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Under the capacity of current G-8 president, the United Kingdom has made combating protectionism a priority. As warned by the Director-General of the World Trade Organization, Mr. Pascal Lamy, the protectionist threat may be greater now than at any point since the beginning of the global economic crisis.
Trade protectionism is a defensive measure employed by countries in their trade policies. It is used to protect domestic industries from perceived unfair competition by market penetration of other countries. Historically, although protectionism may have short-term positive effects such as the creation of jobs, in the long-run it has kept countries and their industries from growth and competing efficiently in the marketplace.
Trade protectionism can be enacted in several ways. One of the most popular is through tariffs. By taxing imports, the price of the imported good automatically jumps which make it less competitive in the local marketplace compared to the domestic version of said good.
The Smoot-Hawley Tariff, enacted in 1930 in the United States, is perhaps the most famous example of protectionism through taxation. Originally meant as a tax solely on agricultural imports, the bill eventually grew to encompass imports in all sectors of the economy. However, other countries replied by enacting their own tariffs, thus leading to a tariff war that restricted global trade and arguably lengthened the Great Depression because of lack of growth.
Another form of protectionism is government subsidizing of the local industry through tax credit or direct payment. Instead of raising the price of imported goods, this allows the local producers to lower their prices. This form is more effective than tariffs because it keeps the home country in relative good will with their trading partners as well as cheapens the goods they ship overseas, making it particularly beneficial for countries with a strong export industry.
Placing quotas on imported goods also protects domestic trade because it sets a numerical limit on the volume of goods a foreign country can ship instead of a pricing limitation. The last type of protectionism is currency manipulation. By lowering the value of currency, a country makes its exports cheaper and therefore more competitive in the marketplace; however this approach is dangerous as it can lead to currency wars, which have rippling effects across markets.
Free Trade Agreements are meant to reduce or eliminate tariffs and quotas set between trading partners, but FTAs don’t cancel out protectionism in the form of subsidies or currency wars. As the European Union and United States gear up for trade talks, there is great concern over the recent trend of protectionism in the world’s largest economies. Over the past seven months, the G-20 nations have enacted 109 individual trade restriction measures such as restrictions on import pricing, tariff increases, and protection of electrical machinery, agricultural, and mechanical appliance industries.
India has a preferential market access (PMA) policy which mandates that a certain portion of electronic goods must be bought from local manufacturers. This has caused concern for the Telecommunications Industry Association (TIA) which believes that "These policies, if left unchecked, carry with them the potential for a contagion effect, encouraging India to issue similar policies affecting other sectors--and providing a rationale for other countries to mirror this unfortunate behavior". PMA also may violate India’s World Trade Organization obligations.
Secretary of State John Kerry was prompted by the Senate Finance Committee to seek improved trade conditions with India during his visit in June, particularly regarding India’s protectionism policies in the pharmaceutical industry. The committee stated that “India is using its intellectual property law to build up domestic industries at the expense of U.S. innovators….India’s actions in the pharmaceutical sector could have far-reaching adverse implications for trade in other innovative products”. Days before Mr. Kerry’s trip, several U.S. business leaders launched a “Alliance for Fair Trade with India”.
In a report by the Geneva-based World Trade Organization, it advised that “To overcome protectionist threats and to prevent a self-destructive lapse into economic nationalism, G-20 economies need to refocus their attention on reinforcing the multilateral trading system”. The US and EU trade agreement is projected to create a free-trade zone with a $28 trillion in economic output, the largest of any FTA.
One of the largest threats to a successful Trans-Atlantic Trade and Investment Partnership is France. A country known for their strong sense of national pride, the French are wary of enacting a deal with the west for fear of losing their own cultural identity defined by industries such as film for example, which statistically are slowly being replaced with content from the United States. Today approximately 60% of television, radio programs, and movies in Europe are produced by the United States, despite the hopeful attempts of state subsidies amongst other policies. Other countries of the 27-state union are in France’s corner attempting to increase protectionism policies in the EU. With the size and influence of France in the European Union, the vote for the trade agreement with the United States is in danger of being vetoed in EU Parliament. However, as awareness of protectionism grows and globalization continues, one can hope countries will see beyond their own interests as well as the benefits of global trade and do what is for the greater global good. Fight against protectionism by signing up for Webport Global to connect with global partners and begin trading internationally.
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