Trade protection and trade liberalisation

Trade protection means reducing or preventing imports from foreign countries by means of measures like tariffs, quotas and non-tariff barrier (ntb’s).

• An import tariff is a tax, e.g., 20 per cent (being set as a percentage it is referred to as an ad valorem levy) or £30 (as a set absolute amount it is called a specific levy) which is placed on each item imported.
• A quota is a fixed quantity, such as 20 tons; only that amount in total can be imported.
• Ntb’s, as they are usually called, are often rather subtle and clever ways of reducing imports by the tricky use of laws or regulations. As an example, health regulations may be used to reduce or prevent wheat imports; or peculiar safety regulations, such as the minimum distance between brake pedal and clutch pedal in a motor vehicle, may be invented and used to prevent the import of certain vehicles.

Note that in order to reduce protection we:

• Reduce or eliminate tariffs (so importers pay less or nothing).
• But increase quotas (so a larger physical amount may be imported).

Reasons for protection

• The infant industry argument. This justifies the protection of a new industry during its early years, in order to allow it to establish and grow behind tariff walls and quota barriers. Once it is mature, then the protection can be withdrawn. This is a respectable argument – but a common problem is that the infants rarely admit to being grown up and protection may continue indefinitely! Eventually, the lack of competition becomes a disadvantage rather than a help and the industry usually continues to be permanently inefficient by international standards.

• Protection in order to level the playing field by keeping out cheap imports. This is a poor argument usually

o it goes against the principle of comparative advantage;
o it reduces a nation’s flexibility in resource allocation (it freezes industries as they are);
o it lowers the standard of living (people cannot buy from the cheapest source so must pay more for the good which leaves less money to spend on other things);
o it slows economic growth (if an industry becomes inefficient, it will hardly grow fast); and
o it may also reduce exports (if the industry is poor, it is unlikely to be able to sell to others).

• The danger of war. The case goes that we should protect our agriculture or basic industries in case we are ever cut off by war. There is something in it as a political slogan but it is not a very respectable economic argument – few wars in the future will involve long years of submarine blockades of the UK! The nature of war has changed with the huge technical advances in the military area since World War Two.

• In order to help some special group, e.g., farmers. The sugar beet industry in the European Union is heavily protected which keeps out much cane sugar from poor countries and means that as consumers we all pay more for our sugar than we need.

The movement to reduce protection since late 1970s – why did this occur?

• At that time many developed economies were not in the best of shapes because various long-standing government and other restrictions had led to resource misallocation, a lack of motivation, and slow economic growth, which held down the lower standard of living. There were heavy restrictions in the labour markets, the capital markets and sometimes the goods markets. The growth of bureaucracy, the emergence of the “nanny state” to look after individuals carefully, and many years of left-wing governments had led to this. The motives

of the latter had been good, but there were several alleged and clearly undesirable side-effects e.g., lack of competition, lack of personal incentives and some erosion of the desire to succeed.

• There was a rise in economic theories promoting competition and free markets (“the Chicago School” and Milton Friedman) and these eventually became widely accepted. The data since suggest that they were right: lower tariffs do increase
per capita income as well as trade.

• Political – Prime Minister Margaret Thatcher and President Ronald Reagan came to power and liked the idea of competition and freer markets. They felt that their economies were stifled by over-restrictions and hence uncompetitive. They, or at least their advisors, saw that this encouraged slow growth, resource misallocation and lower standards of living. This was a “timing” factor perhaps and it just
might have happened anyway a little later?

• The collapse of the communist Soviet Union and Eastern Europe in and after
1989. This happened following many decades of central planning of the domestic economy. Such countries cut themselves off from the international community (known as autarky) which reduced competition and they had fallen well behind international standards in many areas. After the collapse of the Berlin Wall in
1989 and the events that followed, most of these countries moved out into the global area and adopted market mechanisms to try to restore and rejuvenate their economies.

• China moved into the global arena after 1978 and slowly but steadily began to adopt many market policies, although without ending communism or totally dismantling central planning. As a result, China is now a weighty player in global markets and its cheap exports keep the level of international inflation lower.

• The other “tiger economies” (Hong Kong, South Korea, Taiwan and Thailand especially) grew rapidly on a policy of free trade and the use of market mechanisms and people around the world noticed this – and began to copy the policies.

• Technology changed. The rapid rise and spread of computers mean that global markets, especially in finance, are feasible - and inevitable?

• Multi-national corporations rose, and they tend to think globally rather than on a national basis.

Why protection hurts the people in the world

Less competition means a tendency for people, companies, and industries to rest on their laurels and take it easy. This encourages a nation not to reduce or eliminate
slow-growth industries whose products are less in demand or are not competitive with other nations.

As a result we may find:

• Resources become increasingly misallocated for what people wish to buy.

• A lower standard of living because consumers cannot buy products at the lowest price.

• Growth becomes slower because companies do not strive hard to improve their products, production methods, or technologies.

• Exports are lower than they might be, as the nation is not as good as some other countries with which we cannot compete. This limit on exports hits third world countries in particular. Much of the tariff reduction and quote increase that has occurred so far has been primarily to assist the rich developed nations. Relatively little has been done in areas that would help the poorer countries.

• There is less foreign trade in the world as a whole – so we have less comparative advantage being followed. This means slower world growth, and a lower global standard of living.

• The foreign exchange rate may be poorer, as the country is not exporting as well as it might.