LESSON – 34

Non Tariff Trade Barriers and New Protectionism

Learning outcomes

After studying this unit, you should be able to:

Define Free Trade

Know Non tariff Trade Barriers and Protectionism
Arguments for free trade and protectionism
Know the demerits of protectionism
Identify the fall and rise of protectionism

Free Trade Versus Protection

Free trade refers to the trade that is free from all artificial barriers to trade like tariffs,
quantitative restrictions, exchange controls, etc. Protection, on the other hand, refers to
the government policy of according protection to the domestic industries from foreign
competition. There are a number of arguments for and against both free trade and
protection.

ARGUMENTS FOR FREE TRADE

The important arguments in favour of free trade are as follows:

(i) Free trade leads to the most economic utilisation of the productive resources of the
world because under free trade each country will specialise in the production of those
goods for which it is best suited and will import from other countries those goods which
can be produced domestically only at a comparative disadvantage.
(ii) Under free trade, division of labour occurs on an international scale leading to greater
specialisation, efficiency and economy in production.
(Iii) As there will be intense competition under free trade, the inefficient producers are
compelled either to improve their efficiency or to quit.
(Iv) Free trade helps to break domestic monopolies and free the consumers from
exploitation.
(v) Free trade benefits the consumers.in different ways. It enables them to obtain goods
from the cheapest source. Free trade also makes available large varieties of goods.
(v i) Further, under free trade there is no much scope for corruption which is rampant
under protection.

ARGUMENTS FOR PROTECTION

Theoretically speaking, free trade has certain virtues, as we have seen above. But, in
reality, government are
encouraged to resort to some manner of protective measures of safeguard the national
interest. There are a number of arguments put forward in favour of protection. Some of
these arguments are very valid while some others are not. We provide below the gist of
the popular arguments for protection.

(i) Infant Industry Argument The infant industry argument advanced by

Alexander Hamilton, Frederick List and others asserts that a new industry
having a potential comparative advantage may no_ get started in a country
unless it is given temporary protection against foreign competition. An
established industry is normally much more stronger than an infant one
because of the advantageous position of the established industry like its
longstanding experience, internal and external economies, resource position,
market power, etc. Hence, if the infant is to compete with such a powerful
foreign competitor, it will be a competition between unequals and this would
result in the ruin of the infant industry. Therefore, if a new industry having a
potential comparative advantage is not protected against the competition of an
unequally powerful foreign industry, it will be denying the country the chance
to develop the industry for which it has sufficient potential. The intention is
not to give protection for ever but only for a period to enable the new industry
to overcome its teething troubles. The policy of protection has been well
expressed in the following words: "Nurse the baby, Protect the child and Free
the adult".
The infant industry argument, however, has not been received favourably by some
economists. They argue that an infant will always be an infant if it is given protection.
Further, it is very difficult for a government to identify an industry that deserves
infant industry protection. "The infant industry argument. boils down to a case for the
removal of obstacles to the growth of the infants. It does not demonstrate that a tariff
is the most efficient means of attaining the objective." J

