V. Protectionism

A. What is protectionism?

Protectionism is defined as all tariff and non-tariff measures aimed at protecting local producers from foreign competition.

Globalization means that, in theory, there should be less and less protectionism in order to advance the free market.

However, in practice, competition is never pure and perfect and it seems that in some cases (for example in the case of start-ups), a certain amount of protectionism is justified.

While developed countries have eliminated almost all their customs barriers (except in certain sensitive sectors such as agriculture), emerging countries are more inclined to strong protectionism.

The fight against dumping, the practice whereby foreign companies sell for less than domestic companies, leads to protectionist policies.

An indicator of protectionism, the OTRI, was created by calculating domestic prices compared to foreign prices.

Agriculture is the most protected sector, far ahead of textiles and industry. However, the levels of protection are changing with bilateral agreements between countries and with the creation of large economic areas such as the EU.

Every year, the WTO has more and more bilateral treaties between countries, creating a kind of chaos in the global economy. These agreements are usually made to establish specific rules for the commodification of products and to standardize them.

Indeed, customs duties are no longer the major obstacle, especially in developed countries. They are more at other levels, such as hygiene standards for example.

B. Economic thinking on protectionism

There are generally two opposing ways of thinking about international trade:

  1. a liberal vision of the market, which shows a world open to all trade
  2. a vision of a world regulated only by the rules of individual countries and by bilateral agreements.

These two visions confront each other, notably on the fact that there can be no free competition without regulation (to avoid monopolies, for example).

Moreover, in international trade, states always seek to improve their comparative advantages. Although customs protection continues to decline, there are still many non-tariff barriers that tend to be established within certain privileged economic zones and that seek to maintain certain forms of state interventionism (anti-dumping policies, economic patriotism, etc.).

In France, mercantilism is the idea that we will develop an industry (factories) by putting up customs barriers to free ourselves from the outside world. Colbertism aims to protect French industry from the outside world (protectionism).

Colbert took advantage of this to protect the borders, build fortified cities, etc. The industrial and commercial impetus was quite important. This period can be seen through rather different faces in different countries.

Liberal thought develops through philosophy and John Locke elaborates for example the doctrine of natural law: men are born with natural rights, including property. From this idea, the freedom to trade also follows.

Physiocrat thought (with François Quesnay in France) is based on the idea that production will lead to growth, especially through agriculture.

In liberalism, we find the ideas of Locke and Hume: the role of the state is to enforce natural rights and not to interfere in economic activities. The principles of liberalism are reason (religion is no longer a central element), freedom, etc.

Ricardo defends comparative advantages: a country has every interest in trying to produce what it produces best.

Classical economists are often called pessimistic economists because they think that the economy always turns to a stationary state: according to them, there will always be a drop in profits at some point. The system would come to an end because there would be less and less growth. Opening up to the international market would be a way of delaying the moment when we reach a stationary state. According to them, the value of a good is equal to the quantity of work necessary to make it. Marx speaks of exploitation, for example. The value of labor is then calculated according to the level of subsistence, based on the level of wheat (which sets the level of wages). For Ricardo, foreign trade would be a sought-after solution.

C. Bypassing protectionism and new logics

The international economy develops through certain types of differentiation:

  • Technological advantage, as Posner shows. The life cycle of a product (Vernon’s theory) is the idea that a product has a life span. When the elasticity of demand is low (even if the price increases, demand remains the same), suppliers logically find a solvent demand in the country.
  • Product homogeneity/heterogeneity: product differentiation can be horizontal or vertical (if products are differentiated by quality).
  • Demand for difference (Bernard Lassudrie-Duchêne): consumers seek to differentiate themselves from one another through consumption. Demand plays an important role in this field.

Today, returns are decreasing: the marginal unit is less and less profitable. Internal economies of scale are specific to a company.

Brander and Spencer’s model shows that in some cases, when very high investments are required, only very large firms can be in the market.

So there is no perfect competition rule. This model shows that there are very high entry costs to enter markets and that, without subsidies, all countries would lose. Modern theories show the interest that international trade has in creating new situations: firms seek to establish themselves in markets. Protectionism can take more or less covert forms, which will lead to the creation of a much more opaque system.

Summary of the Economics Course on Globalization :

General Knowledge: globalization