Protection and Protectionism

The Return to Agreed Foreign Trade Adjustments

An Article in the Compendium of Market-Based Social-Ecological Economics

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Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?

Click here for the list of all articles: Compendium
Click here for the German-language version: Protektion und Protektionismus

Table of Contents

  1. Abstract
  2. The Neoliberal Indoctrination
  3. The Definition of Terms
  4. Protection as a Means of Profitable Price Adjustment (Category 1)
  5. Protection as a Necessary Safeguard in Free Trade (Category 2)
  6. Protectionism as a Means of Conquering Markets (Category 3)
  7. Protectionism as a Means of Closing Off Markets (Category 4)
  8. Conclusion

1. Abstract

ProtektionGIF01Reasonable price and quantity adjustments in foreign trade – traditionally referred to as protective measures (protection) – can no longer be distinguished from absurd protectionism. This is due to the doctrinal »market liberalization« and the resulting worldwide cut-throat competition. The contradictory nature and the destructive potential of the doctrine imply that unilateral emergency measures that countries introduce to halt their social and environmental decline are immediately denounced as protectionist – and are sanctioned by the World Trade Organization (WTO). The financial market crisis, which took its course in 2008 and meanwhile has turned into a general economic crisis, provides the opportunity to raise awareness again for the necessity and importance of foreign trade agreements including protective measures.

2. The Neoliberal Indoctrination

The economic terms protection and protectionism have lost their original meaning under the neoliberal economic doctrine. While protection, being regarded as a »non-word«, has completely disappeared from the economic vocabulary, protectionism is used excessively and with the intent to indoctrinate. There is an obvious reason for that: Because there is no room for price and volume adjustments, thus protection, under the constraints arising from the neoliberal deregulation of international trade. So it fits in fully to defame unilateral measures as protectionism, measures that countries adopt simply out of necessity to limit the social and environmental devastations caused by the doctrine.

The accusation of protectionism is regularly made in the World Trade Organization (WTO) whenever member countries introduce import restrictions to guard against the goods and services flooding in from other countries, and to protect themselves against the emerging risk of market disruption and market capture. This has led to a WTO-generic schizophrenia that is revealed when member countries demand open foreign markets for their own exports, but, at the same time, claim the right to unilaterally decide on tariffs and quotas for their imports – usually on the ground that their domestic markets are not mature enough yet for the unregulated global competition. The contradiction of these insistences, although borne out of necessity, is systemic and can not be resolved. Since the majority of national productions with their specific traditions and conditions, and consequently their specific productivity levels, can never profitably take part in the continued predatory competition on open global markets, most notably because this competition is based on absolute price advantages in dollars or euros. Countries who expose themselves to the neoliberal competition unprotected, inevitably risk domestic economic disruption.

The systemic inconsistency of the neoliberal doctrine discloses its potential for creating scandal when its protagonists try to overcome the ongoing financial market and general economic crisis: They admittedly recognize the deregulation of financial markets as a cause of the US housing bubble and the snowball system of the global investment banking, but the debate on appropriate countermeasures is nevertheless drowned out by warnings of a »new protectionism« and a failure of the stalling WTO negotiations on the liberalization of services markets. In the midst of the crisis the perpetrators of the crisis and the profiteers of the system position themselves, and, hidebound and reactionary as they are, reclaim the future for themselves again.

The crucial fallacy of the current crisis management consists of the fact that the financial market crisis is classified and valued as an isolated industrial accident, rather than to conceive it as a new peak of the permanent crisis caused by »market liberalization«. This permanent crisis has brought the world unemployment, inequality and poverty since the mid-nineties, and it’s not limited to any segment of the economy, but has affected all markets of the financial and the real economy: the goods, services, financial and labor markets. Therefore the cause lies in the deregulation being extended to all markets, including the doctrinal ban to autonomously regulate the domestic economy and foreign trade at the national level, in particular the ban to negotiate trade agreements that guarantee prosperity and welfare.

3. The Definition of Terms

The term protection refers to constructive adjustments that countries apply to their trading interfaces in order to avoid distortions of competition and market disruption, and to ensure gains from trade. Constructive adjustments can be applied subject to two different conditions:

Category 1: Protection as a profitable price adjustment: Ideally as an active measure within the framework of bilateral and multibilateral trade agreements tailored to achieve mutual gains from trade.

Category 2: Protection as a necessary safeguard in neoliberal free trade: In case of emergency as a passive measure to protect against hostile export initiatives aiming at market disruption, coming either from countries who are expressly unwilling to accept trade agreements, or are guided by the dictates of a general doctrine of open markets – as currently practiced by the World Trade Organization (WTO) and its member countries under the inconsistent neoliberal free trade doctrine (see also the article Neoliberal Economic Doctrine).

