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End Protectionism

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Submitted By djames2
Words 3525
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Daniel James
Kate Reed
English Comp
10 December 2014
End Protectionism.
Table of Contents

Section 1: Introduction---------------------------------------------------------------------------------- 3
Section 2: What is Protectionism?-------------------------------------------------------------------- 3-9
Section 3: Why does it occur? ------------------------------------------------------------------------- 9-10
Section 4: Arguments For ------------------------------------------------------------------------------10-13
Section 5: Conclusion------------------------------------------------------------------------------------13-15
Works Cited-----------------------------------------------------------------------------------------------16

Section 1: Introduction The United States should institute a blanket reform of its international trade policies. Its current protectionist practices are both in violation of current World Trade Organization suggestions and mandates and, far from being beneficial to the American economy, for the most part serve to hurt both American and foreign consumers. There are few American markets not protected in some way by the Federal Government in the form of tariffs, quotas, or domestic subsidies. While these practices are touted as an aid to domestic manufacturing process, true economic analysis shows that most if not all protectionist measures actually serve to limit economic growth. The arguments given to justify protectionism range from the poorly-disguised corporate handout to downright racism, while the few good reasons for it such as to protect 'sunrise' or developing industries do not apply to the United States.

Section 2: What is Protectionism? Protectionism, defined simply, is any form of barrier to free trade that a governing body places on a market. By this definition, any trade legislation that the government enacts, up to and including the establishment of a border, is an example of protectionism. However, for the most part when protectionism is argued about it is in the form of one of three things: quotas, tariffs, or subsidies. The purpose of each of these is the same: to provide a leg up for domestic business. The difference lies in the way in which each goes about achieving this. (Clifton; Ikenson; Lee) First, a tariff. A tariff is a tax placed on an import. It has the two-fold effect of driving up the cost of production for the foreign firm and also providing government revenue.
Figure 1. A graph showing the effects of a tariff on the American Market for Steel. Above is a graph showing, for example, the American market for steel. The red and blue lines denote the Domestic Demand and Supply, respectively. The horizontal black lines are World Price (the price at which the foreign goods are able to be produced) and the World price as raised by the tariff levied by the US Trade Association. In actuality, according to Dan Ikenson in a Center for Trade Policies briefing titled, “Steel Trap”, “U.S. steel producers have been shielded from foreign competition by quotas, voluntary export restraints, minimum price undertakings, and hundreds of antidumping, countervailing duty, and safeguard measures,” (1) meaning that this graph only tells part of the story regarding government intervention in the market. For the sake of this example I will only focus on the tariffs ('countervailing duties'). In short, because the World Price is lower than the price at which domestic suppliers are willing and able to produce (in a closed system, the market would produce where Domestic Supply meets Domestic Demand), we see that foreign producers (mostly China and some South-East Asian countries) provide a significant portion of the steel demanded in the country (signified by both Rectangle A's and Rectangle B combined). The US producers provide for quantity (Origin)-(Q1). “It would be difficult to find another U.S. industry already more coddled and protected from the realities of the marketplace than the steel industry” (Ikenson, 2). When the government levies such a tariff on steel imports we see the world price effectively rise to P2. U.S. Producers are better able to compete with this higher price, and so we see US production increase produce at point (P2, Q2) while foreign production falls to include only Rectangle B. Government revenue is shown by Rectangle C. In short, tariffs make it more expensive for foreign producers, thus allowing their American counterparts (in effect, the less efficient firm) to compete. A quota is a limit on the number of foreign goods permitted to be imported. For example, in the Apparel and Textile market in the US, the U.S. Government has set specific numbers on the number of saleable goods. As I will demonstrate shortly, most if not all protectionist measures are counterproductive, but even if that fact is ignored, quotas actually do very poorly at giving domestic producers the upper hand.
