UPSC MAINS 2019: Protectionist measures by USA

Protectionist measures by USA

 

Topic: Protectionist measures by USA

 

Protectionist measures by USA

Topic in Syllabus: GS Paper 2: International Affairs

Introduction:

The concept of protectionism refers to economic policies that can be implemented by governments in order to limit trade across countries, whose primary goal is to promote fairer competition and help domestic companies by making their goods more competitive than foreign ones. Tariffs and other protectionist measures increase the price of imported products, making them appear relatively more expensive than local ones, and also affect the domestic jobs market. Protectionism has had a major role in the American political environment.

 

Protectionist policies protect the producers, businesses, and workers of the import-competing sector in a country from foreign competitors. However, they adversely affect consumers in general (by raising the cost of imported goods), and harm the producers and workers in export sectors, both in the country implementing protectionist policies, and in the countries protected against.

 

Background of US Protectionism:

  • The new President of the United States, Donald Trump, put forth his protectionist ideas during his electoral campaign. He is firmly convinced that the implementation of these policies will “make America great again”. But despite what people tend to think, Trump is not the original promoter of American protectionism. In fact, as a Credit Suisse report demonstrated, the level of protectionism in the US was already very high before Tump’s appointment.
  • It is in fact possible to identify the Founding Fathers as promoters of protectionism. The aim that moved their thoughts, as does Trump’s, was the protection of local firms from foreign companies.
  • According to economic historian Douglas Irwin, a common myth about U.S. trade policy is that low tariffs harmed American manufacturers in the early 19th century and then that high tariffs made the United States into a great industrial power in the late 19th century.
  • The American economic environment was far different then from today’s situation. The Founding Fathers wanted to protect America and its industry from Britain and its enormous power over its colonial territories. This power allowed British companies to use American raw materials without having to bear any burden of taxation on them and to deny its colonies any chance to build an independent manufacturing business
  • Therefore protectionism was seen as the perfect tool with which achieve justice. The most notable example of American protectionism more recently was the Smoot-Hawley Tariff Act of 1930, with which the US imposed one of the highest tariffs in the history. American duties on imported goods increased by 50%.
  • This act can be taken as an example of the possible disastrous effects that protectionism can have. The purpose of the Smoot-Hawley Tariff Act was initially to safeguard US farmers from external agricultural products.
  • However, the protective feeling spread, reaching other sectors and the aim of economic self-defense reached the entire US industry and all its workers.
  • The first phenomenon was caused by the higher level of American duties that increased foreign companies’ costs and consequently pushed up the price of their products. The latter was due to the retaliation of America’s trade partners, who increased their own tariffs on American goods – the subsequent fall in US exports led to fewer jobs in the USA.
  • Moving on to today’s situation, Trump started his protectionist policies on his first day as US president. He exited the TPP (Trans-Pacific Partnership) and, even though this step was something of a formality as the deal had not yet been ratified, it marked Trump’s detachment from his immediate predecessors.

 

Protectionist policies:

A variety of policies have been used to achieve protectionist goals. These include:

Tariffs:

  • Typically, tariffs (or taxes) are imposed on imported goods. Tariff rates usually vary according to the type of goods imported. Import tariffs will increase the cost to importers, and increase the price of imported goods in the local markets, thus lowering the quantity of goods imported, to favour local producers.
  • Tariffs may also be imposed on exports, and in an economy with floating exchange rates, export tariffs have similar effects as import tariffs.
  • However, since export tariffs are often perceived as “hurting” local industries, while import tariffs are perceived as “helping” local industries, export tariffs are seldom implemented.

Import quotas:

  • To reduce the quantity and therefore increase the market price of imported goods. The economic effects of an import quota is similar to that of a tariff, except that the tax revenue gain from a tariff will instead be distributed to those who receive import licenses.
  • Economists often suggest that import licenses be auctioned to the highest bidder, or that import quotas be replaced by an equivalent tariff.

Administrative barriers:

  • Countries are sometimes accused of using their various administrative rules (e.g. regarding food safety, environmental standards, electrical safety, etc.) as a way to introduce barriers to imports.

