METHODS OF PROTECTIONISM

Governments use a variety of tools to manage their countries' international trade positions. One of the most important of these tools, the tariff, is a tax on an import. It has the effect of making the item more expensive to consumers, thereby reducing demand. For example, if it costs $ 1 to produce a widget in an American factory and only $.75 in a foreign factory, the American factory will have a difficult time staying competitive. If the U.S. government were to impose a tariff of 60 percent, the cost to Americans would jump $.45 to $1.20

($.75 x .6 = $.45). If consumers base their purchases only on price, people would probably buy the less expensive American widgets; by doing so, they would help the U.S. widget industry to prosper.

However, if the tariff had not been imposed, Americans could have saved money by purchasing the imported widgets for less than the cost of the domestically produced widgets. Under a pure free-trade policy, which would not have tariffs, the U.S. widget industry would either have to change in order to compete with the less expensive imported products or face extinction.

Tariffs do not have to push the price of a foreign import above the price of its domestically produced counterpart to be effective. In the example above, a tariff of 20 percent instead of 60 percent on the $.75 foreign product would increase the price of the widget to $.90, but would not make the $ 1 American product a less-expensive alternative. Such a tariff would have three effects, though:

• it might reduce the consumption of the foreign product, simply by making it more expensive and reducing the price difference between the foreign and domestic products;

• domestic companies still would have to become more efficient and reduce prices to compete, but they wouldn't have as far to go; and

• it could be used as a political bargaining chip during trade negotiations.

Tariffs usually are calculated in terms of a percentage of the value of the imported goods, although sometimes a flat rate is charged (one dollar per item or pound, for example).

Governments sometimes restrict sales of foreign goods by imposing import quotas. These limit the quantity of a foreign good that can be imported annually and help domestic producers by limiting the share of the market that can be taken by foreigners. Sometimes governments negotiate voluntary restraint agreements by which the exporting country agrees to limit voluntarily its exports of a certain product. For example, in 1992, Japan began limiting its auto ex-ports to the United States to 1.65 million cars per year, a significant decrease from the limits of previous years. It is important to note, however, that sometimes sales may not even reach these limits.

These types of limits have problems of their own. The free market is not allowed to function since the quantity of goods remains constant while the price changes, instead of supply and demand influencing both price and quantity. In addition, if the price of a restricted good rises, the exporting country profits; if a tariff causes the price of a good to rise, it is the importing country's government that gains revenue.

Another way to achieve the goals of protectionism is to make the domestic industry more competitive, rather than limiting or taxing imports to make foreign goods less competitive. This can be done through subsidies, which are payments by the government to an industry. A direct subsidy is an outright payment; indirect subsidies include special tax breaks or incentives, buying up surplus goods, providing low-interest loans or guaranteeing private loans.

In addition to using tariffs and quotas to manage international trade, governments sometimes ban trade with certain countries for political reasons—during times of war or political crises—or ban imports of a certain product to protect domestic industries. The Japanese government, for example, in order to protect its rice industry from competition, allows almost no imported rice into Japan.

The United States offers most-favored-nation (MFN) status to many of its trading partners. MFN status assures a country that no other country will get lower tariffs when exporting to the United States. Of course, this status can be revoked at the discretion of the U.S. government.

Health, environmental and safety standards, which often vary from country to country, can function as a form of protectionism. Forcing imported goods to meet certain standards before they are allowed into the country can add to their cost. For example, the United States has strict auto emission standards, which foreign car manufacturers must meet to gain access to the U.S. market. Meeting these standards can be expensive and adds to the cost of the imported car.

Besides legal restrictions, sometimes there are less formal obstacles to international trade. Cultural factors may play a significant role in the way companies do business with foreigners. In some countries, it is common for businesses to establish long-term relationships with one another. While this practice tends to preserve the stability of the market, it also makes it difficult for foreign companies entering the market to establish new business relationships. In other countries, companies do business with whoever offers the best terms, often changing business partners frequently. This practice strengthens competition, but sometimes at the cost of more stable, mutually beneficial business relationships.

Date: 2015-12-24; view: 1320