An Era of Economic Globalisation - Coursework Example

Table of Contents Table of Contents Introduction 2 Understanding Protectionism: An Overview of Definitions 3 Types of Protectionism 4 The Protectionism versus Free-Trade Debate 7 The Rationale of Protectionism 10 Conclusion 12 Bibliography 14 Introduction In an era of economic globalisation and the supposed triumph of the neoliberal market ideology, the role of the state in the economy has been, theoretically speaking, minimised. Indeed, some political economic theorists have proclaimed the demise of the state as an economic force, contending that the global economy is moving from shallow to deep integration, a transition which effectively renders the state an obsolete economic entity. Some development economists have even gone so far as to argue that the state no longer has a place in national economy development programmes, projects and strategies as the age of intervention has receded into history. While not denying that globalisation has, to an extent, reduced the economic role of the state, the fact remains that it retains the power to formulate and implement such protectionist policies as would restrict the volume of trade inflows into the domestic economy. Protectionism, in other words, has survived globalisation and in that survival is both a testimony and concession to the fact that, beyond the globalisation-rhetoric, the state has retained its role as a significant economic player. There is no doubt that globalisation has reduced the role of the state in the economy but, there is equally no doubt that protectionism has survived globalisation and remains one of the more significant of the state's instruments for ensuring the welfare of its domestic market. Following a definition of protectionism and an examination of its pre- and post-globalisation forms and mechanisms, this paper shall argue that despite arguments to the contrary, protectionism often serves fundamental and constructive economic purposes. Understanding Protectionism: An Overview of Definitions In general, it is possible to define protectionism as strategies used by a national economy to protect its own goods, industries and businesses from unfair competition or, in some instances, from competition per se. Often criticized by economist and free-trade proponents such as Adam Smith among others, protectionism is not only a logically valid strategy for the protection of domestic economies from such unfair economic competition as could have adverse effects upon infant industries and domestic producers and manufacturers, but it often imposes itself upon decision-makers as the only viable mechanism for the fulfilment of the aforementioned. Indeed, as important as it may be for Lesser Developing and Developing nations, protectionism is as important for Industrialised economies. As Schwartz (2000) succinctly explains, protectionism traditionally functions to protect national economies from all of the virtual destruction of domestic industries, unemployment and inflation (Schwartz, 2000). It does so through the utilisation of a wide array of strategies, ranging from implementation of prohibitions against the entry of certain imports into the domestic economy to the imposition of heavy customs, tariffs and taxes upon specified imports in order to ensure that, upon entry into the domestic market, domestic goods retain a price-competitive edge (Schwartz, 2000). Proceeding from the information presented in the preceding paragraph, it is possible to articulate a definition for protectionism. In brief, protectionism can be defined as a term which references a set of economic policies implemented by governments for the purpose of restricting imports and maintaining the competitive strength of domestic goods within the perimeters of the home market. To the extent that it functions to protect infant industries, allow them space for growth and acts against the transformation of the home-economy from a manufacturing to a consumer-based one, protectionism can be defined as a valid and constructive economic policy. Types of Protectionism Within the context of free trade and the virtual global imposition of neo-liberalism upon the world economy, the very notion of protectionism raises alarm. Apart from being perceived of as a blatant rejection of free trade, hence integration into the global economy, it is regarded as a violation of the very precepts of economic rationalism (Schwartz, 2000). Protectionism, implying direct government intervention in both the economy and the market, is contrary to the liberal economic faith in the market's natural ability for self-adjustment and belief in the invisible hand. As Schwartz (2000) explains, however, this is a rather jaundiced view of protectionism because it fails to take into account, not only its various types but, the fact that protectionism can sometimes be motivated by economic rationalism. There are numerous forms of protectionism, all of which seek to protect national economies from foreign competition. On the surface, this does seem to be the very antithesis of the economic rationalism upon which free trade theories are predicated. As Rooth (2002) explains, even within the parameters of tariffs as a form of protectionism, there are different types therein. For example, tariffs may be excessive, in which case they serve, not to give domestic producers a competitive advantage, but to stringently restrict the volume of imports into the national economy. While often motivated by concern for both infant industries and the welfare of national industries and despite the fact that excessive tariffs may have their advantage, the cost can be very high. In terms of advantages, excessive tariffs ensure that domestic goods retain their dominance in the domestic marketplace and, accordingly, ensure the economic survival, possibly growth of the industries in question. In term of disadvantages, however, the imposition of excessive tariffs could result in retaliatory measures, running from the counter-imposition of tariffs to the virtual exclusion of the country in question from the free trade bloc. Not only that, but tariffs, to the extent that they render foreign competition benign, act to remove domestic producers' incentive