Nov 17 2008

A call FOR protectionism!

13 Responses to “A call FOR protectionism!”

1. # Ross Hutchisonon 17 Nov 2008 at 4:18 am

   The difference in the protectionism, as spoken to by Chang, seems to be pretty straightforward. We have an America in the 19th and early 20th century that was not the huge world dominating giant that it is today. It was the protectionism of that period that nurtured it into becoming so. This is quite a startling observation in itself, as it makes America look ever so slightly hypocritical in its free-market capitalist approach.

   But the point seems to be that the protectionism worked. It created the world’s largest economic giant and world power. Should it have been allowed to happen under a true capitalist system? It seems not. It seems almost like “cheating”. Yet we can’t go back and correct this mistake, if that is indeed what it is. Had it not occurred, we might not be as technically advanced or proficiency as we are these days. It seems we can give up die hard capitalism for protection when it nurtures efficient infant industries.

   The problem is in today’s world that we now have imposing and monolithic corporations that can already produce things, and fast. How can we impose protectionism against these, without incurring anger at their loss of productivity as their markets fall. Who would get to impose tariffs? Who wouldn’t? How do we know if an industry is going to be successful? It’s much more difficult in today’s fast-paced trading climate to advocate this kind of protectionism. Now it needs to be more aimed at protecting and maintaining existing companies as they move into retooling for goods they can better produce.

   Chang speaks about “intelligently designed” models for this new protectionism of the infant-industries of the developing world and the existing producers in the developed world. But we don’t know what these could be, and just how difficult these rulings will be to implement politically will pose an entirely different problem in itself. It makes sense that we do adopt this form of protectionism, seeing as a shift now to actual free market capitalism would result in a huge reconstruction and reordering of the world economic structure. Although this might be the best for the world in the long run, we don’t have all that long, and the pain it will create will be unbearable for a good number of the world’s population.

   So what can we do? The protectionism has its merits, but it is the system that has failed us here. The capitalism might be the way to go, but we are so set in our ways and the way the world functions that it might be a step we are unable to take.

2. # Jason Welkeron 17 Nov 2008 at 4:44 am

   Ross, good analysis, thanks! I think you identify the stark reality of America’s hypocrisy and identify the obvious difficulty associated with identifying the industries to let die and the ones to resuscitate back to competitive life.

3. # Dominic McNameeon 18 Nov 2008 at 6:09 am

   In the past America’s protectionism was to build up its economy to a scale where it became an economic super power. Today the protectionism is so that America stays as an economic super power.
   In a developing country protectionism is useful until the industry has a base to work off of. For example, factories and dealership network. Once these are in place the protections should be gradually dropped so that the local industry can get used the the competition gradually. If all tariffs, taxes or subsides were to be removed in one go then there is a good chance of the local industry would fail straight away in face of the more established competition. On the other hand the consumer would lose out if the protections remained in place because they would not have a competitive market.

   Allowing smaller companies to fail as Chang said does make sense. However for companies such as GM, Ford and Chrysler this is not an option. Not only do they employ an enormous number of people in America there are a huge number of smaller companies that depend on selling parts to those giants. Not only that but many of those companies branches in other counties are successful but only so because of the access to their global network of parts. For example Holden, the Australian division of GM would have been making very large profits if they weren’t all taken by GM America. This partly due to Holden being able to source their transmissions, V8’s and inline 4 engines from GM America and a small car platform from Opel. (GM Europe) In turn Holden supplies the rest of the GM network with V6 engines and a large RWD sedan/wagon platform. If GM were to fail, Holden would go down with them, wiping out over 200,000 Australian jobs. In a country of only 20 million that is a huge number of people to be unemployed. So not only America will be effected by the collapse of one of these companies.
   If all these people were to lose their jobs that would mean they could no longer continue to buy as much as they would have in the past. This means other companies lose money and lay off even more workers and the cycle continues.

   That is why it is politically hard for one of these companies to be allowed to fail.

4. # maddi Don 18 Nov 2008 at 6:28 pm

   America could in the past justify its protectionist policies and high tariffs as necessary because as is stated by Ha-Joon Chang, they simply could not compete with the efficiency of the Europeans. But now that American industries have matured, America still wants to protect industries such as that of the automobil which still cannot compete with rival industries.