Anti-dumping legislation:

  • “Dumping” is the practice of firms selling to export markets at lower prices than are charged in domestic markets. Supporters of anti-dumping laws argue that they prevent import of cheaper foreign goods that would cause local firms to close down
  • . However, in practice, anti-dumping laws are usually used to impose trade tariffs on foreign exporters.

Direct subsidies:

  • Government subsidies (in the form of lump-sum payments or cheap loans) are sometimes given to local firms that cannot compete well against imports.
  • These subsidies are purported to “protect” local jobs, and to help local firms adjust to the world markets.

Export subsidies:

  • Export subsidies are often used by governments to increase exports. Export subsidies have the opposite effect of export tariffs because exporters get payment, which is a percentage or proportion of the value of exported.
  • Export subsidies increase the amount of trade, and in a country with floating exchange rates, have effects similar to import subsidies.

Exchange rate control:

  • A government may intervene in the foreign exchange market to lower the value of its currency by selling its currency in the foreign exchange market.
  • Doing so will raise the cost of imports and lower the cost of exports, leading to an improvement in its trade balance.
  • However, such a policy is only effective in the short run, as it will lead to higher inflation in the country in the long run, which will in turn raise the real cost of exports, and reduce the relative price of imports.

International patent systems:

  • There is an argument for viewing national patent systems as a cloak for protectionist trade policies at a national level.
  • Two strands of this argument exist: one when patents held by one country form part of a system of exploitable relative advantage in trade negotiations against another, and a second where adhering to a worldwide system of patents confers “good citizenship” status despite ‘de facto protectionism.

 

  • Protection of technologies, patents, technical and scientific knowledge
  • Prevent foreign investors from taking control of domestic firms.
  • Political campaigns advocating domestic consumption (e.g. the “Buy American” campaign in the United States, which could be seen as an extra-legal promotion of protectionism.)
  • Preferential governmental spending, such as the Buy American Act, federal legislation which called upon the United States government to prefer US-made products in its purchases.

 

Protectionist measures by USA:

USA taken various protectionist measures in various sectors, those briefly explained below

In Trade:

  • Tapping into economic discontent USA has argued for protectionism and asserted that decades of free-trade policies were responsible for the collapse of the American manufacturing industry.
  • There is a perception among many Americans that globalization has bought more pain than gain for example by bringing cheap consumer goods into the country, costing domestic jobs and depressing wages. Outsourcing of jobs to cheaper markets has also been a concern. Against that backdrop, Trump’s stance on trade is perhaps the clearest of his economic policies.
  • The North American Free Trade Agreement. Nafta lowers trade barriers between the US, Canada and Mexico and was negotiated by George HW Bush and enacted in the 1990s by Bill Clinton. The incoming president wants Nafta to offer a better deal for Americans and has rejected claims by his opponents that the deal has helped the US economy by opening up export markets.
  • The protectionism with regard to Mexico does not stop there. One of USA’s most notorious pledges in the presidential campaign was to build a multibillion-dollar wall along the US southern border and force Mexico to pay it. On the markets on Wednesday fears over the blow to Mthe Mexican economy from Trump’s victory have
  • Other global trade deals are also now very much in doubt, notably the Trans Pacific Partnership (TPP), between 12 countries around the Pacific rim, excluding China, and the agreement being negotiated between the US and Europe, known as the Transatlantic Trade and Investment Partnership (TTIP).

 

Taxes reforms:

  • Here again, Trump has played into frustrations among many Americans over their sense of financial insecurity, inequality and squeezed incomes. Trump, who has faced fierce criticism for appearing to escape paying income tax himself for almost two decades, promised tax cuts for all income groups.
  • He has pledged “a massive tax reduction” for working and middle-income Americans and has vowed to eliminate income taxes for individuals who earn less than $25,000 annually, or $50,000 for a married couple. He has also said he would “ensure the rich pay their fair share”. But analysis by the conservative Tax Foundation has found Trump’s tax plan would disproportionately help the richest Americans, saving those millions.
  • Trump has also supported lower corporate taxes, proposing to cut the business tax rate from 35% to 15%. He wants to close special interest tax loopholes and to restrict companies from moving money out of the country.
  • He has also proposed a corporate tax repatriation plan – to encourage US companies which hoard cash overseas to avoid paying the 35% tax to bring that cash back to the US. According to Capital Economics this cash hoard is now $2.5tn. A tax holiday – so the tax due would be only 10% for a period – could encourage corporations to bring back cash to invest or distribute to shareholders.

