Trade protectionism is a conscious attempt to limit importation by putting up barriers to trade. Free trade aims to facilitate mutual legislation and customs processes to increase trade between countries. Trade protections restrict, complicate, and increase the cost of importing and exporting goods and services. Although the principle of free trade is generally accepted globally, many countries carry out protectionist practices for various reasons. Despite the speech favoring free trade and increasing trade openness, trade protectionism has still functioned.
What Is Trade Protectionism?
Trade protectionism includes the protection measures that countries apply against one or more products, a country, a commercial community, or all countries for various reasons. Protectionist trade policies are the opposite of Free foreign trade. The main objective is to protect domestic producers and developing sectors against import competition.
WTO member countries regulate their trade policies based on developing and facilitating trade as a requirement of participation in the global trade network. Many countries resort to trade protectionism methods to recover their economies, especially during an economic crisis or due to a significant increase in a foreign trade deficit. In such periods, countries often implement foreign trade policies to reduce imports and increase exports.
How Trade Protectionism Work
Trade protectionism's aim is to protect domestic production against foreign competition. By doing this, countries try to create opportunities for domestic producers to benefit from economies of scale. The purpose of increasing the tariff is to increase the cost of imported products compared to domestic products. The purpose of subsidies is to encourage domestic producers to offer products to the market at lower prices. However, it may have a negative effect by causing an increase in costs, especially in countries that import raw materials and energy.
Reasons for protectionism
- Protection of a particular profession or sector
- Sustaining economic development
- Prevention of dumping
- Increasing employment
- Improving the terms of trade
- National security
Invisible Barriers
Until recently, tariffs and quotas were the most frequently used methods of protectionism in foreign trade. Today, these measures are applied less frequently due to the same response from other states and complaints to the WTO. However, there are obstacles outside the tariff that we can define as invisible obstacles. The protectionist measures made through safety, health, environmental protection standards, administrative regulations, and indirect taxes have increased.
Although the countries keep the customs taxes of some products fixed, they impose additional financial obligations to increase the product's unit cost. For example, anti-dumping tax, compensatory tax practices, and surveillance and licensing practices aim to protect producers or balance mutual trade.
Types of Protectionism
Types of Protectionism reflect the protectionist policies applied. Tariffs, quotas, subsidies, standardizations, Import licensing, exchange controls, technical barriers, and many more minor ways to decrease importation and make ways to increase export goods.
1. Tariffs:
Taxes on imported products are called tariffs. High tariffs increase the cost of imported goods. These products, whose cost is increasing, cannot compete with domestic products in the domestic market. Tariffs were the most common measure to increase the cost of imported products. However, countries respond to tariff measures by increasing taxes on the same product or a more critical export product of the exporting country. Therefore, informal measures called non-tariff measures are applied.
2. Quotas:
Quotas are quantitative (volume) limits on the permitted level of imports. For example, suppose that a 100,000-ton quota is set for olive oil imports from a country. It means that in no way can import from that country exceed this volume. Quotas balance the supply of imported products in the domestic market or balance importing a product for which the exporting country is hugely competitive. A restriction on imports causes the prices of imported goods to rise, causing the domestic market demand to decline.
3. Subsidies:
Subsidies include tax relief for domestic producers or financial support to increase exports. A subsidy is a method used to encourage domestic production by lowering producers' costs. The subsidy can be done in different ways, such as direct financial contribution, business tax cuts, low-interest loans, lower input costs, etc.
4. Standardization:
Countries sometimes require minimum standards or certain obligations to import a product. Although health, quality, and environmentalism are suggested for standardization. The aim is to protect the producers in the domestic market or balance the excessively increasing imports. For example, EU countries limit the use of artificial leather in ready-made clothing products. In another example, the USA requires analysis reports and quality certificates for food imports.
Trade Protectionism Negative Consequences
- Product choices for consumers are reduced
- When competition in the market decreases, product prices increase.
- Infant industries may never grow up due to government trade protection policies.
- Exchange rate controls that cause long-term inflation
- Retaliation could result in a trade war.
WTO Dispute settlements
The WTO encourages negotiations between member governments to remove trade barriers. The WTO has rules that member states are obliged to abide by. In addition to the provisions supporting free trade, the WTO has also determined in which situations protectionist measures can be applied. So WTO has regulated procedures for settling disputes. Every member can apply to the WTO in case of a dispute. WTO has a mechanism for resolving trade disputes.
A WTO member can complain that another member government is violating commitments to the WTO. With the international dispute resolution mechanisms, the WTO has resolved 350 of the 616 disputes submitted since 1995. In short, although the WTO cannot resolve every conflict, it also has an active deterrence as a mediator for WTO members.
Conclusion
Today, we often see protectionist measures used as a means of pressure for political reasons, but the main goal is to protect domestic producers, especially emerging sectors. The purpose of the protection may be that the domestic market producers have disadvantages such as technology, production, and raw material costs.
However, it is known that protectionist measures often harm the domestic market due to cost increases and lack of competition. While product costs for consumers increased, local producers in an incomplete competition environment avoided cost items, especially R&D, and fell behind global market standards.
It is recommended that countries considering resorting to protective measures consider the issue with all its components. With the realistic analysis of economic and commercial data, methods that will not hinder free trade can be found.
Written by: Aykut Alan
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