Minnesota’s Economic News — W/E 7/1/22
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In Economics, trade protectionism includes any policy that aims to protect the domestic industry from “unfair” competition from foreign industries. “Unfair” is generally a word open to interpretation and it is applied differently from time to time. But it mostly means practices (mostly dishonest) that businesses may take to undermine their competition in the market. This may include, among other things, flooding the market with goods in order to initiate a downward price shock. Some businesses may lower prices excessively in order to make other companies unprofitable and drive them out of the market.
To counter unfair competition, countries may institute policies like tariffs, subsidies, quotas, currency manipulation as well as temporary trade barriers like antidumping duties.
Regardless of the type of policy, economic theory is clear on the effects of trade protectionism. These policies hurt consumers by reducing supply, increasing prices, and restricting production or innovation. More evidence points to the negative impacts of such policies on the economy.
Covid-19 and protectionism
Quite recently a lot of proposals have been flying around encouraging trade policies that would encourage companies to buy their inputs and produce goods in the country. This has mostly been in reaction to the supply chain disruptions caused by the Covid-19 pandemic. A lot of companies have had their productions halted when COVID-19 hit because they rely on outside inputs.
Another big reason that politicians put forward as to why companies should buy American is that it helps bolster jobs and strengthens the economy. However noble the intentions, every policy has to be evaluated by its results. And protectionism has little to no positive history. Because while it might protect a few industries, it imposes costs consumers and negatively affect the economy.
One of the most recent examples of protectionist policies were the tariffs imposed on China last year. As expected, the effects from this has been negative. According to an NBER working paper, evidence showed that after Tariffs were imposed, American consumers continue to bear the costs of tariffs placed on Chinese goods. Contrary to the expectation of lower foreign prices, recent US tariffs have been passed on to importers and consumers almost entirely.
And additionally according to the paper,
Even though tariffs have not had a substantial impact on prices, they are having sizable impacts on U.S import volumes. Specifically, imports have continued to fall and in higher magnitudes compared to when the tariffs were first introduced, showing delayed impact. This suggests that some firms take time to reorganize their supply chains so as to avoid imposed tariffs.
For the steel industry, however, the effects are a little different. Tariffs have caused a reduction in foreign steel prices, but foreign countries are bearing only close to half the cost of these tariffs. Additionally these costs mostly fall on the European Union, Japan and South Korea, since China is only the 10th largest supplier of steel to the US.
The drop in foreign prices in steel has additionally enabled foreign exporters to export more than in other sectors where tariffs were completely passed on to customers. This suggests steel tariffs have a much smaller capacity to protect workers than those on other goods.
New research has come showing that trade barriers, even though positively affect industry in protection, they pose negative consequences to downstream industries. Downstream industries are “the producers that use protected goods as intermediate inputs”. According to a recent NBER paper, findings indicate that,
First, protectionism has small and short-lived beneficial effects on industry employment. .
Second, protectionism has negative, persistent, and statistically-significant effects on employment in downstream industries.
Third, the downstream employment loss is accompanied by a statistically significant increase in both intermediate-input and final producer prices.