, protecting the domestic industries against foreign competition helps in preventing the unemployment in the domestic country. In order to create more jobs, government should restrain import. But there is a big problem with restricting imports to prevent unemployment that other countries normally retaliate with their own restrictions. Two factors can ease the effects of retaliation:
• First, there may be a lower tendency to retaliate against a small country that restrict imports.
• Second, retaliation that reduces employment in a capital-intensive industry but increases it in a labor-intensive industry may indirectly achieve overall employment objectives.
Case Study: U.S-China Trade Relations
The big conflict between China and with other countries(U.S in the center) is the growing export capacity of China in textile and apparel industry all over the World. %10 of the China’s exports are formed by textile and apparel industry. And all over the World, China is becoming the leader exporter in textile industry year by year. I am going to explain how this growing of China can support unemployment argument in detail below.
China’s Market Share In Developing Export Markets
| |1970 |1980 |1990 |1995 |2000 |2002 |2003 |
|Japan |1,4 |3,1 |5,1 |10,7 |14,5 |18,3 |18,8 |
|United States |0 |0,5 |3,2 |6,3 |8,6 |11,1 |11,3 |
|European Union |0,6 |0,7 |2,0 |3,8 |6,2 |7,5 |6,9 |
The Percentages of Shares In China’s Aggregate Import
| |1980 |1990 |1995 |2000 |2002 |2003 |
|Asia |15,0 |41 |47,1 |50,6 |53,1 |54,9 |
|Japan |26,5 |14,2 |21,9 |18,4 |18,1 |17,7 |
|South Korea |- |0,4 |7,8 |10,3 |9,7 |9,5 |
|Taiwan (Autonomous area of China) |- |- |11,2 |11,3 |12,9 |11,6 |
|European Union |15,8 |17 |16,1 |13,7 |13,1 |12 |
|United States |19,6 |12,2 |12,2 |9,9 |9,2 |8,5 |
After the restrictive quotas have been removed since 2005 by U.S against China, China has started controlling the import of textile and apparel industry of America by great numbers (such as %44 in 2005, and %71 in 2006). And this situaiton threatens all the exporters of textile and apparel industry all over the world not just America. If the dominance of China in this sector continues it is expected that nearly 600.000 labor force will be unemployed, and more than 1300 textile and apparel company will be shut down and moreover 2/3 of the America’s textile and apparel market will be captured by China in a short period of time. And it could be worsen year by year unless U.S restrain its imports from China. The removed quotas started to burden on China again for another 3 years until 2008. And by doing that United States managed to solve the unemployment crisis.
BALANCE OF PAYMENTS ADJUSTMENTS
The trade account is a major part of the balance of payments for most countries. If the exports of a country exceed its imports the country is said to have a favorable balance of trade or vice versa. A trade deficit creates problems for countries with low foreign exchange reserves, the funds that help a country to finance the purchase of foreign goods and maintain its export trade. Governments can improve their BOP( balance of payments) by improving their balance of trade. So if BOP difficulties arise and persist, a government may restrict imports or encourage exports to balance its trade account.
Case Study: U.S-Japan Trade Relations
The United States has imported more from Japan than it has exported there since 1970s. And U.S economy started to give current deficit in big numbers. United States realized that this deficit mainly composed of Japanese automobiles imported. And after that, the U.S government has tried to correct the imbalance by regulating the value and number of Japanese vehicles imported into the United States, persuading Japanese automative companiesto locate more produciton within the U.S and negotiating with the Japanese government to ease the entry of U.S made cars into Japan.
Arguments against Protectionism and Government Interventions
CONSUMERS EXPLOTATION
It may be the one of the most important argument against government intervention and protectionism. According to this argument; main reason for the economical activity is satisfying human needs. Therefore; consumer should be placed center of the economic activities and also consumer should be supported by quality of good products which is also cheaper relative to its substitutes.
To do so, governments should keep away from the protectionist activities such as quotes and tariffs. In the long run, both activities decrease the total number of products which means on the other hand decreases the total supply and increase the relative prices of products. All these activities just serve only to local producers and provide them make more profit. In the end, consumers are forced to consume poor quality of goods more expensive than rest of the world.
RESOURCE WASTING
One another result of the government’s intervention and protectionism is wasting of the resources. After restricting and limiting export, to obtain goods and resources consumers need to waste more money, time and labor instead of exporting efficiently. Literally, it means losing efficiency while disturbing resources.
LOOK AFTER RANT
According to this argument, when a sector is protected by government once. These sectors domestic producers will want to keep status quo as long as they can. To do so, they will use their scare resources on this way instead of using for researching and development or for technological development purposes.
UNDERDEVELOPED TECHNOLOGY AND LOSING COMPETITION
With the visible and invisible trade restrictions, domestic economy becomes more and more isolated from rest of the world and this situation helps domestic producer to conquer the market.
Case: Turkish Auto Industry
In this case, I will try to give an example to the facts under the highlight of this argument.
From 60’s to 80’s Turkish auto industry has been trying to protect by high export restrictions and tariffs. Although people had right to pick what would like to drive, auto market had full of uncomfortable and expensive cars -such as Murat 124, Renault 12 or Anadol, than any other auto market because of the protectionism, even if the Turkish society effort or want any other car, they wouldn’t let by the governments activities. So under the highlight of this example we can say that protectionist activities wouldn’t bring happiness to societies, this kind of practices just bring exploitation.
