Are protectionist policies necessary for development? Discuss using traditional and contemporary examples.
Protectionism is the economic policy of states deliberately minimising trade with other states in order to protect their own industries. It is a policy that has proved successful throughout the centuries in developing strong economies but is considered negatively in the modern neoliberal era by international institutions such as the World Bank, International Monetary Fund and the United Nations, with free trade being seen as the standard to which international financial policy should be held. This essay shall examine both historic and contemporary protectionist policies and whether they have been essential in creating economic development.
Protectionism is a national economic policy by which states consider their own self-interest by limiting trade with other states to benefit their own industry. Fledgling or weak industries within a state can often be hampered or defeated if they are in domestic competition with larger and more advanced industries of other states. This leads to the domestic industry failing or collapsing and brings an increasing trade deficit as well as a loss of jobs. States do not want to be indebted to others or to have to deal with domestic unemployment so “countries continue to protect their markets from foreign competition even though they have committed themselves to free trade”. (O’Brien & Williams, 2013, p. 11) Protectionist policies are introduced to give an advantage to domestic industries over foreign industries with the intention that this will help the domestic economy.
Thompson and Vescera argue that the balance between free trade and protectionism is cyclical and can be defined by “two types of growth waves” in economies: “ascent waves” where “new technological leaders” emerge and create an “increase in the gap between the leaders and technological followers” and “catch-up waves” where there is “an increase in technological diffusion to followers, an expansion of trade, and a lowering of trade”. These waves can be predicted by the economic performance of the hegemon of the time and the “system will become more open as long as the hegemon is ascending and will become less open as the hegemon declines”. (Thompson & Vescera, 1992, pp. 493-495) Protectionism is an economic tactic both for countries looking to develop their economies to the level of more advanced states and for those advanced states to protect their economies from the strengthening of less developed states. In both cases it is essential for development.
Protectionist policies were at the heart of the growth of the major European powers from the 15th century to the 19th century. They subscribed to a mercantilist view of economics, which was a “zero-sum game”, where “one state’s gain is another state’s loss”. This meant “European states strove to establish overseas empires that would be as self-sufficient as possible”. (O’Brien & Williams, 2013) There was only very limited inter-state trade so as to protect national interests.
The United Kingdom developed the world’s largest empire, peaking in the 19th century, in part because of its use of high tariffs on imports. Foreign industries, even those of its’ own colonies such as India, were placed under heavy operating restrictions meaning that only British materials and produce were being traded within their newly industrialised empire. An early example is how Henry VII in the 15th century “transformed England from a raw-wool exporter into the most formidable woollen-manufacturing nation in the world” (Defoe in Chang, 2003, p. 4). Without these measures “it would have been very difficult for Britain to make this initial success in industrialization”. (Chang, 2003, p. 4)
Friedrich List argued that this form of protectionism was essential to begin the process of economic growth and recommended that his native Germany “should industrialize behind trade barriers so that it could catch up with the economic might of Great Britain”. (O’Brien & Williams, 2013, p. 9) The United Kingdom, United States and Germany all expanded and flourished using protectionism even if it was “a transitional policy on a road which will lead eventually to free trade”. (Levi-Faur, 1997, p. 161) Even though these powerful states now encourage developing nations to engage in free trade to improve their economies, they would not have developed in the way that they did without protectionism. Their recommendation of free trade to the developing word is “in effect “kicking away the ladder by which they have climbed to the top beyond the reach of the developing countries” (Chang, 2003, p. 14) Powerful states know that protectionism can be beneficial for developing states, but it is not in their interests to allow them to use protectionist policies.
Although free trade is beneficial for the former superpowers in the present day who have little in the way of resources and much in the way of corporations, it is not necessarily helpful for countries in the developing world. There is wide-scale exploitation of politically weaker countries in Africa, generally through transnational corporations (TNCs) who “have achieved and demonstrated the ability to influence the direction of political and economic policies both on a national and international level.” (Hobson Jr., 2006, p. 23) These TNCs make large profits from the extraction, sale and use of foreign states’ resources with little in the way of reparations to the host state. These host states do not earn enough from their resources to develop sufficiently. It can be argued that the development of Africa would have been stronger had they been able to introduce protectionist measures against the exploitative companies that have plundered their natural resources.
However, there is disagreement over whether protectionism would be to the benefit of developing states. Love and Lattimore suggest that “if tariffs were eliminated, more than half (52%) of the benefit would be expected to accrue to developing countries”. (2009, p. 61) The investment of foreign companies in developing states is also undoubtedly helpful in the creation of infrastructure. Free trade means that developing states can maximise the profits they do receive for the sale of their resources. In this regard, free trade is more helpful to developing states than protectionism.