(ii) Diversification Argument It is necessary to have a diversified industrial

structure for an economy to be strong and reasonably self-sufficient. An
economy that depends on a very limited number of industries is subject to
many risks. A depression or recession in these industries will seriously affect
the economy. A country relying too much. on foreign countries runs a number
of risks. Changes in political relations and international economic conditions
may put the country into difficulties. Hence, a diversified industrial structure
is necessary to maintain stability and acquire strength. It is, therefore, advised
to develop a range of industries by according protection to those which require
it.
(iii) Improving the Terms of Trade It is argued that the terms of trade can be
improved by imposing import duty or quota. By imposing tariff the country
expects to obtain larger quantity of imports for a given amount of exports, or
conversely, to part with a lesser quantity of exports for a given amount ofim-
ports. But the terms of trade could be expected to improve only if the foreign
supply is inelastic. If the foreign supply is very much elastic a tariff or a quota
is unlikely to improve the terms of trade, there is also the possibility that the
 foreign countries will retaliate by imposing counter tariffs und quotas. The
validity of this argument, is therefore, questionable.
(iv) Improving Balance of Payments This is a very common ground for protection.
By restricting imports, a country may try to improve its balance of payments
position. The developing countries, especially, may have the problem of
foreign exchange shortage. Hence, it is necessary to control imports so that the
limited foreign exchange will be available for importing the necessary items.
In developing countries, generally, there is a preference for foreign goods.
Under such circumstances it is necessary to control unnecessary imports lest
the balance ofi payments position become critical.
(v) Anti-Dumping Protection is also resorted to as an anti-dumping measure.
Dumping, certainly, can do harm to the domestic industry; the relief the
consumers get will only be temporary. It is possible that after ruining the
domestic industry by dumping, the foreign firms will obtain monopoly powers
and exploit the home market. Sometimes, dumping represents a transmission
of the recession abroad to the home country. These factors point out the need
to protect domestic industries against dumping.
(vi) Bargaining It is argued that a country which already has a tariff can use it as a
means of bargaining to obtain from other countries lower duties on its .
exports. It has been pointed out, however, that the bargaining lever, instead of
being used to gain tariff concessions from foreign powers, may be employed
by others to extract additional protection from the home government.
(vii) Employment Argument Protection has been advocated also as a measure to
stimulate domestic economy and expand employment opportunities. Restric-
tion of imports will stimulate import competing industries and its spread
effects will help the growth of other industries. These, naturally, create more
employment opportunities.
This method of employment generation, however, has some problems. First,
when we reduce imports from foreign countries employment and income will
shrink abroad and this is likely to lead to a fall in the demand for our exports.
Secondly, the foreign countries will be tempted to retaliate in order to protect
their employment.
(viii) National Defense Even if purely economic factors do not justify such a course
of action, certain industries will have to be developed domestically due to
strategic reasons. Depending on foreign countries for our defense
requirements is rather foolish because factors like change in political relations
can do serious damage to a country's defense interest. Hence, it is advisable to
develop defense and other industries of strategic importance by providing
protection if they cannot survive without protection.
(ix) Key Industry Argument It is also argued that a country should develop its own
key industries because the development of other industries and the economy
depends a lot on the output of the key industries. Hence, if we 40 not have our
own source of supply of key inputs, we will be placing ourselves at the mercy
of the foreign suppliers. The key industries should therefore be given
protection if that is necessary for their growth and survival.
 The arguments mentioned above have been generally regarded as 'serious'.
There are, however, a number of other arguments also which have been
branded as 'nonsense', 'fallacious', 'special interest', etc. Common among them
are the following:
(x) Keeping Money at Home This argument is well expressed in the form of a
remark falsely attributed to Abraham Lincoln: "I do not know much about the
tariff, but I know this much: When we buy manufactured goods abroad we get
the goods and the foreigner gets money. When we buy the manufactured
goods at home we get both the goods and the money". As Beveridge rightly
reacted, this "...argument has no merits; the only sensible words in it are the
firsteight word." The fact that imports are ultimately paid for by exports
clearly shows that the 'keeping money at home' argument for protection has no
sense in it.
(xi) The Pauper Labour Argument The essence of this argument is that if in the
home country the wage level is substantially high compared to foreign coun-
tries, the foreign producers will dominate the home market because the cheap
labour will allow them to sell goods cheaper than the domestic goods and this
will affect the interests of the domestic labour. This argument does not
recognize the fact that high wages are usually associated with high
productivity. Further, labour cost differences may not be a determining factor.
(xii) Size of the Home Market It is argued that protection will enlarge the market
for agricultural products because agriculture derives large benefits not only
directly from the protective duties levied on competitive farn1 products of
foreign origin but also, indirectly from the increase in the purchasing power of
the workers employed in industries similarly protected. It may be pointed out
against this that protection of agriculture will harm the non-agriculturists due
to the high prices of agricultural products and the protection of industries will
harm agriculturists and other consumers due to high prices encouraged by
protection.
(xiii) Equalisation of Costs of Production Some protectionists have advocated
import duties to equalise the costs of production between foreign and
domestic producers and to neutralise any advantage the foreigner may have
over the domestic producers in terms of lower taxes, cheaper labour, or other
costs. "This argument allegedly implies a spirit of 'fair competition', not the
exclusion of imports. When, however, by reason of actual cost structure or
artificial measures, costs of production become identical, the very basis of
international trade disappears. The logical consequence of this pseudo-
scientific method is the elimination of trade between nations. Thus, the
equalisation of costs of production argument for protection is utterly fallacious
and is one of the most deceitful ever advanced in support of protection.
(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and
government cooperation to certain high-tech industries in the developed
countries is somewhat similar to the infant industry argument applied to the
developing countries. The argument is that government support should be ac-
corded to gain comparative advantage in the high technology industries which
are crucial to the future of the nation such as semiconductors, computers,
 telecommunications, etc. It is also argued that State support to certain
industries become essential to prevent market monopolisation. For example,
outside the former Soviet Union, only three firms build large passenger jets. If
European governments do not subsidise the Airbus Industries, only the two
American companies, Boeing Company and Mc-Donnell-Douglas
Corporation, will remain.

