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Protectionism and U.S. Policy

Thomas Shelton, CPA

PART A

Arguments in favor of government intervention in international trade

International trade implies several entities and also several counties or states with different legislations and procedures. While free trade is becoming the most commonly accepted way to promote exchange of goods and services, government intervention or regulation can help protect consumers, national security and emerging traders against monopoly. Here are some reasons that can justify a level of government regulation:

The first area where a government can intervene in international trade is to foster free trade region in order to expand markets and promote its own companies. In that area the US government has reached over the last decades several milestones such as the North American Free Trade, (NAFTA). According to the USDA  “Under the NAFTA, all non-tariff barriers to agricultural trade between the United States and Mexico were eliminated. In addition, many tariffs were eliminated immediately, with others being phased out over periods of 5 to 15 years.  This allowed for an orderly adjustment to free trade with Mexico, with full implementation beginning January 1, 2008”.

The government can control and regulate the quality of the goods that are offered to the customers, by defining the norms and quality control regulations. The government can assure that the products that are entering its territory were not made using subsidies or any form of government compensation.

The government should also assure that the labeling is in accordance with the advertising policies in effect.

Regarding the safety of its customers, the government should also guarantee that the product meets the highest standards and the testing process had been thoroughly conducted. During the Toyota crisis in 2009 and 2010, the public discovered that the Japanese automobile maker was aware about the probability of a sudden acceleration of some of its automobile models. This finding triggered a serious fine of $16 million from the US federal government through the National Highway Safety Administration. The Wall Street Journal noted that “Factually, it validates the legitimacy of our allegations that Toyota has been misleading the federal government and consumers, as far as the severity of the problems with their sticky pedals and their whole electronic throttle control system,”

While a government should diversify its exchange with other nations, local communities should be protected when the long term impact of a foreign product or living animal is not well known. Since several years, local communities along the Mississippi river are facing a difficult problem with the invasion of the Asian carp. According to the L.A Times “The fish were imported in the 1970s to help wastewater treatment facilities in the South keep their retention ponds clean. Mississippi River flooding allowed the fish to escape and then move into the Missouri and Illinois rivers. Some species can grow to more than 100 pounds”.

Because of national security concerns, especially in this era of global terrorism, a government can restrict access to sensitive technology when selling weapons or cutting edge technology to some countries. According to the Huffington Post in 2009, The Government Accountability Office, GAO discovered that “Sensitive technology, including parts that can be used in the development of nuclear weapons, guided missiles and IEDs, can be easily purchased in the US and illegally exported to countries known as shipping hubs for terrorist organizations”.

Free trade doesn’t mean a total absence of moral and religious values. A huge number of American companies had partially or totally relocated their production in Asia, where the labor cost is very low. The US government can demand that products made in those countries and entering the US market should be manufactured under guidance and regulations prohibiting the use of child labor.

One area still very contentious, it is about agricultural subsidies. That issue still a lingering problem discussed inside the World Trade Organization (WTO). A country can decide to allow some form of subsidies to its farmers to protect families and local markets against competition. The US and the European Union still using agricultural subsidies to promote their agriculture.

Sources

http://www.fas.usda.gov/itp/policy/nafta/nafta.asp

http://blogs.wsj.com/law/2010/04/07/the-toyota-fine-the-16m-might-not-be-toyotas-biggest-problem/

 

http://articles.latimes.com/2010/sep/07/nation/la-na-asian-carp-20100907

http://www.huffingtonpost.com/2009/06/04/gao-sensitive-military-te_n_211655.html



Part B

Protecting countries workers should be the greatest underlying principle of the protectionist theory in economic development, even though there are many other reasons for this theory which include comparative advantage in trade and political issues.

For a classic example of a protectionist policy people in the United States would not have to look very hard to find one. Over the past few decades the United States have placed tariffs, quotas, trade barriers and asked for voluntary restrictions and industry such as steel, rubber (tires), autos, and sugar. The steel industry has been very active for years in lobbying congress and the presidents for trade policies on their industry.

The steel industry in the late 1990’s went through a very serious crisis that they felt were brought on by high imports of steel and low exports and a subsequent drop in steel prices.  During this time period “Six-firms – Acme Steel, Geneva Steel, Laciede Steel, Qualitech Steel, and World Cass Processing – were driven into bankruptcy, typically citing the increase in steel imports and the fall in prices as one of the reasons they filed for protection under Chapter 11.  As a result of this downturn in the industry thousands of workers lost their jobs.

President Bush was authorized by Section 201 of the American Trade Law “to impose temporary import relief to industries injured by a surge of imports”.  Mr. Bush imposed this tariff because of the falling prices, lost jobs and the series of bankruptcies that were taking place.

This downturn in the United States steel industry caused economic harm to other industries as well including the auto industry and building and construction industries.  The U. S. consumer was going to have to suffer higher prices in consumer goods and or the lack of quality in the products they purchased as a result of this tariff because the manufacturers had to pay more for their steel products.

The crisis effect other parts of the world as well, including the European Union and Latin American countries, with “Brazil and Russia being the hardest hit”.  Other third world countries would not feel the impact because most of their trade was not affected by the trade restrictions. “Brazil’s steel exports to the US,…will drop 10% – 15% this year”.

Foreign competition had much to say about the action the United States had taken in trying to protect the steel industry, but the strongest comment as stated in a narrative from Martin Khor should just about sum up the feelings of all competitors as it says “If the world’s strongest  economy requires such high protection for its steel industry, then what right would it have to ask much weaker economies to lift their tariffs?.  Could this be the argument made by them at the WTO?

The exporters will lose some exports to the United States, but it can ship those goods to other counties.  If this is done it could very well drive up prices in those countries.  Whatever the case, protectionist policy should be weighed very carefully.

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