Unit 3: The Case for
Protection
Part 4: The Theory of
Protectionism: Other Types
There are many other non-tariff and non-quota kinds of protection.
One obvious one—the subject of much debate—is
subsidies. When any nation gives a subsidy to an industry,
it lowers that industry’s costs, and allows it to
be more competitive on the world market. For example, it
frequently happens that wealthy nations like the US and
those in Europe subsidize farm production. This hurts developing
countries—for the majority of whom raw agricultural
materials represent their only source of comparative advantage.
Both tradition and political power explain these subsidies:
farming is thought to embody a valuable “way of life,”
and farmers also have strong political representation, especially
in Europe.
For example, consider a subsidy that pays a flat sum per
unit of production. If the going world price of wheat is
$.20 per bushel, and the cost to farmers in the US is $.22
per bushel, then the developing countries have a cost advantage
and will export wheat. Now, suppose the US government offers
a subsidy of, say, $.05 per bushel to its wheat farmers,
reducing their cost $.17 per bushel. Such a subsidy encourages
farmers in the US to produce more wheat—which, when
put on the world market, will drive world prices down, possibly
to the point that they fall below the developing nations’
production costs. It’s possible then—and happens
frequently—that such a subsidy to US farmers actually
prices others out of the market, especially producers in
developing countries. That’s why subsidies draw attention
and criticism from trading partners and the WTO.
AUDIO CLIP: NPR Audio: WTO: Agricultural
Subsidies (9/16/2003)
http://www.npr.org/features/feature.php?wfId=1432861
AUDIO CLIP: Criticism of U.S. Agricultural
Subsidies at WTO (6/16/2004)
http://www.npr.org/features/feature.php?wfId=1960385
These clips will be important to Discussion Questions #3.
A second example of a trade dispute over subsidies involves
what the European Union perceives to be an illegal subsidy—according
to WTO rules—based on a tax “loophole”
in the US tax code that allows US exporting companies to
set up “offshore” accounts which allows them
to minimize their tax obligation to the US government. Recently
the WTO has upheld the EU’s charge against the US
and given the EU permission to impose retaliatory measures
against the US. To learn more about this debate listen to
the following audio clip from NPR:
AUDIO
CLIP: NPR Audio: EU Hits U.S. with Sanctions in
Trade Dispute (3/1/2004)
http://www.npr.org/features/feature.php?wfId=1724878
Another kind of protection comes from government procurement
policies. Such policies outline rules about the amount of
non-home-country labor that can be used by government contractors.
In effect, the government is giving a subsidy to home-country
producers, since it isn’t allowing foreign producers
to compete for a given contract. We might expect such agreements
for defense contractors or civil engineers working on government
buildings, dams, or other infrastructure. But this frequently
happens in other arenas as well. Have you ever seen a police
officer in the US driving a Honda?
One of the most talked about examples of non-tariff protection
is dumping, which is the logical and practical outcome of
subsidies that encourage overproduction. The US, for example,
subsidizes corn production to the tune of $10 billion each
year. That subsidy encourages American farmers to overproduce
corn, which is then “dumped” in Mexico, for
example, driving down the price of corn, and driving many
Mexican farmers out of business. Dumping in general is the
practice of selling goods in a foreign nation for less than
cost (or price) in the home market—which is what subsidies
allow. On the other hand, the US has accused foreign furniture
manufactures of dumping their product onto the US market
in hopes of driving US industry out of business. For a detailed
discussion of this topic, read the article in the next segment,
written by Andrew Brod, Director of the Office of Business
and Economic Research, UNCG.
Finally, “soft” protection also takes the form
of regulations about packaging and content, and delays in
the processing of goods. For example, if the German government
insists that all personal audio systems imported into the
country have a particular shape of headphones, and if the
shape happens to be the one used by German manufacturers
of headphones, they are using content regulations to protect
their own producers. Governments use similar kinds of rules
with respect to packaging and health and safety restrictions.
Food products of all kinds are good examples of this. Food
products are also frequently the target of protection through
bureaucratic delays: if a foreign producer of cheese knows
that 5% of whatever is shipped to the home market will go
bad in the process of handling and paperwork, then the trade
bureaucracy is offering a subsidy to domestic cheese producers.
VIDEO: Other Types
of Protectionism
