The paper posted by Razeen Sally (2010) can be divided into three parts: the prosperity before economic crisis in 2008, the deglobalisation when crisis happens, and the comparison of protectionism between 1930s and 1980s. This part of the essay will introduce the content mentioned above in detail.
Sally (2010) reported that the global economic experienced a golden period. During this period, the rate of economic growth, FDI (foreign direct investment) and globalization went up dramatically. As to the rapid growth of globalization, there were two main reasons to explain this phenomenon. That is, technology and policy liberalization. Advanced technology, such as computer, Internet, visual technology, 3G, airplane and so on, not only facilitated the life of individuals, but also realized the communication of people in different places in the whole world, which was a prerequisite of international trade. With respect to the policy, the majority of the counties, no matter West countries or Asia Pacific Areas, adjusted the policies in order to integrate into the global economy very well. In the developing countries, the average tariffs decreased more than 20% from 1985 to 2005.
When the economic crisis, an unavoidable trend, happened in 2008, the situation changed. Policy makers tried their best to protect the economy in their own countries. Deglobalisation was prevalent in the end of 2008. As a consequence, international capital flows decreased by 82%, global wealth reduced by 29 trillion dollars, and the amount of international trade shrunk by 11.9% (Sally, 2010).
To keep social stability, government preferred to protectionism. However, the current protectionism is familiar with protectionism in 1980s, rather than in 1930s. There are three main differences between protectionism in 1930s and 1980s. First, the protectionism in 1980s was subtler than that in 1930s. There were no tariff barriers in 1980s. What's more, as to the speed, protectionism in 1980s unfolded slowly, and lasted for about fifteen years. The third difference was that protectionism in 1980s leaded to overcapacity in a variety kind of industrial sectors, and had influence on the economic situation in the whole world.
In this essay, protectionism will be discussed in international trade. Specifically speaking, some theories will be introduced to explain the existence of protectionism. Then, some misunderstanding of protectionism will be clarified. What's more, the question about why protectionism is prevalent during the bad times will be addressed too.
2.0 Theories to explain the existence of protectionism
Many scholars apply several theories to analyze why some policy makers prefer protectionism to free trade. Public choice approach can explain this phenomenon in a very good way.
2.1 Rent seeking
Krueger (1974) argues that many governments in their own countries intervene the economic activities, which may lead to the increase of rents for individuals. Therefore, people always compete for rents. This procedure is defined as rent seeking. Bhagwati (1982) finds that profit-seeking activities could enhance the welfare in the area indirectly due to the depletion of resources which may have negative influence elsewhere. Krueger (1974) also points out there is a vicious circle. Since rewarding rent seekers can weaken the fairness in markets, government will spend more time on intervening the activities in markets.
2.2 Median voter
According to Kaempfer, Tower and Willett (2003), the purpose of officers in government who have the right to making policies is to maximize their own profits. That is, they want to make sure that they can be reelected via enacting appropriate policies. For example, if the voters can decide the level of protection in an electorate, the bill with the most support will come from the median voters when the voting is determined by referendum. If the result is decided by a legislature, the legislators, who support the opinions of median voters, have a large chance to be elected.
In a majority of economic situations, voters have different amount of capital. A few of them own a great deal of capital. However, by contrast, many of them own nothing. Despite of this fact, every voter, no matter rich or poor, has the same amount of the factor labor. Therefore, the median voters are likely to vote based on the aspect of labor. According to a survey conducted by Gokcekus and Tower (1989), the labor-scare countries tend to protectionism by higher tariff rates.
2.3 Status quo bias
It is common that individuals who gain profits by expanding the chances in non-traded sector are difficult to identify. However, it is easy to recognize individuals who are hurt by liberalization. Therefore, voters will focus on, or even exaggerate, the easily identifiable phenomenon. In order to establish a good image to the voters, authorities spend a mammoth amount of budget on saving the identifiable individuals, even if the demand of unidentified individuals is more urgent (Shelling, 1984). Likewise, voters in an electorate care more about the victims in the free trade, so many of them vote for protectionism without hesitation.
3.0 Misunderstanding of protectionism
Some people treat protectionism as an effective and efficient strategy in international trade. Undeniably, protectionism can benefit the economy to some extent. But the policy makers should correct some misapprehensions before they enact policies for protection.
3.1 Protectionism is good for enhancing the competitiveness
Many people vote for protectionism because they take it for granted that protecting the domestic industries will strengthen the ability in order to make these industries have an advantageous position in international trade. They think the protection activities can make sure companies earn a plenty of profits. Then, companies can invest these profits into purchasing advanced machines, technologies and facilities, helping them to compete with their counterparts in the international marketplace in an efficient and effective way.
However, this argument is not convincing for three reasons.