for the improvement of quality and cost, thereby taking their goods and services to an internationally competitive standard. Apart from the imposition of excessive tariffs, protectionism can take the form of the levying of reasonable tariffs on specified goods for the purpose of giving domestic producers a reasonable edge. This type of protectionism, reasonable tariffs, has survived free trade and has often been imposed by leading pro-globalisation countries, such as the United States and great Britain, for the explicit purpose of protecting their national industries. Other types of protectionism, as which involve government intervention in the market for the explicit purpose of restricting the inflow of foreign goods, include quotas (Rooth, 2002). As the name itself implies, quotas refer to the allowance of a specific volume of a particular good into a country, or a particular volume of total imports from a specific country. As with tariffs, they are imposed as a strategy for the protection of national industries and, as with reasonable tariffs, have survived free trade and globalisation (Rooth, 2002). Indeed, at the present time, they are most often imposed vis--vis Chinese imports consequent to the fact that the price and quality of Chinese goods function as an immediate threat to local producers (Rooth, 2002). Except for the fact that they run the risk of instigating the counter-imposition of quotas, they are beneficial insofar as they do protect local producers and manufacturers. The question of whether or not types of protectionism can, and should survive free trade, will be determined through a critical analysis of the free trade versus protectionism debate. The Protectionism versus Free-Trade Debate The viability of protectionism as an economic policy has been the subject of debate ever since the rise of liberalism. Proponents of free trade maintain that protectionism constitutes an unnatural interference with both domestic and international market mechanism, effectively functioning as an obstacle to economic rationalism (Lederman, 2005). This view is predicated on an acceptance of Adam Smith's invisible hand theory,' on the one hand, and on a belief in the comparative advantage' theory on the other. In accordance with the former, markets are endowed with natural mechanisms for self-adjustment whereby, in the absence of external intervention, the invisible hand,' constantly moves the market towards states of equilibrium. External intervention, as in state control and politically motivated economic policies, disrupt the natural operations of a market and undermine the inherently economically rational nature of the invisible hand (Lederman, 2005). As per the latter, all domestic markets have at least one good/service which supersedes alternatives/substitutes present in or produced by, other markets, whether in terms of quality of price. This one good/service functions as its market's comparative advantage over other (Lederman, 2005). Referencing both these concepts/theories, liberal economists/proponents maintain that free trade promotes economic welfare and development both because it is founded upon pure economic rationality and the validity of comparative advantage. Free trade advocates maintain that the liberalisation of domestic economies is a valid economic development and growth strategy while protectionism is not, insofar as it effectively prevents rational market operations and undermines comparative advantage precepts. The implication, therefore, is that the liberal school fundamentally rejects the very notion of protectionism (Crane and Amawi, 1997). Even while conceding to the advantages of free trade, outright rejection of protectionism is insupportable. There is hardly a market which does not practice protectionism, in one form or another, or which has not practiced protectionism at some point. Indeed, Schwartz (2000) insists that the exercise of protectionism is nothing less than a duty owed by a state to its market and a strategy deployed for the specific purpose of lessening external threats and, hence, market-shocks. Certainly, free trade has limited a state's authority to exercise protectionist policies over its domestic economy but, as Todaro (2005) explains, such limitations only apply to indiscriminate protectionism. Insofar as protectionism instigated by the imperatives of protecting domestic industries from unfair competition or by the exigencies of ensuring against the entry of sub-standard goods into the domestic market, is concerned, however, the state's authority remains inviolate. Many of globalisation and free trade's advocates, however, object to any and all forms of protectionism. Within the context of the free trade versus protectionism debate, they contend that the exercise of the latter is in immediate conflict with the former. As Schwartz (2000) states, "A belief in the benefits of international free trade conflicted with a determination to protect domestic employment and production from external shocks The GATT thus dealt ... with manufacturers, sheltering agriculture and the service sector from international markets" (263). In other words, despite a concession to the benefits of free trade, governments cannot withdraw from the management of their country's trade. Certainly, they need to abide by WTO guidelines and this includes the removal of artificial barriers to trade (protectionism) but, when international trade poses a direct threat to domestic industries, governments need to step in, intervene and confront the stated threat through the instigation and imposition of trade restrictions, including targeted protectionist policies (Todaro, 2005). In commentary upon the above argued, it is apparent that the protectionism versus free-trade debate is fallacious. Quite simply stated, the entire question of international trade should not be approached from an either or perspective. Instead, one need concede to the fact that while free trade has undeniable benefits ad countries, including developing ones, need to engage in it, the fact remains that protectionism cannot be eliminated from the equation. Rather, protectionism should be made to co-exist with free trade since, as the following section shall highlight, it