Figure 2. A Graph Showing the Effects of A Quota on the American Textile Market. The graph above shows a simplistic representation of the American market for Textiles and Apparel. Along the X-axis is Quantity of the goods demanded; along the y, Price. As can be seen, in the market structured without the imposition of a quota, the World Price is far below that of the equilibrium for the domestic market (Pe). This is because the foreign producers are able to produce these goods at a far more efficient level, mostly due to the lower wages present in the developing and semi-developed countries that produce these goods. The ethical implications of these possibly unfair working conditions will be discussed in Section 4, but the economic explanation is simply that they are more efficient. Without protectionism, foreign producers provide from Q1-Q5 (Rectangle A) at the World Price, and Rectangle D accounts for the small group of domestic producers willing and able to produce at that price. Now, the imposition of a quota on the number of goods allowed to be imported, like the “Special Safeguard Mechanisms” put in place by Congress at the time of China entering the World Trade Organization (Ikenson, Washington, 2). We see price rise to Pquota, which means that more domestic producers are able to compete, thus domestic production increases to include both red Rectangle B's, just as Congress wants. On the other hand, we also see that, because price has risen, foreign producers see their revenue rise to include all of Rectangle C; a reduction from the level they were at with free trade, but not nearly as large a decrease as it could be, and the government doesn't even get the revenue they would have had they instituted a tariff. The last and most insidious example of classic economic protectionism is government funded subsidy of domestic firms. This is actually the most effective way to protect a domestic market, and thus also the most harmful to consumers. In a subsidy, the government uses its budget to effectively pay a company to produce a product. As shown in the graph below, this lowers the costs of the firm and allow it to drop the price. It is a general economic principle that as the price of a good lowers, the number of consumers willing and able to buy the good increases.
Figure 3. A graph Showing the Effects of A Subsidy on the American Market for Cotton With free trade, the American Market for Cotton would function at World Price, with (Origin-Q3) supplied by domestic producers, and (Q3-Q2) supplied by foreign producers. As David Clifton writes in The Harvard International Review article “Routine Failure: The Mistake of International Protectionism,” “The United States' extensive protection of its agricultural sector has essentially become a fact of life...”(2).The effect of the subsidy on the cotton market as displayed here is to drop Domestic Supply to 'Domestic Supply + Subsidy', where, because the equilibrium point in conjunction with the Demand curve is lower than the world price, its revenue includes both Rectangles A and C and, because the government is effectively paying the firm to produce the good, Rectangle C. This, of course, shows that subsidies are a highly effective method of ensuring your domestic firms remain on top. In the case of this example, the fact that the equilibrium is lower than the World Price means that the World Price actually drops because of it. When the world price of cotton drops, other producers of cotton, such as much of West Africa, are suddenly struggling to function. Even discounting the harm that subsidies do to developing countries, the problem lies in the fact that they are doubly inefficient. Subsidies are firstly inefficient in the way that all of these instances of protectionism are inefficient: they put the less successful firm in possession of a larger market share. However, the second way they are inefficient is that they use taxpayer dollars to fund a private operation when that money could go to funding education or infrastructure. This, of course, is all in connection with how the government makes its decisions, a topic to be dealt with in the next section.
Section 3: Why Does Protectionism Occur? The simple answer is that politicians make decisions based on what is best for their individual constituencies rather than what is good for the U.S. population as a whole. The best example of this is the fact that most of the reason that the agricultural subsidies on goods (especially cotton) are still in place is that Iowa, the second largest producer of agricultural goods in the U.S., is a 'swing state'. No politician attempting to get elected in Iowa has a chance if they don't support the subsidies, even though the United States would probably be better off without them. As Clifton writes, “According to the Budget Office, the implementation of the current farm hill will cost the US roughly $956 billion over the next 10 years.” What is more, these farmers are not even desperately in need of it to compete with their foreign counterparts as ¨roughly 75 percent of total agricultural subsidies in the US go to the top 10 percent of farming companies; meanwhile, the average farmer still makes more money than the average American.” As Clifton sums up, “...agricultural protections have become a means by which tax-payers needlessly hand over money to fellow Americans who are already financially stable.” All because you can't get elected in Iowa otherwise. As with so many things in democracy, protectionism is the result of general, rather disinterested disapproval versus specific and motivated approval. Lobbyists for corporations or workers' unions spend time and energy convincing politicians to protect their specific markets. For instance, in relation to the steel example above, as quoted in Wall Street Journal Op-Ed piece “Protectionists Steel Washington”, “So it goes in the protectionist racket known as antidumping enforcement. Low-priced steel from South Korea is good for American buyers but annoying for American producers like Nucor and U.S. Steel that would rather have the market to themselves and charge higher prices.” (2) The piece is a response to the Commerce Department imposing duties on hundreds of millions of dollars in annual steel-market trade with various Asian countries. These lobbyists are able to cajole the U.S. government into attacking foreign firms for them. The article states that the anti-dumping legislation (Dumping: selling a good in a foreign market for less than “fair” price) is so loosely controlled that domestic firms are able to use it to create barriers to entry for foreign firms. It is almost to the point that a corporation need only to point a finger at a foreign corporation before the USTA slams them with heavy tariffs, particularly in the steel industry.