To begin with, the assumptions are questionable. Since the conclusion - protectionism will sharpen the competitiveness of domestic industries in international trade - is based on three assumptions. First, they suppose that the government has the ability to correctly choose and protect the industries to become "competitiveness" in the future. What's more, they assume that the protected industries can achieve a lower cost for production during the period of protection. Furthermore, they believe the revenue in the protected industries will exceed the costs of inefficiencies due to protectionism.
Second, even though the government can accurately distinguish the promising industries from the "bad" ones and provide protection to these "good" applicants, it does not mean that protection is the most appropriate way for the government to assist the industries. Maybe the other methods, such as loan or subsides provided to the industries in trouble, can help the industries in a better way.
Moreover, protection from the government is unnecessary to some extant, especially in developed countries, where have a great deal of private capital. The private lenders are sensitive to the promising industries. If they believe they can make profit in the industries, they will invest money. Therefore, it is needless for the government to intervene and protect these industries (Sykes, 1991).
3.2 Orderly contraction
When revenue of an industry is hard to cover the cost of production, this industry will contract unavoidably. If there is an industry contraction, many resources, such as materials, machines, warehouses, employees, will not be used. It is seems that protection can stimulate the demand of domestic market and then increase the demand of employees (Bhagwati, 1988). What's more, orderly contraction can bring some benefits. Hence, it is possible that many workers can remain be employed when they find a new job. And there is a limitation of the figure of unemployed workers.
Nevertheless, this conclusion will be objected by two reasons.
First, protection activities conducted by the government are not superior ways to solve the problem of inefficient unemployment. What's more, as to a reasonable approach to calculate subsidy for employee, it should take all the inefficient different between the private and social marginal cost of labor into account (Srinivasan & Bhagwati, 1975).
Moreover, the form of trade will be changed due to protection. In the policy of protection, there will be fewer goods imported from the overseas. Accordingly, the demand for the domestic will increase, which can boost the domestic marketplace currency. If the exporting industries have the same level of rent with the protected importing industries, nothing can be obtained.
3.3 Protectionism can lead to equity
Some people hold the view that the protection of "ill" industry is an approach to redistribute the wealth in a society, achieving the equity in a society. But this opinion is not right. As mentioned above, a fierce competition in the international marketplace can contract the industries in the domestic. Some employees will lose their jobs because of industry contraction. However, employees may also become unemployed due to the cutthroat and heated competition in the domestic market. There is no difference of jobless between domestic and international competition in terms of characteristics. So, if the authority enacts policies to save the jobs of employees who face international competition, the equity of society does not achieve. Since it is unfair for the workers who lose their jobs resulting from domestic competition (Sykes, 1991). Retraining for the unemployed workers, rather than protectionism, is a better way for workers to find satisfactory jobs.
4.0 Protectionism in economic crisis
Free trade and protectionist are the two main strategies in international trade. These two different strategies are prevalent in different periods. For example, during the period of 1930s, the idea of protectionism dominated the international markets. However, free trade began to become popular in the middle of 1940s. Then, protectionism came back in 1980s. And in the economic crisis in 2008, many countries in developed countries still chose protectionism in order to "save" the economy in their own countries (Sally 2010). From these examples, it is easy to understand that protectionism is always popular in bad times. However, in fact, industries can obtain some benefits from protectionism in both good and bad times. Why do policy makers prefer protectionism in tough period?
In the first possible explanation, protectionism is treated as a way to achieve equity in the views of the publics. Besides that, the publics emphasize on the easily identifiable phenomenon, such as the loss in the international trade. In order to win the reelection, policy makers will issue laws to protect the industries, which the publics care about, to show the equity of a society (Baldwin, 1982). The second possible explanation is that the industries will gain less without protectionism in bad times than that with the protection from government. The third reason is that the increased level of protection can make the rate of return in an industry go up substantially, and avoid the new entrants to share the profits to some extent in adverse economic situations (Friedman, 1990).
5.0 Conclusion
This essay introduces the report written by Razeen Sally (2010). The author in this report discusses the globalization in the golden period before the economic crisis in 2008 and the protectionism in the international trade when crisis happened. Based on this report, protectionism is illustrated in detail. In the part of reasons explaining the existence of protectionism, public choice approach is applied to address this question. In this approach, three basic theories are introduced. That is, rent seeking, median voter and Status quo bias. Then, some misunderstandings are clarified. Several reasons are given to support the clarification of these ideas. In the last part of this essay, the question about why protectionism is prevalent during the bad period is answered.
To come to a conclusion, although a great amount of excellent scholars are doing the research about protectionism in international trade, it is still very hard for them to come to a consensus about whether, when and how protectionism will do good to the economic. There are both advantages and disadvantages in this strategy. Industries can benefit from this policy only if the policy makers can understand the impact of protectionism very well.