   The Infant Industry argument is very understandable when used in developing countries. If for example, an African country wishes to enter into trade of their textiles amoungst many other developed countries and their textile industries, they could never stand a chance; their industries are small, their workers unexperienced and therefore inefficient. It would be necessary for them to impose either subsidies on their producers, or tarrifs on imported textiles (and HOPEFULLY other countries will not retaliate against this) so domestic consumers only purchase domestic goods, further fueling the developing industries. The reason the infant industry theory pretty much works, is because it is in many people’s interest for the industries of these developing countries to grow. Their growth with fuel consumers with inexpensive goods, thus raising consumer surplus and it will provide other firms with new sources of exported resources in which to expand their own industries ect.

   As we have learned in class, mature industries who are being crushed at the hands of more competative rivals, are probably better off not being saved because chances are, they will be back i nthat same situation when their protection is removed. In the spirit of free trade, inneficient industries, especially those who have had their chance to keep up with globalization, should be let to die out of the market, and their potential protection money spent elsewhere in the economy, somewhere more useful. For example, in America the government could instead be using this money used to spoon feed the failing industries, for research which may decrease the cost of production of industries that AREN’T failing, because ultimately, these will do more good, and at a cheaper price, for the US in its current state.

   I believe therefore, that Chang’s idea about “through orderly liquidation and redundancy” is a very suitable solution to these failing industries. What he means by this is basically removing barriers slowly and forcing firms to discharging costly labour and machinery gradually, saving the firm those costs but decreasing their output,and repeating this process until the firm is no longer able to function, but has not experienced a sudden halt and mass unemployment of workers at one time. This is very hard to achieve politically because the government will have to deal with a large amount of unemployment and therefor have to expend unemployment benifits to these workers, and in America’s current situation, mass unemployment would not be ideal. The government must choose between spending money on these unemployed workers who, in the economie’s current position, may not find another job for a very long time, or spending money keeping the industries who may have to fire them open hwen the money could be used to better correct other parts of the economy.

5. # Joelon 19 Nov 2008 at 1:03 am

   What seems to be the difference between America’s justification for protectionism in the 19th and 20th Centuries and today, is that in those days had not yet acheived the economies of scale it was to obtain later on, and its infant industries needed room to develop.

   This is in my view quite a valid argument which can be presented for protectionism in developing countries, especially today, when countries are competing against highly developed economies with access to relatively large pools of capital.

   It seems to me that Chang is arguing for protectionism of a very specific kind: temporary protectionism. Acknowledging, albeit subtely, that inefficient sunset industries will eventually collapse and that resources will be moved elsewhere, he argues for a type of protectionism which will allow a smooth transition, allowing for controlled structural changes in the economy while industry is shifted into a kind of production to which it is better suited. I would call this “parachute protectionism”.

   It just takes one look at the current global crisis to understand why Chang is advocating this view. Bang, Lehmann Brothers collapsed! Northern Rock, Fannie May, Freddie Mac. It happened so fast! When industries as vital as these collapse as they have done in the current crisis, both political and economic repurcussions are severe. Likewise, if a sunset industry suddenly shut down with that speed because it was pushed out of business by more efficient competition, the consequences of this, too, would be unfathomable. Clearly the crux of Chang’s protectionist argument is to provide more time for domestic economies to sort themselves out. Workers could be retrained without being unemployed.

6. # Wilhelmon 19 Nov 2008 at 3:07 am

   I thought this article was most interesting ones on the wiki. I disagree with Maddi’s point of developed economies simply letting their markets fail where they do not have comparative advantage. Like Joel said, ‘both political and economic repercussions are severe’, and this would be devastating for America for example. America should not let their failing markets simply dwindle and die, because then they would lose their ‘advantage’ in those markets. As it stands now, America still has a good chance of being able to become competetive once more in Auto manufacture (as the American market slows, with a rise in unemployment causing workers to take jobs at lower wages allowing the market to become competetive once more). If it were to just give up on the Auto market, it would most probably not be willing and able to enter it once more as it would be an infant market, and the costs and risks associated with reentering the market would be too great.
   This logic doesn’t apply to something in which America does not, and can not gain comparative advantage in (such as shoe manufacture). While it is better for both the American economy and the world economy to reallocate the resources in shoe manufacture, it would be extremely harmful for American standards of living in the short run. The costs in the short term might even be higher than the gains in the somewhat long term, as there would without a doubt be widespread protests and strikes and a destabilization of the current government. Rather than getting rid of all protectionist measures immediately, it might be smarter to do so over a long period of time (possibly through social propaganda creating a gradual negative outlook of the market), sufficiently allowing resources to correctly allocate without causing too much of an economic shock.