can function to ensure that domestic economies benefit from, but are not adversely affected by free trade and market liberalism. The Rationale of Protectionism When arguing protectionism as both a viable and valid economic strategy which can coexist with globalisation/free trade, it is imperative to distinguish between the different types of protectionism and clearly outline those which fall within the stated category and those which do not. Murray, Schmidt and Walter (1978), while supporting protectionism maintain that some forms of it are simply unsustainable and insupportable insofar as they retard economic development and growth. These types of protectionist strategies generally impose a closure upon domestic markets, effectively isolating them from the international economy, through the imposition of trade restrictions which, to all intents and purposes, prevent the inflow of imports. Such protectionist strategies, generally associated with communist and socialist economic systems, emanate from economic ideologies which are overtly anti-capitalist and uncompromisingly opposed to free trade (Murray, Schmidt and Walter, 1978). Such forms of ideologically motivated protectionism are, quite obviously, inconsistent with free trade and, indeed, given the isolation they impose upon domestic economies, are insupportable. Not all forms of protectionism are ideologically motivated, economically destructive and irrational. Indeed, Crane and Amawi (1997) maintain that targeted protectionism can be conducive to economic growth and development, on the one hand, and is not inconsistent with free trade on the other. In order to explain this in greater detail, it is necessary to refer to specific protectionist policies practiced by different countries. The United States, popularly recognised as the standard-bearer for free trade, globalisation and capitalism, has often reverted to the exercise of protectionist economic policies as a strategy for confronting economic threats and determining market outcomes. As Schwartz (2000)notes, in the years during and after the Depression and World War II, the United States imposed heavy custom duties and tariffs on overseas imports as a strategy for ensuring the performance of domestic goods on the home market. Both events had wrecked havoc upon domestic industries with the implication being that space and time for regeneration and growth were necessary. The competition posed by foreign imports on the domestic market would have worked against the aforementioned. Protectionism, therefore, in the form of heavy customs and tariffs, was the only viable option and, indeed, insofar as it allowed domestic industries the time to recover, validated itself (Schwartz, 2000). More recently, the threat posed by British steel to American steel within the US domestic market forced the former to revert to protectionism through the imposition of heavy tariffs and taxes on British steel In fact, even developed industrialized countries such as the United States practice protectionism as we all recently saw when it placed heavy tariffs on British steel in order to protect its own national industry ( UK blasts,' 2002). The United States is hardly an exception among the countries that, while committing to free trade and are supportive of economic liberalism, occasionally exercise targeted protectionism. The United Kingdom, as Tasker and Riley (2002) assert, has often exercised targeted protectionism on agricultural products in order to ensure the continued growth and development of its domestic agricultural sector. Were it not to do so, the domestic market would be virtually flooded by lower-priced agricultural imports, effectively reducing the sales levels of domestic produce (Tasker and Riley, 2002). Commitment to free trade and globalisation aside, were the United Kingdom not to do so, it would be participating in the destabilisation of its agricultural sector. On the basis of the above stated one can suggest that not only can protectionism and free trade coexist but the exploitation of targeted protectionist strategies allow countries to both maintain free trade relations and minimise its harms while maximising its benefits. Conclusion In the final analysis, protectionism may come across as the very antithesis of all that which globalisation represents. The latter insists upon the withdrawal of the state from the market, argues that state intervention in trade disrupts rational economic operations and contends that the imposition of artificial barriers to trade has an adverse effect upon trade flows and, hence, upon the economy. Protectionism, on the other hand, maintains the centrality of the state in market and economic relations and insists on the impossibility of state withdrawal from the economy, as a direct consequence of its underlying belief that trade restrictions are beneficial. There appears no possible reconciliation between the two views, expect when protectionism assumes the form of targeted protectionism exercised vis--vis external threats to the domestic economy and as a reaction to market disruptions. Indeed, and as the research has tried to argue, targeted protectionism is essential within the context of free trade, not only because it functions to offset the effects of unfair competition but because it promotes the benefits of the aforementioned while reducing its costs. Thus, within the context of the presented argument, protectionism emerges as a viable, valid and vital economic strategy. Bibliography Crane, G. and Amawi, A. (1997) The Theoretical Evolution of the International Political Economy. New York: Oxford University Press. Murray, T., Schmidt, W. and Walter, I. (1978) Alternative forms of protection against market disruption.' Kyklos, 31(4). Lederman, D. (2005) The Political Economy of Protectionism. Chicago: Stanford University Press. Rooth, T. (2002) British Protectionism and the International Economy. Cambridge: Cambridge University Press. Schwartz, H. M. (2000) States Versus Markets: The Emergence of A Global Economy. London: Macmillan. Tasker, J. and Riley, J. (2002) Beckett will back free trade and open UK to import flood.' Farmers' Weekly, 137(4). Todaro, M.P. (2005) Economic Development. London: Assison-Wesley. Read More