Public finances:

  • All those tax cuts mean less coming in to government coffers, at least in the near-term. There is an argument that the potential boost to businesses and to household spending power would lift the economy enough to improve government finances. But, for now, economists expect that Trump’s plans for tax cuts across the board will mean the US taking on more debt as its deficit – the gap between spending and income – swells.
  • Reducing the budget deficits, while cutting tax rates at the same time, will be difficult without sizable cutbacks in federal spending. If a Trump administration manages to push through tax cuts with matching spending cuts, federal budget deficits, which are already trending higher, will probably increase substantially.

Obamacare:

  • Trump wants to repeal and replace President Barack Obama’s healthcare plan, introduced under the Affordable Care Act (ACA), with his own, cheaper plan for tax-free health savings accounts (HSAs). On the campaign trail, Trump called Obamacare an expensive “disaster”
  • About 20 million more people have insurance thanks to the ACA but the scheme has struggled to run efficiently because it relies on competition between insurers to provide affordable coverage, and that competition has dwindled.

Immigration:

  • The most high-profile Trump plan on immigration is for a wall along the Mexican border. He also said he would deport 11 million undocumented migrants, something opponents say is physically impossible. He wants immigrants to be selected on the basis of “their likelihood of success in the US and their ability to be financially self-sufficient.

 

Jobs and growth:

  • Unemployment in the US has dropped below 5%, a good record on the surface for Obama. But during his campaign, Trump has focused on those parts of the economy and country where the recovery since the financial crash has not being felt, gaining traction with those Americans who have seen their industries diminish and their wages stagnate.
  • Trump chose the once booming industrial centre of Detroit to set out his economic plan. He cited the motor city’s higher-than-average unemployment rate and crime levels in a speech that played on widespread worries about the decline of US manufacturing.
  • Trump has said his protectionist policies will keep “jobs and wealth inside the United States. He has promised to increase employment, saying his plans for lower taxes, trade barriers and tighter immigration rules would lead to stronger economic growth. As with the deficit, many economists warn his plans could make things worse not better, hindering economic growth and thereby employers’ ability to create new jobs.
  • Trump has bemoaned the deteriorating conditions of American infrastructure but has provided little detail on what big spending projects he would undertake. In his victory speech he said: “We are going to fix our inner cities, and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We’re going to rebuild our infrastructure … and we will put millions of our people to work as we rebuild it.”

 

Interest rates:

  • In the longer-term, more spending and tax cuts from the government – in other words looser fiscal policy could usher in tighter monetary policy with a more interest rate hikes from the Fed.

Climate change:

  • Trump’s victory has sparked alarm and dismay among environmentalists fearful he will reverse many of the green measures introduced under Obama. Caroline Lucas, the co-leader of the UK’s Green party, described the Republican’s win as “a hammer blow for the fight against climate change”.
  • In the past the real estate mogul has dismissed global warming as an “expensive hoax”. Now his election to the US presidency has thrown the historic Paris agreement into uncertainty just days after it officially came into force. Trump has threatened to to withdraw the US from the deal to cut greenhouse gases, which took 20 years to negotiate
  • By contrast, Trump has indicated he would promote coal, shale gas and oil and there are worries he will curb investment into renewable energy sources as well as funding for the Environmental Protection Agency.

 

Conclusion:

  • There is a broad consensus among economists that protectionism has a negative effect on economic growth and economic welfare, while free trade and the reduction of trade barriers has a positive effect on economic growth
  • Protectionism is frequently criticized by economists as harming the people it is meant to help. Mainstream economists instead support free trade
  • The principle of comparative advantage shows that the gains from free trade outweigh any losses as free trade creates more jobs than it destroys because it allows countries to specialize in the production of goods and services in which they have a comparative advantage.
  • Protectionism results in deadweight loss; this loss to overall welfare gives no-one any benefit, unlike in a free market, where there is no such total loss.

 

Sample Question:

What do you understand by the Protectionism in present context? And critically examine how protectionism measure would impact on Indian economy.