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Why is everyone afraid of protectionism?

Protectionism devastates export incomes and trade-dependent economies.

Mar 03,2009
There is worldwide alarm that developed countries are moving toward protectionism amid the deepening global economic crisis. The United States’ economic stimulus package enacted recently has fed growing fears over protectionism. In drafting the $819 billion package [$787 billion by the time it was signed into law], U.S. lawmakers inserted a “Buy American” clause, stipulating that only American-made steel goods be used in public projects.

A government adopts protectionist policies to shield domestic industries against cheaper imports and protect local jobs. Protectionism is universally blamed for the further worsening global recession.

International trades are exchanges of goods and services between nations; protectionism limits free trade and competition in the name of safeguarding local industries. Import duties are levied on foreign goods to raise their prices to reduce demand for them and subsequently the amount imported. This could result in retaliation by exporting countries as well as sanctions from the World Trade Organization. Protectionist policies can also include imposing quotas on certain imports to limit their entry, providing subsidies to local producers and exporters and issuing import permits to restrict the importation of certain goods. Recently some countries have instituted tough environmental or safety standards to limit imports.

But protectionism can also play a positive role. It can protect the industries of developing countries from exposure to competition from developed countries. This is one way that countries can nurture infant industries until they get more competitive.

Most countries have used protectionism at one time or another. The most recent example is the Buy American clause, which enraged Canada and European countries. The European Union has also recently imposed anti-dumping duties on screws and bolts brought in from China even as it decided to offer export subsidies to livestock farmers in some EU nations.

Protectionist policies are not accepted quietly; sooner or later they provoke the targeted exporters. Brazil said in February it could file a lawsuit against Argentina at the WTO if the country keeps putting up barriers for its products. Brazil said its exports to Argentina fell by half in January compared to a year ago.

Friedrich List (1789?1846), a leading 19th-century economist, criticized protectionism, saying developed countries achieved economic hegemony through high tariffs and extensive subsidies but encouraged free trade among other countries. List also criticized free trade, saying it could deprive developing countries of an opportunity to develop basic industries.

“If every country pursues protectionist policies, international trade could collapse,” said Seo Jin-gyu, a senior researcher at the Korea Institute for International Economic Policy.

The Great Depression of the 1930s was made worse by U.S. protectionism. President Herbert Hoover signed the Smoot-Hawley Tariff Act which raised import tariffs on 20,000 imports by an average of 20 percent, some as high as 49 percent, in a bid to protect American industries. Other countries retaliated. The escalation of tariffs caused the total amount of international trade to drop to $2.1 billion in 1932 from $4.9 billion in 1930. At the same time, U.S. unemployment spiraled, to 9 percent in 1930, 16 percent in 1931 and 25 percent in 1932.

The WTO said if its members raise tariffs to the highest allowable level, the amount of international trade would fall by an estimated 8 percent. The WTO also warned that the recent spread of protectionism in developed countries could damage or even upend developing countries’ economies. Developing nations tend to depend heavily on exports; falling exports devastate their economies.

According to the Korea Trade-Investment Promotion Agency, Korea is facing a worsening trade environment. Ukraine is mulling raising import tariffs to 13 percent. The EU is considering classifying mobile phones with TV capability as television sets. According to WTO rules, there is no tariff on mobile phones but a 13.9 percent tariff is levied by the EU on electronics including television sets.

Korea is already feeling the pinch. Korea’s economy has grown exporting automobiles, steel, ships and semiconductors since the 1970s but with the global economic slowdown, Korea recorded $3 billion in trade deficits in January.

Protectionism is spreading even to developing nations. Argentina saw its exports fall 36 percent in January from a year ago; it has joined a trend of protectionism amid declining exports, introducing import controls, such as requiring importers to secure government permits to bring in certain types of auto components.

Park Sung-hoon, an international relations professor at Korea University, said that the current global economy is more interdependent and intertwined than in the past and protectionism cannot bring economic progress. “Countries that have accomplished rapid economic development always looked outward and promoted free trade,” Park said.

The best way to tackle protectionism is to sign free trade agreements with as many countries as possible. This is because countries that have signed an FTA need to abide by agreed tariff rates. “An FTA, which sets plans to abolish tariffs, can be a safeguard against protectionism,” Lee Hye-min, Korea’s chief free trade negotiator, said in an interview.

One reason to hasten FTAs is the fact that it has expanded trade between countries that signed the pact. “Chile and Singapore are likely to see the portion of their international trade with countries they signed FTAs with rise to 86.3 percent and 72.8 percent of the total,” said Myong Jin-ho, a researcher at the Institute for International Trade. The two countries have aggressively signed FTAs with many countries.


By Park Hyong-soo JoongAng Ilbo/ Limb Jae-un Staff Reporter [jbiz91@joongang.co.kr]


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