In modern times of economic hardship it is common even for developed nations to re-introduce protectionist economic policies to ensure the recovery of their own industries first. In 1975, when the United Kingdom was undergoing a period of “stagflation”, the Cambridge Economic Policy Group, made up of economists from the University “proposed a strategy for ending the cycle of British industrial decline: a Keynesian policy of reflating domestic demand behind general import barriers” (Kahler, 1985, p. 477) Although the policies did not fully return the economy to growth, they did lay the foundation for the beginnings of the economic boom of the 1980s under Prime Minister Margaret Thatcher. However, the growth of the British economy in Thatcher’s era was largely from neoliberal free trade ideals that counter-act the theory that protectionism is always the best solution to bring growth. In 1987, Aggaral et. al. noted that “negotiated protectionism has been particularly evident in five industries in the United States during part or all of the last quarter century” with those industries being “textiles and apparel, steel, footwear, television sets and autos”. (1987, p. 345) Without such policies, economic development would have stagnated in both these states and their economies would be overtaken by others. These policies may not have been as successful as the neoliberal free market policies of Thatcher and US President Reagan but were important nonetheless.
Protectionism does not guarantee limitless growth of a domestic industry and therefore it is beneficial for states to introduce policies of open and free trade once they are satisfied that their economy can sustain the influx of foreign investment and industry. China is an example of the benefits of gradually liberalising a formerly protectionist economy when conditions are right. The Chinese government introduced major economic reforms in the late 1970s to allow for international trade and the results have been massively successful. China’s economy has seen growth of between 3.8% and 15.2% every year between 1980 and 2012 according to the International Monetary Fund (2013) as well as becoming the world’s largest exporter of goods. China also has a vast economic surplus and is on course to becoming the economic hegemon within the century.
It is unknown whether such rapid and successful economic development could have been achieved without protectionist measures existing before and to an extent after opening up for free trade. China’s communist government continue to subscribe to a mercantilist view of economics which aims to create a state that is as self-sufficient or autarkic as possible. Free trade is still limited in China to special economic zones along the coast and in larger cities such as Beijing and Shanghai and the largest Chinese companies in terms of revenue and market capitalisation are part-owned, at least, by the central government. According to The Economist:
“Its [China’s] tariffs may be low, but it lavishes subsidies on favoured domestic companies and discriminates against foreign ones, especially in sectors such as energy and transport, forcing them to surrender their technology and tolerating brazen intellectual-property theft. The yuan is still not a free-floating currency.” (The Economist, 2011)
China may have liberalised in some ways but are in no doubt that some level of protectionism is required to maintain their economic rise.
From the rise of European powers in the colonial era to China’s current re-emergence as one of the world’s largest economies it is clear that protectionism brings economic development at the expense of international trade. Although free trade may be the neoliberal ideal of inter-state economics, even those countries that consider themselves the most neoliberal such as the United States of America and United Kingdom have used protectionism in recent times to help their own continuing development. Both historical and contemporary examples show that protectionist measures are required by a state to develop its’ own industries and develop economically.
Word Count – 1,631 (excl. bibliography)
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Chang, H.-J., 2003. “Kicking Away the Ladder: The “Real” History of Free Trade”. Foreign Policy in Focus.
Hobson Jr., I., 2006. “The Unseen World of Transnational Corporations’ Powers”. The Neumann Business Review, Spring 2006, pp. 23-31.
International Monetary Fund, 2013. “World Economic Outlook Database”. [Online]
Available at: http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx
[Accessed 19 March 2014].
Kahler, M., 1985. “European Protectionism in Theory and Practice”. World Politics, 37(4), pp. 475-502.
Levi-Faur, D., 1997. “Friedrich List and the political economy of the nation-state”. Review of International Political Economy, 4(1), pp. 154-178.
Love, P. & Lattimore, R., 2009. “Protectionism? Tariffs and Other Barriers to Trade”. In: International Trade: Free Fair and Open?. s.l.:OECD Publishing, pp. 55-75.
O’Brien, R. & Williams, M., 2013. “Global Political Economy”. 4th ed. s.l.:Palgrave Macmillan.
The Economist, 2011. “And now, Protectionism”. The Economist, 15 October.
Thompson, W. R. & Vescera, L., 1992. “Growth Waves, Systemic Openness, and Protectionism”. International Organisation, 46(2), pp. 493-532.