7. # Moritzon 19 Nov 2008 at 4:04 am

   In the late 1800’s and the early 1900’s America was protecting its industries from the powerful European economies that were expanding. The protectionism that the USA was making use of were tariffs. These tariffs were in place to set up the “infant industries” as Hamilton decided to call them. These infant industries refer to new industries that have recently been established. Therefore the USA put tariffs on imports to allow the local industries to achieve economies of scale. In comparison to today’s protectionism this seems to be a valid argument. The protectionism nowadays is to help protect sunset industries, industries that are slowly dying. That is the main difference between protectionist policies in the late 19th century and today.

   The sunrise industry is a responsible reason why protectionism should be introduced to help developing countries. Without protectionism developing countries will find it very hard to open their borders to trade because they will not be able to compete with the low cost products that can be imported into the country. The infant industries would collapse as soon as they become vulnerable to imported goods. It takes time for an industry to develop and adapt to the needs and wants of the consumers (or producers). Protectionism allows an industry the time it needs until it is ready for competition.

   The idea of Chang’s principle of thorough liquidation and redundancy is pure free trade. Without barriers supporting the sunset industries each country would produce what they could with the lowest opportunity cost. However not everything is black and white. If we take the American automobile industry as an example we can tell that the USA does not hold comparative advantage on producing cars. So a free trader would argue, like Chang, let them go under. The free trader would not be taking into consideration all the negative externalities that are tied with the “death” of this industry. The main problem would be unemployment. 3 million American workers would lose their job! First of all this would arise the social problems associated with unemployment such as crime or drug abuse. Secondly fired workers/consumers would receive no more wages, therefore decreasing the amount of goods they will consume and the government will receive less tax revenue. In a time of recession falling consumption and therefore demand. A positive aspect, regardless of unemployment, would be that the American government no longer needs to pay out the automobile industry and can open its borders to free trade. Overall however, unemployment would result in a worse crisis than bailing out.
   A solution for the problem would be to gradually retrain the workers and one by one start to close down sections of the industry, without making unemployment a big problem.

8. # Eithanon 19 Nov 2008 at 5:51 am

   Professor Ha-Joon Chang states that “the US cannot continue its peculiar mixture of free-trade mythology and uncoordinated, ‘reactive’ protectionism that has served ordinary Americans and the developing nations so poorly.” Instead, Professor Chang advocates protectionism to ease the adjustment of mature industries, which, arguably, can “facilitate, rather than hinder, trade adjustment and industrial upgrading.” This argument is undoubtedly politically more appealing, as it will save millions of jobs and evade the widespread economic and political repercussions of not bailing out the auto industry. However, is it really best for the American economy? In the short-run, the effects of not bailing out the auto industry will be disastrous. In the long-run, nevertheless, according to economic theory, jobs will move into more efficient sectors of the economy, and eventually, the US economy will be more efficient. Even with economic theory aside, the question at the heart of this issue is: can the US really save its auto industry and transform it so that it can compete with foreign manufacturers? Professor Chang believes so, and argues that “industries can be revived through re-tooling of its factories and re-training of its workers.” This argument is idealistic and optimistic at best. The US auto industry is simply less efficient than the Korean and Japanese auto industries. Trying to ‘revive’ the American auto industry will require large government expenditure. Additionally, it will lead to an over-allocation of resources, and even then, the US auto industry might not be able to compete with foreign producers. Hence, it seems that the doom of the American auto industry is inexorable. Although the government should use protectionism to ease out its collapse, it should not attempt to revive it.
   The US achieved its economic supremacy because of the protectionist policies it enacted in the 30’s and 40’s. Indeed, by protecting its infant industries from large and established European firms, the government fomented their growth and allowed these industries to become competitive. Today, however, the US is merely trying to maintain these established industries. It is not attempting to foster new and auspicious ones. Hence, although the US will be able to save its established in the short-run, eventually, they will collapse. If the US does not invest in new industries in which it has a comparative advantage, the economic supremacy it achieved in the 20th century may well soon come to an end.

