I. Discuss the arguments for and against protectionism and how it can affect international trade?
Protectionism, to a certain extent is the anti-thesis of free trade. In particular, it is the manner in which a country protects its local industries by imposing barriers such as quotas, subsidies, tariffs, and other trade restrictigie, 1994, 2) Though it merely takes on a certain part of the general principles of free trade, the practice of protectionism is by and large a current issue in the international setting, particularly in international trade. In discussing the arguments in favour and against protectionism entails a similar discussion on the context of fair trade. Thus, answering the question above will entail a discussion on the general arguments in favour of protectionism. Subsequently, these arguments will then be discussed and analysed in such a way that its flaws and weaknesses will be taken into consideration. In this manner, the discussion will be limited on the principles of protectionism.
One argument in favour of protectionism states that employing such means will enable the money to stay within the control of the country. More particularly, the argument maintains that when the buying public purchases imported products, it is the foreigners that get the profits from these transactionnt, 200655) On the same manner, the purchase of domestic products will provide profits for the revenue from the transactions. Consequently, by preventing the access of the purchasing public on imported goods, the country in general will be able to financially develop by protecting its local industries.
In looking at the said arguments, it appears that the logic takes on a mercantilist approach. This means the argument presents an assumption that the monetary aspect of the transactions is wealth in itself. Those in favour of the protectionist approach and use this argument has to realise that money wont be hoarded ultimately by the exporting country. Eventually, they have to use it and in to some degree return to the importing country, though it may be in the form of investment or even payment for export acquired by other countries. Thus, claiming that importing products from other countries will make the said country richer would be rather fallacious. The money used to acquire the products from other countries will incessantly cycle around the international community through continuous trade.
Another argument in favour of protectionism is guised under the intentions of fair play and equitable competition. Specifically, the argument is based on the equalization of costs. , 2001, 5) In this argument, the intention is to even out the costs in which the foreign and domestic producers all in the spirit of fair play. However, when one analyses the said scenario, equalizing the cost may in fact be a process of counterbalancing any of the advantages that the foreign producer over its domestic counterpart. This means that ultimately, the repercussion of such implementation of an argument would be to impose tariffs to the foreign producer such that their costs are equal with what the domestic counterparts are incurring. This basically is a mockery of free trade and international trade. It is a fact that producers from different countries incur different costs for a particular product. The existence of economic elements such as exchange rate and the availability of the product to a certain region (supply and demand) consequently change the costs from nation to nation. In the long run, if a nation intends to apply such an argument, then every industry in the said state would be a haven for a domestic producer who somehow has taken advantage of the tariffs imposed on its foreign competitor. Thus, in the said argument, the intention is to ultimately eliminate the foreign competitor by imposing trade barriers in favour of domestic producers.
The emergence of infant industries was also taken as a possible recourse for protectionism. This argument claims that when a state realizes that a particularly new industry will enable them to acquire protection from foreign competit, 1979, 7) The point of the said protection is to allow the local industry to reinforce its resources and bulk up such that it will enable itself to compete in the international setting. Improving the skills in production, management and marketing are among the said elements which the local industries should acquire and eventually be good at. Ideally, when the local industries have been deemed as ripe for trading, the protection is lifted. Protection in this context denotes the application of tariffs such that it would improve the growth of the manufacturing industry and concurrently reinforce economies of the state.
Theoretically, the said argument is compelling especially in nations in third world countries. However, there may be problems in implementing the said theory so as to acquire the desired benefits. If one looks at the contention of the argument, it seems that there are flaws especially if it is implemented in the current era where commerce and trade is commonplace. If a particular industry, despite its rather freshness in a particular state, shows signs of potential then local investors would be up for grabs to exploit the chance to become a player in the said industry. Companies in the said industry will eventually become competent enough to compete in the international setting ahead of schedule. On the other hand, if the state does not have any local investor that could shoulder the development of the industry, then engaging in protectionist methods would be rather overshadowed by another course of action: government investment. This means that states could take into consideration the implementation of this protectionist argument but this may possibly reflect badly on their image in the international scale. Besides, finding the right industry and detecting whether it does have a potential for competitive advantage would be extremely difficult. This is especially true given the fact that the repercussions would be irreversible. This means that when an industry is given protection, the companies playing under its shield will try to maintain that shield with all their powers. However, this may be beneficial for a state provided that the said industry does have a competitive advantage in the international setting. Otherwise, having such protection in a rather weak industry will discourage foreign direct investments and other aids coming from other nations.
II. In 2005, the US government and the EU imposed quotas on a range of Chinese textile products. Discuss the reasons behind the introduction of these quotas and the reaction by the Chinese business community.
China is a major exporter of textile and clothing in the international setting. According to a studyao (2000), 1995 was the year when China has exported $5,161M of textile and clothing in the US alone. Moreover, the United States imports most of its textile needs from China, specifically, 20% of its import comes from China and its other administrative regions. Needless to say that China is highly dependent on the United States in terms of the sales coming from the textile exports. The imposition of quotas and other trade barriers has been a big blow in the textile industry of China.
China, US and the EU are initially under the Multifibre Agreement (MFA) which has also imposed quotas and other restrictions in the imports of textile. However, in 2005 a considerable number of these restrictions were abolished to the delight of major exporters in the Asian regiony, 2005, 2) The sales of China to the United States and EU went up the charts with this development. However, they are unaware that this success in the international textile trading would bring them back to the quota horrors much more daunting than those indicated in the MFA.
In the first quarter of 2005, a report in the US government indicated that imports of the US from China were 63% higher as compared to the entire fiscal year of 2004y, 2005, 3) The United States claimed that China was “dumping” their products in their soil. This means that the US accused China of selling their product at a price that is considerably lower China as well. They claimed that this is “unfair trade” and that it caused unemployment, triggered lay-offs and even started the trade deficit in the United States. (p4) On the same quarter of 2005, the EU similarly anticipated the possible dumping processes that the US claimed coming from the Chinese textile industry. In so doing, trade restrictions were imposed by the United States and European Union to keep China from dumping textile and clothing merchandise in their soil.
As expected, the Chinese government intended to protest against the decision. They claimed that the said increase was “reasonable.” (p5) They further claimed that even though there were increases in specific areas in the world, their international sales fell by 2% by the first quarter of 2005. Rather dissatisfied, the Chinese government even claimed that such trade restrictions coming from the top two importing markets in the world would cause 160,000 individuals is China to lose their employment.
To counter this dumping accusation form US and EU, the Chinese government initially proposed to impose a tariff on their own product to increase its price before they are shipped to the said countries. However, they eventually withdrew their proposal of imposing export tariff on over seventy categories of textile products. In the mid part of the second quarter of 2005, EU and China arrived at an agreement wherein China will impose trade restrictions of 8%-12.5% on 10 categories of textile products. In return the EU revoked the plan imposing 7.5% tariff increase on the textile products coming from China.
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