Why do nations pursue protectionism?
-Desire to promote fledgling industries (also see political cronyism)
-Ban external investment
-Food, steel, arms
-Desire for local high tech
-Bovine growth hormone
-Child labor, unions
How do nations pursue protectionism?
-Raise price of imports
-Create shortage of imports
-Lowers price of exports/domestic goods
-Sometimes under guise of health/labor/environmental concerns
What are the negative results of protectionism?
-Import taxes-high prices
-Industry subsidies-higher prices
-Import restrictions-higher prices
(Governments can introduce consumer subsidies but that leads to deficit spending=debt)
Impact on lesser-developed countries
-3rd world can’t export their goods leading to no capital
-Developing countries with no external investment can’t build industry
-Borrowing money to develop industries leads to debt=may lead to less social spending
-No middle class emerges in developing world
Motive to innovate is eliminated
So what is the solution?
1. World Trade Organization (WTO) – Lower tariffs + establish court to mediate trade disputes
2. North American Free Trade Agreement (NAFTA) – Free trade + open borders
3. World Bank/IMF – Loans to mitigate and restructure national debt (austerity measures)
Problems with the solutions
NAFTA + WTO
-Loss of jobs in protected industries
“A rush to the bottom”
Austerity measures can destabilize a country and make the poor even more miserable