The economics jargon ‘protectionism’ is at its peak of popularity lately. The difference with text book is that this time it comes from one of the most developed economies-US rather than LDCs.
The rationale of US to practice protectionism:
(1) Protect local jobs. Unemployment in US is at record high now. Latest data released showed that 3.7 millions people in total have been out of job since December 2007, with more than half of those from the recent 3 months. Obama’s proposal of ‘Buy American’ which is still under negotiations while not exactly like the Smoot-Hawley tariff is actually meant to make local consumers substitute away from imported goods to local goods. Rise in the demand for domestic goods & services will generate jobs for locals & put loss-making firms back to business as usual
(2) Improve trade deficit. US & UK have something in common, the current account deficit. With protectionism such as import tariffs, imported goods will become more expensive & as such spending on imports will fall. Assuming that other countries do not retaliate & US is still able to export as usual, the imbalance will shrink
(3) Provide government with some revenue. Again, in the case of import tariffs US government may earn some revenue. It is calculated by tariffs per unit x no. units imported
Why protectionism is not wise?
(1) Companies become complacent. Operating behind the walls of protection may cause loss-making firms to become slack ‘forever’. Firms will not have the incentive to become productively efficient. There could be little to no improvement in quality of goods. Furthermore, the cost of removing this protection is very high & is politically unpopular
(2) Trade retaliation. The worst case scenario. In fact, protectionism is nothing new in US. It has been practiced way back during the period of Great Depression. US Senator Reed Smoot & Representative Willis Halley thought what they did was right that time. So they raised tariffs to protect American from foreign competition. Some duties of more than 60% were slapped onto 3200 imported goods. This led to retaliation by other country. As a result, demand for US exports had fallen by 69% & unemployment increased once more not only in US but all around the world.
(3) Harmful to consumers. Depends very much on the nature of trade restriction. If US erects higher administrative barriers such as requiring imported goods to meet certain safety standards, many goods will not be able enter US. This results in lesser choice for consumers. On the other hand, if US impose import tariffs probably consumers can still exercise their options but at the expense of higher price. Either way, consumers’ welfare will still be lower
(4) Worsen poverty in LDCs. It is a well known fact that these countries mostly specialised in the production of agriculture goods. Under the existing CAP (Common Agriculture Policy), farmers from the poorest continent are often depress as EU impose high import quotas & practice dumping of cheap surpluses. If they were to retaliate & practice ‘Buy Euro’ only, then the windows of opportunities for poor countries to export themselves out of poverty will be shut. The vicious cycle of poverty will take place. The efforts drawn in the UNDP will be meaningless as they will have to start all over again
Anyway, I do hope that the world’s biggest economy shouldn’t start any protective measures. While it is understood that Mr. President is trying to save the local industries & employment, nevertheless the price to pay for it is hefty. Hope Obama had taken his history lesson!