INFANT INDUSTRY
In 1972, Alexander Hamilton presented what has become one of the oldest arguments for protectionism. According to Alexander Hamilton; governments should shield an emerging industry from foreign competition by guaranteeing it a large share of the domestic market until it’s able to compete its own.
This argument also says that production becomes more competitive over time because of increased economies of scale and greater worker efficiency.
At first sight, these arguments look so logic but on the other hand, too many experiences were showed us, reality is not that simple. I would like to explain this opinion with an example; beginning of the 50’s, Turkey and South Korea was looking very similar according to economic indicators, Turkey was little bit ahead anyway. But everything has turned upside down, when we returned beginning of the 2000. South Korea has become one of the top 10 countries of the world with its GDP, brands, exporting performance and exporting volume. And South Korea has left Turkey behind. But at first both countries were using protectionist activities to protect their industries and developing purposes. So what are the main reasons for that? Truth is South Korea has planned every activity with detailed. Setting main goals clearly, determining deadlines, crossing borders out successfully. On the other hand; Turkey has only focused on protection and this resulted with missing the opportunities. So we can say that to be successful, governments need more the just using protectionist activities.
ANTI-DAMPING
Like as I mentioned above, at first sight anti- damping looks like logic too and based on rightful reasons. But the main idea behind this argument shows us this can be used for domestic producers as a kind of protection which is practiced by governments in the favor of producers. In the end, as I mentioned above it creates rant, unwanted environment for the consumers and monopoly. Experiences show us that most of the time without reasons governments take decisions in the favor of domestic producers even though exporters were right.
Case: United States Steel Industry
First of all, I would like to give some numbers about steel industries then I will try to explain why domestic producers appeal this way.
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This chart shows us the percent difference of the steel producing amount between year 2000 and 2001 due to the countries. As you can see, the most affected country from these changes with the 10, 9 percent decreases is the American steel industry.
And also, between 1998 and 2002, 29 American steel companies have applied for bankruptcy.
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Last but not least fact is; at year 1974 number of the workers of the whole steel sector was 521,000, this number has decreased to 163,000 and at first quarter of the 2001, it was 142,000.
Sector was trying to find the way to exit. To do so, they were ready to do everything. Because sector was losing its share on the market, also labor and most of all profit.
Until 2001, domestic producers have complained to International Trade Commission 159 times for acting against anti-damping practices. Most of the, time they got what they want, but these actions were not enough for the sector. Then they started to lobby to make commission taking decisions and actions as they wish.
Therefore; President Bush has decided to take actions. And activate the International Trade Commission to investigate Sector 201. What is sector 201? It’s the 201th sector of the USA trade law. With 201, commission has right to give permission to president to take actions for protecting domestic industries against harmful effects of the exporting, it means let domestic producers do what they want without competition. At first sight, it looks logic and reasonable for developing and making compatible the domestic producers. But on the other hand, it will obviously create monopoly.
In the end, commission announced their decisions and agreed on taking protectionist actions in 16 categories including raising taxes and setting quotas as domestic producers wish and want.
UNEMPLOYMENT
The unemployed can form effective pressure groups for import restrictions. For example, as I mentioned above unemployed U.S. steel workers pressured U.S. lawmakers to apply tariffs and quotas to restrict imports in order to preserve their jobs and pensions.
But there is doubt that protecting activities can create opportunities. I will try to explain with an example, let’s say you trade with one man. After long time, you have decided to cut this relationship off but you also want from him to keep relationship with you. Then you say “I am not going to buy from you anymore, but please you keep going on!” Nobody is fool nowadays, if you cut off importing then you must know that exporting will cut off too.
To conclude, in long run this kind of protectionist activities will not create more employment as you wish.
IMPACT AND REACTION
The biggest mistake while taking protectionist actions is forgetting or not taking care of what will others does. It is so obvious they will take precautions.
As I mentioned before in U.S. steel industry case, while USA was trying to protect its domestic producers, it forgot the reaction. Reaction always comes sooner or later. In this case, to prevent itself from exporters, U.N. took some precautions. And raised taxes and set some extra quotes as a protectionist action. It’s so clear that too many nations will follow this trend. And international steel trade will be interrupted by this trend.
WELFARE
As a result of all we said until now are protectionist activities can influence the society’s welfare negatively. Because protectionism brings monopoly, it means one kind of products with limited amount and poor quality. In addition to this, monopoly sells these products with high prices. Protectionism also affects other producers which do not range in the protection because scare resources channel to the shielded industries.
To conclude, protectionism brings wasting scare resources, creating monopoly, losing competition power and losing welfare.
CONCLUSION
Protectionism does not obtain more power to the economies; to the contrary it condemns undeveloped technology, monopoly, poor quality of products with high prices and low level of welfare. Also it creates domestic producers which running after rant and ready to use their scare resources to form protectionism.
In today’s world, globalization is the key leading to success. Protectionism can isolate the countries from rest of the world.
Protectionism can restrict people’s dreams.
Last but not least we believe and say that Malların geçmesine izin verilmeyen sınırlardan askerler geçer.
Bibliography
Daniels, John D., Radebaugh, Lee H. And Sullivan, Daniel P. International Business Environment and Operations
Alpar, Doç. Dr. Cem Az Gelişmiş Ülkelerin Dış Ticaret Sorunları ve Sanayileşme. Ankara:1982
Türk-Amerikan Ekonomik ve Ticari İlişkilerinin Analizi ve Geleceğe Yönelik Öneriler,
Tüsiad 2002
Kim, Ph.D. Yong-Chan, Social Claims and Government’s Intervention, University of South California:1996
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