9. # Sabrina Walshon 20 Nov 2008 at 6:10 pm

   The US when first going through the industrial revolution set up high tariffs to lessen the amount of imports and nurture the infant industries that were developing within it’s own borders. The introduction of a sense of protectionism in developing nations will hopefully create a similar affect. By setting up tariffs hopefully there will be less imports and thus less competition for the industries in thos e areas. If a government is able to set price ceilings so that the companies still make profit to grow and charge relative to incomes of that area. So the people can afford the products, with affordability and jobs there will be more money in circulation in these areas and the economy will grow. Slowly it can be opened, and new products introduced so that monopolies are not created.

10. # Gorka Zubieteon 21 Nov 2008 at 12:12 am

    Between the 1830’s and 1940’s the US’ economy was competing with the powerful Old-continent economies, where these controlled various colonies. The US economy, to be able to compete encouraged and imposed tariffs to protect their infant industries. However, things have changed, especially after the great world wars. Here, the economies of Europe were destroyed and the US economy flourished and the economic powers changed. In the late 19th century the US government used protectionism to protect infant industries, that if weren’t protected they would have been left to wither away to their European competitors. However, today the US government uses protectionist policies to protect sunset industries, industries that do not have comparative advantage. The US government is protecting these sunset industries to please the voters, and is only slowing down the process in which these ineffiecient economies will disappear from the market. The government of the USA should start to retrain the car manufacture employees and employ them in sectors of the economy in which they have comparative advantage and truly start to promote free trade.

    BASQUE INDEPENDENCE!!!

11. # Deirdre Stensonon 21 Nov 2008 at 4:46 pm

    The main difference between the protectionism used in the United States in the 19th and 20th century in comparison to the methods used now, is the sheer scale in which the nation was integrated. Unlike today, the United States was not a huge dominant force within the global market, and therefore the methods it put in place where not to the same scale as they are used currently. Furthermore as stated by Chang, the current protectionist methods are in aid of ‘mature’ or ‘sunset industries’, whereas, beforehand they were more focused on ‘infant industries’, this shift itself is a massive overhaul to economic policy.

    Like free trade, protectionist methods can also be beneficial to a nation’s economy. Protectionism in the form of subsidies, tariffs or quotas, can be vital in helping to protect domestic stakeholders from being at a competitive disadvantage. Futhermore, this is often the case in many nations’ current economic plans. As proposed in the economic plan of the United States, protectionism of ‘sunset industries’ is a practice they find to be of vital importance, and can see long term growth in this sector of the market.

    Chang’s belief of responsible protectionism and letting industries to die out through ‘through orderly liquidation and redundancy”, is an ideology based for the most part on freee trade. Chang obviously believes in comparative advantage and letting industries without a future to die out. However, although this does seem to be ideal for a pro free trade standpoint, it is a controversial issue politically. In modern politics, letting industries deeply connected to a nation die out without any intervention is an unpopular stance for politics. Furthermore, the negative short term impacts of letting these industries die, such as unemployment, would also prove to be unpopular stance for politicians.

12. # Calvinon 21 Nov 2008 at 7:09 pm

    How could protectionism be used responsibly by developing countries to promote economic growth and development?

    Protectionism is only justifiable to a certain extent.

    Arguments for Protectionism include:

    The Sunrise Argument, in which a country may claim that it has placed a tariff on a certain good, in order to protect a newly developing domestic firm who is producing the same good. This firm may not be able to conpete on the global market, and while its building up its competativeness it needs to be protected.

    Protectionism would keep jobs from being outsourced, and thus domestic emplyment can remain constant.

    Another popular argument for protectionism is dumping. Dumping is when a a country sells its surplus of goods off cheaply in another country’s domestic economy. This would ruin the domestic market of the country being dumped on. This is why many countries claim it is justifiable to have tariffs in place to prevent their domestic economies from being ruined by dumping.

    However all these arguments can all be considered excuses to just protect the certain interests of lobby groups. This will create dead weight loss as resources are misallocated.

13. # mankaon 21 Nov 2008 at 10:18 pm

    Protectionism isn’t always considered good when you are trying to promote free trade, but it is required in order to keep the flow of trade. For instance, if ou want an infant industry todo well and develop fully to be able to compete in the market, the government has to protect it by imposing tariffs or supplying subsidies. ALso, several other factors compell government to protect their industries as discussed above in comments.

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