Trade Protectionism in International Business

Trade Protectionism is the economic policy of restraining trade between nations,  through methods such as high tariffs on imported goods, restrictive quotas, and  anti-dumping laws in an attempt to protect domestic industries in a particular  nation from foreign take-over or competition. This contrasts with free trade,  where no artificial barriers to entry are instituted.

Trade Protectionism

Trade Protectionism has frequently been associated with economic theories such as  mercantilism, the belief that it is beneficial to maintain a positive trade balance,  and import substitution. There are two main variants of trade protectionism,  depending on whether the tariff is intended to be collected (traditional  protectionism) or not (modern protectionism).

  1. Modern protectionism:  In the modern trade arena many other initiatives besides tariffs have been called  protectionist. For example some economists see  developed countries’ efforts in imposing their own labor or environmental  standards as protectionism. Also, the imposition of restrictive certification  procedures on imports are seen in this light.  Recent examples of protectionism are typically motivated by the desire to  protect the livelihoods of individuals in politically important domestic  industries. Whereas formerly blue-collar jobs were being lost to foreign  competition, in recent years there has been a renewed discussion of  protectionism due to offshore outsourcing and the loss of white-collar jobs. Most  economists view this form of protectionism as a disguised transfer payment  from consumers (who pay higher prices for food or other protected goods) to  local high-cost producers.
  2. Traditional Protectionism:  In its historic sense, protectionism is the economic policy of relying on revenue  tariffs for government funding in order to reduce or eliminate taxation on  domestic industries and labor (e.g., corporate and personal income taxes). In  protectionist theory, emphasis is placed on reducing taxation on domestic labor  and savings at a cost of higher tariffs on foreign products. This contrasts with  the free trade model, in which first emphasis is placed on exempting foreign  products from taxation, with the lost revenue to be compensated domestically.  Traditional protectionism sees revenue tariffs as a source of government  funding, much like a sales tax, that can be used to reduce other domestic forms  of taxes. The goal of traditional protectionism is to maximize tax revenue from  the purchase of foreign products with the goal of being able to reduce or  eliminate other forms of domestic taxation (income taxes, sales taxes, etc.) as a  result. Tariffs were the predominant source of tax revenue in the United States  from its founding through World War II, allowing the country to operate  through most of that period without income and sales taxes. Traditional trade protectionism remains highly dependent on large amounts of imports. It also  requires tariffs to be kept at reasonable rates to ensure maximum government  revenue.

Protectionism refers  to policies or doctrines which “protect” businesses and living wages by  restricting or regulating trade between foreign nations:

1. Dumping

A practice of charging a very low price in a foreign market for such economic  purposes as putting rival suppliers out of business.  If a company exports a product at a price lower than the price it normally  charges on its own home market, it is said to be “dumping” the product.

Is this  unfair competition? The WTO agreement does not pass judgement. Its focus is on how governments can or cannot react to dumping  –  it disciplines antidumping  actions, and it is often called the “Anti-dumping Agreement”.

2. Subsidies

In economics, a subsidy is generally a monetary grant given by government to  lower the price faced by producers or consumers of a good, generally because it  is considered to be in the public interest. Subsidies are also referred to as  corporate welfare by those who oppose their use. The term subsidy may also  refer to assistance granted by others, such as individuals or non-government  institutions, although this is more usually described as charity. A subsidy  normally exemplifies the opposite of a tax, but can also be given using a  reduction of the tax burden. These kinds of subsidies are generally called tax  expenditures or tax breaks.

Subsidies protect the consumer from paying the full price of the good consumed,  however they also prevent the consumer from receiving the full value of the  thing not consumed — in that sense, a subsidized society is a consumption  society because it unfairly encourages consumption more than conservation.  Under free-market conditions, consumers would make choices which optimize  the value of their transactions; where it was less expensive to conserve, they  would conserve. In a subsidized economy however, consumers are denied the  benefit of conservation and as a result, subsidized goods have an artificially  higher value than expenditures which do not consume. Subsidies are paid for by  taxation which creates a  dead-weight  loss for that activity which is taxed.

3. Countervailing Duties

Means to restrict international trade in cases where imports are subsidized by a  foreign country and hurt domestic producers. According to WTO rules, a  country can launch its own investigation and decide to charge extra duties. Since  countries can rule domestically whether domestic industries are in danger and  whether foreign countries subsidize the products, the institutional process  surrounding the investigation and determinations has significant impacts beyond  the countervailing duties.

4. Tariffs and Quotas

A tariff is a tax on imported goods. When a ship arrives in port a customs officer  inspects the contents and charges a tax according to the tariff formula. Since the  goods cannot be landed until the tax is paid it is the easiest tax to collect, and the  cost of collection is small. Smugglers of course seek to evade the tariff.

