Free trade or protectionism has always been a controversial debate not only within countries but in the global trading arena. The issue was brought back to the forefront with the onset of the global economic recession that has plagued almost every country. Countries were looking at ways of reversing their trade deficits and protectionism seemed like the only solution People were and still are losing jobs especially in the manufacturing sectors with most of the blame being piled on the shipping of jobs overseas or the flooding of respective markets by cheap imports from overseas. When the global economy does recover, the issue will still be there with some countries feeling their economic future is more secure if high tariffs are introduced to restrict imports. (Bhagwati, 1989, 47)
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This is common rhetoric especially in the US manufacturing industry millions of jobs are being lost because much cheaper products like electronics are flooding its market from Japan and China. The average US manufacturer cannot push its production costs further down to compete with the imports. What angers them, even more, is the fact that Japan imposes high tariffs and restricts the number of US products through quotas entering the Japanese market.
It might appear like Japanese products have easy access to the American market but the fact is they do pay high tariffs to the US government and this revenue is used to spur various development activities. The main source of contention is whether this revenue generated from high tariffs is worth making millions of American workers jobless. In the case of Japan, the quota imposed on imports has resulted in astronomical prices on some commodities like rice due to lack of competition from imports.
The high prices hurt the Japanese consumer but the farmers are guaranteed job security. Both of these arguments do provide legitimate reasons but the question remains which one will be more productive to a region’s economic development in the long run. In this study, we will focus mainly on the trade between the US and Japan which has been beneficial to both countries over the years but has kicked of a debate on protectionism from the US traders who feel the current status quo is favoring the Japanese. (George, 1998, 216)
Protectionism or Free Trade
Some analysts have argued that the current trade deficit in the US, though manageable, still poses a threat to the country’s financial stability. The American people consume more than they produce and this has led to the flooding of imports into the US market. Its export market is also gigantic and still thriving but it still lags behind the volume of trade generated by imports. This imbalance can be seen in the auto industry where various firms like General Motors are in deep financial trouble yet the US consumes 25% of the world’s crude oil. This shows the auto industry in the US is quite profitable but this revenue is split between the home industries and the various foreign firms like Toyota and Nissan that are from Japan.
Raising tariffs would certainly increase the price of a foreign-made car forcing the American driver to opt for a locally manufactured car. Imposing quotas would also protect the struggling auto industry giving US manufacturers’ monopoly over their market, create jobs, and the revenue generated would remain in the US economy since most foreign companies take their profits back to their home countries. This does seem quite clear-cut and beneficial to the US economy. However, there is more than what meets the eye. (Russell, 2000, 25)
Protectionism calls for the restriction of a country’s consumer market to only the local manufacturers. There is no denying most of the goods flooding the US markets from other countries have been massively subsidized to make them more appealing to the US consumer. If anything, it’s the citizens of these foreign countries who should be mad because their taxes are being used to sell goods at a bargain through subsidized costs! Importing these commodities saves the US resources that would have been used to produce these goods from scratch and. These saved resources are again used to produce goods that are otherwise expensive and all of this would not have been possible if it weren’t for the cheap imports.
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It is a true influx of imports that has resulted in job losses in industries that directly compete with these commodities. However, these imports are paid for through tariffs and the revenue generated is used to create jobs in other sectors of the economy like manufacturing goods that foreigners are interested in hence boosting the export market. Isolating oneself would only result in worsening of the trade deficit. Unfortunately, hardworking people end up losing their jobs but through the acquisition of new skills, they can still find employment in other sectors.
The call for protectionism is due to the imbalance in the trade deficit. What they might have forgotten to look at is the trade “balance sheet”. Most of these countries generating profits from imports do not buy more commodities from the dollars earned; instead, they re-invest most of it back into the US economy through savings in the credit markets or directly injecting funds into US companies.
This has increased the pool of savings in the US banks which has made it easier for domestic businessmen to access loans. The risk of all these foreign capitals being suddenly withdrawn from the US economy is highly unlikely because currently, the US economy offers the most conducive economic and political environment for conducting business. Unless that changes, there isn’t another market in the world that can handle such quantities of cash. (Irwin, 2005, 118)
From the explanations given above, protectionism might do more harm than good but there are still strong voices advocating for the need to protect the American manufacturer. Further raising of tariffs and quotas would certainly tighten the noose on imports but would the American consumers tolerate the sudden increase in commodity prices? The reality is the most prosperous economies in the world, including the US, are the ones with free trade agreements with other countries. However, every country has the moral obligation to put its interests first and this involves job security for its citizens.
Even if the US appears to be a free trade nation, it has systematically put trade barriers in form of tariffs and quotas to protect its interests. (Bovard, 1991, 97) The only difference is its trade barriers are not as stiff or visible as Japan’s. Calling for stiffer barriers will eventually lead to a boom in the manufacturing industry, but it will also erode the gains made over the years and dent its image as an investment hub.
Bhagwati Jagdish, (1989) Protectionism, The MIT Press, pp 47-53.
Bovard James, (1991) The Fair Trade Fraud, Palgrave Macmillan, pp 97-101.
George Henry, (1998) Protection or Free Trade: An Examination of the Tariff Question With Especial Regard to the Interests of Labor, Robert Shackelford, pp 213-217.
Irwin Douglas A (2005) Free Trade Under Fire: Second Edition, Princeton University Press, pp. 115-119.
Russell D Roberts, (2000) The Choice: A Fable of Free Trade and Protectionism Updated Edition, Prentice Hall, pp 23-25.