Protectionism on the rise
Martin Khor
Western
countries are increasingly resorting to protectionist
measures such as ‘buy local’ clauses in government spending
and massive subsidies for their failed companies. Developing
countries may be the ultimate victims. |
As the recession deepens in the
Western countries, many of them are resorting to protectionism. This
adds to the problems in developing countries, which are already facing
the effects of the global economic turmoil.
Protectionism is the policy of protecting the markets, industries or
jobs of one’s own country, usually by restricting the entry of products
or services from other countries.
It can take, and is taking, many forms. The most recognisable
protectionist method is to restrict imports by imposing a tariff, a ban
or a quota.
There are also non-tariff trade barriers such as imposing
anti-dumping measures or using safety standards as an excuse to block
imports.
enough subsidies
Protectionism can also take the form of requiring (or giving
incentives to) government agencies or companies to make use of locally
produced goods and services, thereby putting foreign products at a
disadvantage.
Then there are the subsidies that governments give to industries or
financial institutions, either to keep bankrupt companies afloat or to
strengthen viable ones. Without these state aids, they may fall or be
taken over even by foreigners.
If enough subsidies are given, they may even be able to export and at
prices below their cost of production, as is taking place in
agricultural goods like rice, wheat or chicken coming from the United
States and Europe.
Bad Overall
Most economists are against protectionism because it is bad overall
for the country practising it because the costs of consumer goods or
production inputs increase as a negative effect and that may outweigh
the benefits of increased local business and jobs. But more importantly,
it will invite retaliation from affected countries that leads to ‘rade
wars’ and reduce global trade overall, to the detriment of all parties.
The protectionist measures taken by the US in the 1930s are said to
have triggered trade wars and to have worsened the Great Depression.
New forms of protection are now emerging in the global crisis. The
most notable is the ‘Buy American’ clause in the US$ 800bil stimulus
package now being negotiated in the US Congress. In the House of
Representatives version of the Bill, increased government spending on
steel and some manufactured products will only be for made-in-America
products.
After protests from political leaders in Canada and many European
countries, this clause is to be watered down (that it will be in line
with international law) in the Senate version, but is likely to remain,
thus violating the spirit if not the letter of the non-protection
principle.
France is another country where blatantly protectionist policies are
on the rise.
According to a Financial Times report on Feb 3, French President
Nicolas Sarkozy wants French car companies Peugeot and Renault to commit
to buy specific volumes of parts and services from local suppliers in
return for soft loans and loan guarantees.
A few days later he also called on the two car companies to close
their factories in eastern Europe and move production back to France,
sparking a protest from the Czech Republic.
The biggest protectionist measures however are in the area of
subsidies. Until the current crisis the most notorious subsidies were in
agriculture, with developed countries providing over US$ 300bil in state
aid to farmers and food companies, and in high prices paid by consumers.
This has enabled otherwise uncompetitive Western farm products to
flood international markets, at the expense of developing countries’
farmers.
US CONGRESS
The subsidy phenomenon is now rising in the industrial and services
sectors. In industry, most subsidies are banned by rules of the World
Trade Organisation. Recently, however, the US Congress approved a
US$17.4bil aid package to two crisis-hit car companies, Chrysler and
General Motors.
Some European leaders originally threatened to take action against
this US move, but their countries are instead now joining the US to also
give subsidies to save their car companies.
Research And Development
Sweden is providing US$3.4bil to Volvo and Saab in loan guarantees
and support for research and development, France has promised US$7.8bil
in loans and loan guarantees to its car companies and the German finance
minister said it is ‘fatal’ not to support German auto companies when
the US is giving its own firms billions of dollars in aid.
Although protectionism is spreading in the manufacturing sector, it
has arrived with incredible force in services, where the US and European
governments have doled out more than US$1 trillion in various types of
aid to banks, insurance companies and other financial institutions, such
as house-mortgage companies. Without these massive injections of equity,
loans and loan guarantees, giant companies such as Citigroup and AIG in
the US, UBS in Switzerland and Royal Bank of Scotland in Britain would
have gone under.
Developing countries are at a disadvantage because they do not have
the same amounts of public funds to bail out their troubled
manufacturing companies or financial institutions.
(The writer is the Director of the Third World Network. Courtesy:
Third World Network Features.)
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