The Policy of Protectionism and Its Impact on the World Economy - Essay Example

The world economy has become more interconnected due to the globalization movement that took place during the 2nd half of the 20th century. Globalization led to the proliferation of free trade between states. New regional agreements were formulated to promote trade such as the NAFTA, the European Community and MERCOSUR. In this new economy free trade became the status quo which most economist and politicians believe to be the best route to achieve economic success. Despite the many benefits free trade has on an economic system particularly been able to lower the prices of goods it also creates problems. Free trade has lead to the loss of many jobs because developed nation can not compete with developing nation as far as wages. Many jobs are being outsourced to foreign nations. Due to this dilemma there are people who propose protectionism as a solution to the problem. Protectionism is the economic policy of restricting trade among nation through mechanism such as tariffs, import quotas, administrative barriers, anti-dumping legislation, subsidies, and exchange rate manipulation (Answers, 2008). Protectionism is viewed as a measure that benefits special interest groups. There is a theory called rent seeking which explains how protectionism behaves which an economic system. An industry that seeks protectionism measures is indirectly looking for welfare; these rent seekers undermine the faith of the public by utilizing resources that could be used elsewhere (Kaempfer, Tower, Willett, 2002). This perspective makes bring awareness to the fact that protectionism involves governmental intervention and the use of public funding to create protectionism mechanisms. The distribution of public resources is always subject to controversy and public opinion. In order for protectionism to gain greater acceptance from the general public its application must target a large group of people. When there are thousands of jobs in jeopardy protectionism measures gain greater acceptance. In the United States an industry that has benefited from protectionism in the auto industry. In 1981 the government set import quotas to limit the amount of Japanese car imports in order to save 17,000 American jobs (Bnet, 2008). The Chinese economy which traditionally promoted full protectionism by closed its doors to outsiders became an open economy in the 21st century. Despite the changes and proliferation of free trade in China the socialist has ensured the stability and control of its local economy through the use of monetary system in which its national currency, the renminbi, is not subject to foreign exchange fluctuations. China is able to have full control over the value of its currency due to its use of currency protectionism. China is the world top manufacturer of consumer goods. The products and merchandise produced in China are very cheap which means this nation is targeted a lot by other countries as a nation whose exports are subject tariffs in order to raise the final price of the product prior to entering a domestic market. Tariffs provide protection to locally products items by raising the prices of imports. Job creation is one of the most important aspects of a healthy economy. Protectionism serves an important role in the creation of jobs. A strong argument for protectionism occurs in infant industries. An infant industry is an industry that is just starting out and it needs governmental assistance in order to grow and become self-sustainable. These industries have the potential of creating a lot of jobs for an economy in the long term, thus it is very import to protect them. Renewable energy is one of the hottest industries in the 21st which can be developed to change the American economy. A protectionism tool that has helped the farming industry is subsidies. A subsidy is the opposite of a tax, it provides a governmental refund to the producer of a good (Varian, 2003). An agricultural crop that can be used in the creation of biodiesel fuel is soy beans. The United States government provides a $1.00 subsidy toward the price of a gallon of biodiesel fuel produced domestically. American farmers have benefit from subsidies for different crops which were created to protect them against cheaper products produced in neighboring South American countries. A more subtle type of protectionism is de facto protectionism. De Facto protectionism compromise statuary moves towards protecting local goods, manufacturers and distributors (O’Connell). Two examples are copyrights and patent protection laws. This legal statute gives exclusivity to a specific company which provides protection and limits competition. Another way de facto protectionism occurs is when a government limits the access of imports by imposing rigid standards which are very difficult to meet in order to persuade foreign companies from entering a marketplace. High environmental standards are a type of restriction which inhibits many products from entering domestic markets. I am a strong believer in the open market because it has allowed the world economy to unite and has been instrumental in the growth of many economies around the world. Protectionism in essence is the opposite of free trade, but despite that I also believe in the benefits protectionism can have on an economy. I oppose full blown use of protectionism because doing so would imply closing an economic system and the imposition of barriers that limit the possibility of free trade. Protectionism can be a viable solution is special circumstances such as emerging industries and to protect jobs in certain communities. For example if a particular manufacturing plant in a small town employees the majority of the workforce this company is essential for the survival of this micro economy. If this company is in need of governmental assistance for its survival any protectionism mechanism that can help in such a situation should be used. I am a firm supporter of protectionism for the agricultural industry. Farmers serve a great social purpose which is instrumental towards the survival in humans. All nations should try to produce as much food as possible to become self-sustainable. In countries such as the United States there is too much industrialization and there needs to be higher agricultural activity, thus incentives associated with protectionism are good way to promote this industry. The new elected president of the United States, Barack Obama, has an economic platform in which new jobs are going to be created in emerging industries associated with renewable energy. In this industrialized nation protectionism is going to play a vital role in its economic growth. European nations such as the United Kingdom should follow the US model of taking advantage of infant industry to create new jobs. References Answers.com (2008). Protectionism. Available from < http://www.answers.com/topic/protectionism> [Accessed 14 November 2008]. Bnet. (1994). Trading losses – how import quotas have hurt more industries than they have helped. National Review. Available from < http://findarticles.com/p/articles/mi_m1282/is_/ai_15779176> [Accessed 13 November 2008] Kaempfer, W. and Edward, T. and Thomas, W. (2002). Trade Protectionism. Available from [Accessed 14 November 2008 2008]. O’Connell, J. De Facto Protectionism. Available from < http://www.blackwellreference.com/public/tocnode?id=g9780631233176_chunk_g97806312349377_ss1-14> [Accessed 14 November 2008]. Varian, H. (2003). Intermediate Microeconomics: A Modern Approach (6th ed.). New York: W.W. Norton & Company. 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