The question of efficiency is the crux of why the United States needs to seriously re-evaluate its stance on free trade. When the government places a quota on textiles, we see a drastic increase in the price of those goods. Consumers are paying more for clothing than they have to be, and the explanation is “to save American jobs.” This argument, really the main argument for protectionism in the United States, is one I will address in the next section.
Section 4: Arguments For Protectionism Figure 1. demonstrated that when cheaper steel is imported from South Korea and China we see a drop in the amount American firms are willing and able to produce. This inevitably means that there will be fewer Americans working in the steel industry. Politicians dislike unemployment, and thus they listen when US Steel tells them they'll have to start laying off workers if they aren't protected in some way. What is not being taken into account is that there are many markets within the U.S. that depend on steel being relatively cheap. The automotive industry and the oil industry spring to mind, both major employers of American labor. Thus, I'd like to introduce a graph of my own invention, a modified Laffer Curve known as the “Depending on Elasticities Curve.” As shown below, depending on elasticities (ahem), there is a point, or section, where when tariffs are lifted, the subsequent inflow of labor to oil and automotive jobs outweighs the outflow of labor from the steel market, a market that has already proved itself too inefficient to deal with the foreign competition.
Figure 4. A Graph Known Facetiously as the “Depending on Elasticities Curve,” created to show the effects of a Tariff on Employment within Industries Connected with the Steel Industry. My hypothesis deals with the law of diminishing returns, the idea that if you continue to add variable factors to fixed factors of production there will be a point at which you see decreasing returns in terms of production. If we accept that, because of the natural constrictions on both of these industries there is a set amount of steel and oil that can possibly be produced by the United States, then we can draw the conclusion that at areas of extremes in regard to domestic production of steel, we see a corresponding decrease in employment. First of all this means that at points with close to zero barriers to trade, (Section A) all steel production will be in the hands of foreign entities (the more efficient firms), and thus employment will drop as there is a limit to the increase in labor resulting from cheaper available materials, particularly as what is being described is an almost complete collapse of the steel industry (as of now, according to Don Lee of the L.A. Times, tariffs on imported steel for some countries are as high as 118%) (1). This is in line with what the steel companies are suggesting, that 'there will be a decrease in employment if tariffs are dropped'. At the other end of the curve, Section C, the scenario is that the tariffs are so steep that it is impossible for foreign companies to export steel to the United States. The market would operate as only a domestic market, and thus employment would be at the hypothetical value of “Closed-System Employment”. What I am hypothesizing is that there is a section on the curve (Section B) where the increase in employment from the growth in the oil and automotive sectors will be larger than the increase in unemployment caused by the reduction in domestic steel production. In short, provided we are not at the point of total collapse of the steel industry, employment will actually rise when protections are removed, contrary to what the steel lobbyists are saying.

Another far more reasonable argument for protectionism in the form of agricultural subsidies is that the lowered World Price for these commodities makes it cheaper for developing countries to feed themselves. (Ikenson) (3) That being said, the drastic economic destabilization of many West African countries, mostly developing nations that depend on the production and export of these commodities for growth will most likely do more harm to their communities than cheaper food can make up for.