The oft cited examples of industries developed with the support of the strategic trade
policy include the steel industry in Japan in the 1950s, semiconductors in the 1970s _nd
1980s, and the development of the supersonic aircraft, Concorde, in Europe in the 1970s
and the development of the Airbus aircraft in the 1980s.
As Salvatore observes, while strategic trade policy can theoretically improve the market
outcome in oligopolistic markets subject to extensive economies and increase the nation's
growth and welfare, even the originators and popularisers of this theory recognise the
serious difficulties in carryingl it out. The following difficult\es are pointed out/ in
particular. First, it is extremely difficult to choose the wimiers (i.e. choose the industries
that will provide large externaly economies in the future) and devise appropriate policies
to successfully n\lrture them. Secondly, since most leading nations undertake strategic
trade policies at the same time, their efforts are largely neutralised so that the potential
benefits to each may be small. Thirdly, when a country does achieve substantial success
with strategic trade policy, this comes at the expense of other countries (i.e., it is a
'beggar-thy-neighbour' policy) and so, other countries are likely to retaliate.

DEMERITS OF PROTECTION

The following defects are generally attributed to protection:

(i) Protection is against the interest of consumers as it increases price and reduces
variety and choice.
(ii) Protection makes producers and sellers less quality conscious.
(iii) It encourages domestic monopolies.
(iv) Even inefficient firms may feel secure under protection and it discourages'
innovation.
(v) Protection leaves the arena open to corruption.
(vi) It reduces the volume of foreign trade.
(vii) Protection leads to uneconomic utilisation of world's resources,

FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid
expansion of the world output and trade. World trade, in fact, grew much faster than the
output. After the Second World War, there was a progressive trade liberalisation until the
early seventies. Thanks to the efforts of GATT, the "tariff reductions in the industrial
countries continued even after this. The average levels of tariff on manufactures in
industrial countries is now about 3 per cent compared to 40 per cent in 1947.
Although the period until the early 1970s was characterised by trade liberalisation in
general, there were several exceptions. In the developed countries, heavy protection was
given to the agricultural sector through import restrictions and domestic subsidies.
Further, in manufactured goods, textiles and clothe ing were subject to heavy protection.
There was also protection associated with regional trade agreements like the EEC.
Imports to developing countries were in general highly restrictive due to reasons such as
balance of payments problems and the need to protect infant industries. In the industrial
countries, anti dumping and counterveiling duties began to assume more importance
since the mid-sixties. The overall trend in the industrial countries, however, was one of
liberalisation. This trend was reversed in the seventies.

Since about the mid-seventies, protectionism has grown alanllingly in the developed
countries. This has taken mainly the fonn of non-tariff barriers (NTBs).

The main reason for the growing protectionism in industrialised countries is the
increasing competition they face from Japan and developing countries like, for example,
the South-East Asian countries. Due to the fact that the competition has been very severe
in the case of labour intensive products, the import competing industries in the advanced
countries have been facing the threat of large retrenchments. Several other industries, like
the automobile industry in the US, have also been facing similar problems. The demand
for protection has, therefore, grown in the industrial countries in order to protect
employment. Protective measures have also been employed to pressurise Japan and the
developing countries to open up their markets for goods, services and investments of the
industrial countries.