An ad valorem tax is a percentage of the value of the item, say 10 cents on the  dollar, while a specific tariff is so-much per weight, say $5 per ton.  A “revenue tariff” is a set of rates designed primarily to raise money for the  government. A tariff on coffee imports, for example (by a country that does not  grow coffee) raises a steady flow of revenue.  A “protective tariff” is intended to artificially inflate prices of imports and  “protect” domestic industries from foreign competition For example, a 50% tax  on a machine that importers formerly sold for $100 and now sell for $150.  Without a tariff the local manufacturers could only charge $100 for the same  machine; now they can charge $149 and make the sale.  A prohibitive tariff is one so high that no one imports any of that item.

The distinction between protective and revenue tariffs is subtle: protective tariffs  in addition to protecting local producers also raise revenue; revenue tariffs  produce revenue but they also offer some protection to local producers. (A pure  revenue tariff is a tax on goods not produced in the country, like coffee perhaps.)  Tax, tariff and trade rules in modern times are usually set together because of  their common impact on industrial policy, investment policy, and agricultural
policy.  There are two main ways of implementing a tariff:

  1. Ad valorem tariff:  Fixed percentage of the value of the good that is being imported. Sometimes  these are problematic as when the international price of a good falls, so does the  tariff, and domestic industries become more vulnerable to competition.  Conversely when the price of a good rises on the international market so does  the tariff, but a country is often less interested in protection when the price is  higher. They also face the problem of transfer pricing where a company declares  a value for goods being traded which differs from the market price, aimed at  reducing overall taxes due.
  2. Specific tariff:  Tariff of a specific amount of money that does not vary with the price of the  good. These tariffs may be harder to decide the amount at which to set them, and  they may need to be updated due to changes in the market or inflation.  Adherents of supply-side economics sometimes refer to domestic taxes, such as  income taxes, as being a “tariff” affecting inter-household trade.

A Quota is a prescribed number or share of something.  In common language, especially in business, a quota is a time-measured goal for  production or achievement. An assembly line worker might have a quota for the  number of products made; a salesperson might have a quota to meet for weekly  sales. In trade, a quota is a form of protectionism used to restrict the import of  something to a specific quantity. The number of cars imported from Japan may  have a quota of 50,000 vehicles per annum to protect auto manufacturers in the  United States  IMF member’s quota is broadly determined by its economic position relative to  other members. Various economic factors are considered in determining changes  in quotas, including GDP, current account transactions, and official reserves.  When a country joins the IMF, it is assigned an initial quota in the same range as  the quotas of existing members considered by the IMF to be broadly comparable  in economic size and characteristics.  Quotas are denominated in Special Drawing Rights, the IMF’s unit of account.

5. VERs (Voluntary Export Restraints)

A voluntary export restraint is a restriction set by a government on the quantity  of goods that can be exported out of a country during a specified period of time.  Often the word voluntary is placed in quotes because these restraints are  typically implemented upon the insistence of the importing nations.  Typically VERs arise when the import-competing industries seek protection  from a surge of imports from particular exporting countries. VERs are then  offered by the exporter to appease the importing country and to avoid the effects of possible trade restraints on the part of the importer. Thus VERs are rarely  completely voluntary.  Also, VERs are typically implemented on a bilateral basis, that is, on exports  from one exporter to one importing country. VERs have been used since the  1930s at least, and have been applied to products ranging from textiles and  footwear to steel, machine tools and automobiles. They became a popular form  of protection during the 1980s, perhaps in part because they did not violate  countries’ agreements under the GATT. As a result of the Uruguay round of the  GATT, completed in 1994, WTO members agreed not to implement any new  VERs and to phase out any existing VERs over a four year period. Exceptions  can be granted for one sector in each importing country.

6. Customs Valuation

The rates of customs duties leviable on imported goods (& export items in  certain cases) are either specific or on ad valorem basis or at times specific cum  ad valorem. When customs duties are levied at ad valorem rates, i.e., depending  upon its value, it becomes essential to lay down in the law itself the broad  guidelines for such valuation to avoid arbitrariness and to ensure that there is  uniformity in approach at different customs formations.

7. Trade Sanctions

Trade sanctions are trade penalties imposed by one or more countries on one or  more other countries. Typically the sanctions take the form of import  tariffs(duties), licensing schemes or other administrative hurdles. They tend to  arise in the context of an unresolved trade or policy dispute, such as a  disagreement about the fairness of some policy affecting international trade  (imports or exports).  For example, one country may conclude that another is unfairly  subsidizing  exports of one or more products, or unfairly protecting some sector from  competition (from imported goods or services). The first country may retaliate  by imposing import duties, or some other sanction, on goods or services from  the second.

Credit: International Business-CU

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