There are other situations when protectionism is justified “Dumping” refers to goods being sold at a price below the cost of production or charging different prices in different markets without a change in the actual cost of production. This latter use suggests anti-competitive behaviour and to charge different prices in different markets is extremely unfair. There are reasons why a standard price cannot be achieved on a global scale:
∙ “competitive conditions on a market by market basis, which often makes local adaptation a prerequisite of competitive success. Different costs of factor inputs, different levels of local competition and differences in price elasticity of demand for goods between countries, prevent firms establishing common
market prices;
∙ a higher degree of intra-industry trade between divisions of multinational firms distorts the assessment of prices. Efficiencies of internalised business functions arising both from horizontal and vertical integration makes it difficult to determine what may or may not be deemed a ‘fair’ competitive price”(2).
In theory the EU’s anti-dumping laws in the external trade policy was designed to prevent anti-competitive behaviour through pricing. Not as a protectionist weapon against import competition from the rest of the world. The vast scope of the law allows the Commission to use the anti-dumping law in a number of situations, i.e. if the EU can prove that a European company is suffering hardship because of a foreign firm and also show that the firm is selling goods below the production cost, of the product plus a mark-up or below the selling price on the domestic market, GATT rules allows the Commission to force the firm to raise the price of the product or pay import duty on the product in question. The commission was accused prior to 1992 of distorting the rules “ By over stating source countries production prices and understating EU prices suggests that the law was being used for protectionist reasons rather than promotion of fair competition. Colchester and Buchan (1990) assert that ‘within GATT rules the creative dumping-inquisitor can demonstrate just about anything’ (p.201)”
100 accusations each year are levelled against non-EU countries for dumping by companies who do not like the harsh reality of foreign competition most of these are against Japanese companies and it reflects the fact that the EU lacks competitiveness, the fear is that retaliation will start if the EU continues in this way.
The circumstance that protectionist measures would be acceptable is if one country has a glut of a particular product and tries to sell that product in another country well below the actual cost of production by exporting the surplus to support their own internal market. This protectionist measure should be used carefully and not abused, as retaliation would affect our own economy.
The protectionist measures could be used to protect employment as in times of world recession tariff barriers could be raised to prevent cheap imports from flooding into the country. Britain has suffered from balance of trade problems in the past and this would be one way to counter this by increasing tariff barriers on imported goods encouraging people to buy British made products.
Protectionism could be used in a number of industries including the textile industry to protect the workers from low wage countries such as India who produce cloths at extremely low prices; this would enable them to be able to compete with these low prices.
The last area were protectionism would be used is in key industries i.e. coal industry and the manufacture of ammunitions and other military products during wartime. Governments look on these industries as being strategically important, as without them the country would be vulnerable.
- What are the main methods of protectionism used and what is their economic justification?
The main measures of protectionism are:
1.Duties/Tariffs on imported goods, which increase prices and reduce demand. This is justified in most cases because it brings money back into the country i.e. if pens are imported from Spain and a 20% tariff or duty was placed on each pen before it was sold in the UK then the government will collect 20p from each pen sold and this would go into government funds. The only draw back is that the companies in this country do not become competitive this means they never increase efficiency and are unable to reduce the price of their products to enable them to compete in the world market.
2.Quotas this limits the quantity or value of the products in question that are being imported into Britain. This method is justified because it stops cheap imports flooding the British market, it guarantees a market for our own goods but the price of the goods remains high, it does not give the firms any competition so again they are unable to compete in the world market. This type of barrier does not bring revenue into the country. Another problem as well is for example a video cost £100 to make and normally it was sold for £150 but the amount allowed in the country is cut by half then they will be losing profit so could raise the price of the video to £200 so the profit margin is not reduced.
3.Subsidies put on domestic products in order to reduce the price and enable them to compete with competitors. This type of aid can be justified in so much as it allows companies to compete with a foreign competitor but it puts an unreal price on the goods. If for some reason the subside was lost or reduced what would happen to the company? Would it go out of production and fold or carry on. In the case of farming subsidies from the European Union, the subsidy was removed or reduced in a certain area and some farmers were unable to continue and went out of business.
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4.Exchange controls this makes it difficult for importers to obtain the foreign currency needed to buy foreign goods.
5.Bureaucratic import systems made deliberately difficult to understand and often charge frequently. i.e. France restricted Japanese video exports by sending them to a small company to be processed which only opened 3 days a week this limited the number that could be imported. This is very similar to tariff barriers in that the number imported is reduced but without saying you can only import x amount. Justification for this could be no direct restriction, its not the governments fault the company is not open more often, fear of retaliation could be reduced as it is not direct intervention.
6.Technical standards which are not the same as everywhere else, this makes the product expensive to change just to suit one particular market, this is often changed and has long-winded testing procedures. This could be justified in that again we are not saying they cant import we are saying they must meet our standards which could be extremely high. The problem would arise if our domestically produced goods did not meet the same standards.
7. Bilateral and multilateral trading agreements these are agreements between countries to limit the number of each product imported and exported between the countries. This can be justified, as it is a mutual agreement between the countries involved.
8. Sanctions these stop trade between countries i.e. Iraq, Serbia etc. they can be justified because the government of that country is doing something that the other governments do not agree with and it puts pressure on the government to change its policy.
It is not easy to impose protectionist measures on to another country, as they are liable to retaliate as already stated there are some cases when it can be justified if it is to protect a newly developing country or if it is to rectify deficits in the balance of payments when more money leaves the country than is coming in, but it can cause problems within the economy. Some form of protectionist measures can have an effect on unemployment and help to reduce it. The government has to weigh up the benefits against the costs and it is a delicate fine line as governments of other countries could see it as a threat.
Bibliography
Nigel Oyston, Paul Armstrong 1995 European Studies
and Gordon Mitchell Module 11
National Consortium
John Kellett 1995 European Business
Hodder & Stoughton
Ian Marcouse, Andrew Gillespie 1999 Business Studies
Barry Martin, Malcolm Surridge Green Gate
& Nancy Wall Publishing
Alan Anderton 2000 Economics
3rd Edition
The Alden Press
Dave Hall, Rob Jones & 2000 Business Studies
Carlo Raffo 2nd Edition
Causeway Press Ltd
Jackie Thomas - - 08/05/07