As mentioned earlier, the NTBs affect the exports of developing countries much more
than those of the developed ones. In other words, the main target of the developed
country import restrictions in the last two decades, or so, has been the developing
countries. By 1987, NTBs were estimated to have affected almost a third of OECD
imports from developing countries.4 While developing countries as a group now face
tariffs .10 per cent higher than the global average, the least developed countries face
tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest
potential for the poorest countries, such as textiles, leather and agricultural commodities.

Labour intensive products like textiles, clothing and footwear are among the most highly
protected imports. The restriction on the textiles and clothing, which account for nearly
one-fourth of the developing country exports, has been' exercised mainly by the Multi-
Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24
billion a year in terms of export earnings. Tariff escalation (i.e. increase in tariffs with the
level of processing) is yet another important factor which discourages developing
countries' manufactured goods. For example, while the tariff on raw sugar is less than 2
per cent, it is around 20 per cent for processed sugar products. The tariff escalation
discourages the developing countries' graduation as exporters of manufactured goods
from commodity exporters. Tariff escalation affects a wide variety of products such as
jute, spices, vegetables, vegetable oils, tropical fruits beverages, etc.
As the industrial countries face more competition, they increase protectionism. This
encourages one to think that they wanted free trade only as long as they enjoyed a
dominant position; when their dominance is challenged they increase the trade barriers
giving one or another reason. One should not be surprised if tomorrow they restrict the
imports from developing countries arguing that the cost advantage of the developing
countries is because of the 'injustice' done to the labour by paying wages lower than that
in the US or other industrial countries! Ironically, industrial countries are increasing trade
restrictions while the developing countries are liberalising trade.

Trade restrictions prove costly not only for the affected exporting country but also for the
importing country restricting the trade. The consumers often pay a heavy price for
protection. It is estimated that overall the American consumers pay as much as $ 75
billion a year more for goods on account of import fees and restrictions-a sum roughly
equivalent to about a sixth of the US import bill. In Canada every dollar earned by
workers who continue to hold their jobs because of protection of the textile and clothing
industries costs society an estimated $ 70. In the United States, consumers paid $
1,14,000 a year for each job saved in thc steel industry.7
POINTS TO PONDER:
___________________________________
Free Trade
Meaning:
___________________________________
Free trade refers to the trade that is
free from all artificial barriers to trade like ___________________________________
tariffs, quantitative restrictions, exchange
controls, etc.
___________________________________
___________________________________
___________________________________
___________________________________

___________________________________
Protection
Meaning:
___________________________________
Protection, on the other hand, refers to
the government policy of according protection ___________________________________
to the domestic industries from foreign
competition.
___________________________________
___________________________________
___________________________________
___________________________________

___________________________________
Arguments for Free Trade
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
 ___________________________________
Arguments for Protection
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________

___________________________________
Demerits of Protection
Protection is against the interest of consumers as it
___________________________________
increases price and reduces variety and choice.
Protection makes producers and sellers less
quality conscious.
___________________________________
It encourages domestic monopolies.
Even inefficient firms may feel secure under
protection and it discourages' innovation.
___________________________________
Protection leaves the arena open to corruption.
It reduces the volume of foreign trade. ___________________________________
___________________________________
___________________________________
Questions for self assessment:

1. Give a brief and critical account of the arguments for protection.

2. Present your views on protection vs liberal trade in respect of a developing country like
India.

3. What are the advantages and disadvantages of free trade for a developing economy?

4. What, in your opinion, is the right trade strategy for India in the emerging international
economic environment?

5. Review the trade liberalisation in India and its impact and implications.

6. Write notes on the following:

(i) Infant industry argument.

(ii) Strategic trade policy.

(iii) "When we buy manufactured goods abroad we get the goods and the
foreigner gets money. When we buy the manufactured goods at home we get both the
goods and the money". Discuss.

(iv) Trends in trade liberalisation.

SUGGESTED READINGS

Ellsworth, P.T. and 1. Clark Leith, The International Economy, London: Macmillan
Company.

Haberler, Gottfried, The Theory of International Trade, London: William Hodge Co.

Johnson, Harry, G., Aspects of the Theory of Tariffs, London: George Allen and Unwin.

Salvatore, Dominick, International Economics, New York: Macmillan Publishing Co.

Towle, Lawrence, W., International Trade and Commercial Policy, New York: Harper
and Bros.

Wells, Sidney J., International Economics, London: George Allen and Unwin Ltd.