Contrary to protection the term protectionism refers to measures that countries take to unilaterally pursue unfair or ideological goals:

Category 3: Protectionism in support of conquest strategies: As an active unilateral measure with which countries attempt to distort competition in foreign trade in order to profit at the expense of other countries.

Category 4: Protectionism in support of ideological isolation: As an active unilateral measure with which countries attempt, out of ideological motives, to shield against actual or alleged harmful influences arising from foreign trade.

4. Protection as a Means of Profitable Price Adjustment (Category 1)

Active measures, agreed between trading partners, are the silver bullet to constructively integrate foreign trade competition into domestic competition, as well as to contribute to greater diversity in supplies, and to achieve mutual gains from trade. A prerequisite sine qua non for this are bilateral trade agreements between autonomous countries (economic areas) that involve all markets and contain, as a central element, a calculation of exchange rates such that the average differences in prices (and thus automatically the productivity differences) are neutralized to enable a trade based on relative (comparative) price advantages.

It should be noted that the neutralization of average price levels between trading partners is the original purpose of the exchange rate (as a complement see the article Comparative Advantage – Upgraded).

Specifically, this means: A product becomes an export candidate when its relative price (that is, it’s absolute price devided by the average price of all traded products) is lower than the trading partner’s relative product price. Consequently, the relative product price becomes the decisive competitive success factor. But precisely the opposite is true for absolute price advantages, currently in dollars or euros: They cause irrevocable crowding-out effects on the open markets of the neoliberal globalization. The success of relative price advantages, however, goes further, since they exert a constant downward pressure on prices and thus contribute to learning processes and progress, even more so under a socio-ecological economic policy, and: without causing any crowding-out. Countries can therefore constructively and profitably trade with each other even if they have different levels of productivity.

In addition, trading partners have to mutually concede and stipulate autonomy on tariffs, trade quotas, and control of capital movements and labor markets, as well as to stipulate minimum standards concerning safety, health, and environmental compatibility. Tariffs and trade quotas serve to fine-tune foreign trade competition, particularly its conducive, crowding-out-avoiding incorporation into domestic competition.

Finally, a multilateral free trade of intellectual property rights, especially regarding patents, industrial designs and copyrights, may be agreed upon, namely independent of physical trading. Intellectual property is distinguished from goods and services by the fact that crowding-out is desirable and completely uncritical, because the dissemination of the best ideas, protected by licenses, can inspire new ideas, new inventions, and competitive productions, and contribute to progress throughout the world.

Since the term protection is still associated with closed markets, it is advisable that autonomously negotiated bilateral trade agreements, covered here under category 1, should better be headlined foreign trade adjustments.

5. Protection as a Necessary Safeguard in Free Trade (Category 2)

Countries will sooner or later be forced to implement these measures if they engage in trade and competition with countries who deny trade agreements, or if they engage in trade and competition on open markets, as practiced in neoliberal free trade. In any of these cases competition will be determined by absolute price advantages in reserve currency, as stated, currently in dollars or euros. Naturally, the lowest price in reserve currency is, in each case, the decisive competitive factor, regardless of whether this price is due to actual productivity or is effected through low social and environmental standards or a unilateral currency devaluation.

The unilateral emergency measures include all possible restrictions on trade as well as the application of state subsidies – in neoliberal and neoclassical terminology usually called trade barriers and trade/competition distorting subsidies. Two types can be distinguished: tariff and non-tariff measures:

In case of imports in free trade the necessary tariff based protection is achieved by imposing calculated customs duties or taxes on imported products in order to raise their prices and create equal competitive conditions between imports and domestic products and to prevent the latter from being driven out of the market. In case of exports in free trade protection is achieved by directly or indirectly subsidizing products to be exported to provide them with a calculated price advantage, again to create equal competitive conditions. Export subsidies, however, are tricky because they bring two threats along with them: Firstly, producers for domestic markets are tempted to raise their prices to the level of subsidized exports, and secondly, a strategy favoring export production over the production intended for domestic markets can provoke unbalanced economic structures, excessive concentration of economic power and capital as well as foreign trade imbalances.

The necessary non-tariff protection is achieved for imports by directly limiting their volume or indirectly by means of legal requirements and prohibitions regarding safety, health or environmental protection. For exports the protection is achieved vice verca by withdrawing legal restrictions and prohibitions to make use of the resulting cost and price advantages in international competition. In a positive sense, export volumes can also be directly limited to conserve, for example, scarce non-renewable resources. On financial markets and on the labor market non-tariff protection is achieved by controlling and restricting capital movements and labor market access.