There is also the ethical argument that was alluded to in Section 2. Of course, the reason that Chinese companies can produce steel cheaper than U.S. firms is that their workers aren't paid nearly as well, and also have fewer workplace protections placed by the government. The ability of Chinese firms to cut corners on safety that the Americans cannot is much of the reason they are able to produce so cheaply. While this is a valid argument, what Chinese workers need is societal and governmental reform, not simply the U.S. government making their firms less efficient through protectionism. Smaller Chinese steel mills don't mean safer conditions, it just means more people are out of work rather than facing those unsafe conditions. The workers are taking what they perceive as their best option for making a living, and the goal should be to improve that option rather than to take it away. If it were a question of placing tariffs on companies that don't meet high safety standards, and lowering duties on firms that do, then it'd be a different story. As it is, the tariffs in place currently do not have that incentivising quality, and thus all of the “buy American” rhetoric does nothing to reduce the plight of the exploited worker.

Section 5: Conclusion Much has been made of the North American Trade Agreement as a breakthrough for free-trade and negotiation between the United States and Mexico, but a piece of legislation put in place almost ten years ago highlights exactly what is wrong with the way trade decisions are made. The legislation deals with safety standards for Mexican trucks bringing goods into the U.S., forcing firms to switch to American trucking companies as they cross the border. While this isn't a tariff, a subsidy, or a quota, it presents a significant barrier to trade and thus is most definitely an example of protectionism. What is truly appalling about it is that neither government really cares about the issue itself. “US lawmakers who sponsored the rules say they're simply trying to protect the public from sub-standard Mexican trucks” while at the same time “the rules will hold Mexican trucks to a higher standard than trucks from the US and Canada, the other signatory to NAFTA” (Murphy Par. 7). This double standard makes it clear that the safety concerns are not the real issue with the trucks, and “Since the measure is backed by the Teamsters union, which is fearful of losing jobs, critics in the US and Mexico say the safety issue is just cover for protectionism.” At the same time, while these negotiations were taking place, the Mexican government, headed by President Vincente Fox, was threatening counteraction in the form of stricter trade regulation on their end. However, “The rhetoric of protectionism has already become more appealing to politicians on either side of the border as unions have worried about job losses.” Thus, it appears that we have the U.S. Congress making a decision to protect against Mexican shipping, ostensibly for safety reasons but in fact because they are being leaned on by the Teamsters Union, and on the other side of the border is the Mexican Government squawking about how the U.S. violated its agreement and threatening repercussions, simply because they are being pushed into protectionism by unions in their own country and find it a convenient excuse. What on earth is the point of a government if all it does is cater to the whims of lobbyists?
Thus not only do we need to repeal most if not all of the protectionist practices - tariffs, subsidies, quotas, prejudiced legislation – that currently contribute heavily to waste and stagnation within our economy, we need to change the system entirely so that the government acts as an entity with the best interest of a larger percentage of the population at heart. When governments are influenced so entirely by big business; when they are pushed around by lobbyists and unionists and whomever else cares enough to throw money at the problem, we can't make any kind of real progress that benefits the majority of the population; of the U.S. or of the world. In short, tariffs do nothing to help the conditions of workers in foreign countries; they're just used by corporations to cut out the competition. Subsidies cost tax-payer dollars to prop up big Agri-businesses that don't need the help anyway, and serve to destabilize the economies of developing nations. Quotas, the least effective of all protectionist practices, for most part merely serve to raise the price for consumers. Protectionism is the result of corporations throwing their governments at each other like cats batting yarn back and forth, and the U.S. requires serious economic and democratic restructuring if it isn't to remain the guiltiest of the lot.

Works Cited

Clifton, D. “Routine Failure.” Harvard International Review, 35(4), 8-1. Web. 7 Dec. 2014
Ikenson, Dan. "Protectionists Steel Washington." Wall Street Journal. 26 July 2014. Web. 07 Dec. 2014.
Ikenson, Dan. "Steel Trap." Center For Trade Policy Studies 14 (2002): Cato Institute. 1 Mar. 2002. Web. 7 Dec. 2014.
--- "Washington's Coddling Of U.S. Textile Industry Is Hurting Shoppers." Forbes. Forbes Magazine, 23 July 2013. Web. 07 Dec. 2014.
Lee, Don. "U.S. Moves to Levy Tariffs on Steel from South Korea, 8 Other Nations." Los Angeles Times. Web. 07 Dec. 2014.
Murphy, Dan. "Mexico Protests US Truck Rules." The Christian Science Monitor. The Christian Science Monitor, 6 Aug. 2001. Web. 09 Dec. 2014.…...

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