All described emergency measures are classified by the WTO as a protectionist or trade-distorting violation of the »liberalization« of world trade, and may lead to a conviction of a member country before the WTO arbitration tribunal and subsequentially to sanctions. By contrast, the WTO classifies the above mentioned dumping methods as conducive to the process of »liberalization« – without actually articulating it –, as long as the trading price of products is not below their business production costs. That is, costs externalized by enterprises and to be borne by the general public are not considered by the WTO on the grounds of its ‘intangible’ free-trade doctrine. These costs, however, are responsible for the increasing social and environmental devastations (as a complement see the article Economic Externalities).

The listed emergency measures are indeed capable of lessening the impact of neoliberal cut-throat competition, however, a constructive foreign trade and international competition based on relative (comparative) prices is not achievable under the current regime of the WTO with its 154 members. The resulting pressure particularly forces countries with low productivity to apply emergency measures, and explains the ongoing squabbling in the WTO between industrialized countries on the one hand and developing and emerging countries on the other. The former are anxious to sell their industrial and agricultural products worldwide without any restrictions, the latter try to protect themselves against the flood of imports in order to save their economic structures or to build new ones, but, as agricultural countries, also seek to sell their agricultural products freely around the globe.

6. Protectionism as a Means of Conquering Markets (Category 3)

Strategies to conquer global markets (hegemonic economic strategies) are made up of two parts:

Firstly, a long-term national export initiative whose production costs and product prices are kept low through state-sponsored or tolerated social and eco-dumping, currency devaluation and government subsidies.

Secondly, import restrictions, usually non-tariff restrictions such as bureaucratic hurdles, that are difficult or impossible to overcome for imports.

China currently provides the perfect example of a politically supported conquest strategy aimed at global markets while closing off its domestic markets at the same time.

The major Western European industrialized countries only implement import restrictions on the already fully deregulated markets if they come under domestic political pressure from interest groups. The United States usually disregard WTO agreements more lightly. Incidentally: Although these import restrictions are implemented by powerful economic areas in the context of active conquest strategies, they can, at the same time, be perceived as protective emergency mesures of the above category 2, which underlines the inconsistency of the neoliberal doctrine. Anyway, the neoliberal schizophrenia is especially evident in the behavior of the EU and the USA, because both economies constantly act as guardians of the »market liberalization« and, nevertheless, repeatedly violate it. The behavior of these two highly competitive economic areas leads to constant bickering in the WTO.

It should be noted that protectionism as an accompanying measure of conquest strategies is not specific to contemporary neoliberalism. This kind of protectionism has always been present in economic history whenever large power imbalances existed between economic areas, putting the strong ones in a position to blackmail the weak ones.

7. Protectionism as a Means of Closing Off Markets (Category 4)

For this category there are mainly historical examples: Japan has still refused a reasonable foreign trade up to the mid-nineteenth century for cultural and ethnic reasons. The former Eastern bloc has until recently tried to shield its socialist ideology against external influences and keep its citizens from Western consumer products. By the way, the socialist ideology can in fact be classified economically as an inefficient state capitalism. Today only Cuba and North Korea isolate themselves for ideological reasons.

The United States fall within category 4 too, because their way of life, their foreign policy and their foreign trade have been infused for decades with a sense of mission to spread their ideology of freedom. Concretely, the United States fluctuate, due to their exaggerated consumerism, between the general acceptance of low-priced imports and an imperialist-protectionist trade policy exerted on a case by case basis. However, because of the mass consumption is of such overwhelming political significance, the country has been accumulating an extreme trade and budget deficit for years now. This means precisely: The United States deliberately finance their lifestyle by means of public and private debt at the expense of the rest of the world. The ongoing financial, economic and debt crisis – including the resulting unemployment and unequal distribution – has, originally stimulated by President Obama, allowed a public discussion on the causes of the economic difficulties, only to be marginalised in the course of the power struggle between Democrats and Republicans during the 2011 and 2016 election campaign.

8. Conclusion

Under the prevailing neoliberal conditions, the boundary between meaningful protection and senseless protectionism is displaced and blurred for doctrinaire reasons. »Protectionism« is instrumentalized as a political battle cry and distorted in its meaning in order to enforce a radical »market liberalization« detached from national and supranational economic policy influences for the sake of a globally operating industrial and financial system. Thereby the historical fact is overlooked that agreed foreign trade adjustments and the related mutual economic gains were an undisputed, though not easy to implement economic principle until the seventies of the last century.

The absolute conformity of world trade pursued and enforced by the WTO using a negotiating style of »multilateralist« dictation, is responsible for the world’s increasing social and environmental devastations. However, a globalization committed to future-proof foreign trade and sustainable welfare can only be achieved through bilateral and multibilateral trade agreements between autonomous trading partners.

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