Foreign experience№ 3 December 2017
In these times of global economic upheaval, governments of various companies are becoming more tempted to resort to protectionism. As Jim Yong Kim, President of the World Bank, notes, this is one of the fundamental risks for the fragile economic recovery. The effectiveness of protectionist policies is not always evident. However, as a rule, no one rushes to reject them, either.
It is genuinely unknown who was the first protectionist. However, the English king Henry VII of the Tudor dynasty is often described as the pioneer of this economic policy. Henry ascended to the throne in 1485 after the bloody Wars of the Roses and made his name with his economic policy.
A Reformer with a Crown
During the time of Henry VII, fabric was a vital commodity. England exported wool and imported finished fabric products. Henry ended this dependency by incentivising technical production, and increasing the domestic processing level of raw materials.
Henry VII – the pioneer of protectionism
To achieve this, he introduced tariff barriers, decreasing exports of wool and preventing imports of ready-made fabric products. English producers, on the other hand, benefited from tax breaks and a policy of trade preferences. As a result, the country’s fabric production led to economic prosperity. Henry VII’s heirs continued his policy.
The author of Robinson Crusoe, Daniel Defoe, who also wrote political tracts, called the strategy A Plan of the English Commerce or the Tudor Plan. By and large, the policy is still in existence today in the form of support for industries with a high degree of processing. In modern history, Japan and South Korea have undergone similar reforms.
“Not all countries have succeeded through protection and subsidies, but few have done so without them”, writes the South Korean economist Ha-Joon Chang in his book Bad Samaritans.
However, not all protectionist policies have been successful. A good example would be the Jones Act (The Merchant Marine Act) in America. Since 1920, this legislation has been eliminating foreign competitors from maritime trade routes linking the different regions of the United States of America.
In the time following World War I, the Jones Act was designed to support domestic ship owners and shipbuilders, as well as to solve American employment issues. Railway companies lobbied for the law, fearing that European merchant fleets would use American routes. The Act continues to require that any goods transported by water between American ports be carried on ships bearing the US flag, constructed in America, owned by American citizens, and even crewed only by American citizens or American permanent residents. These requirements still apply even when the ships stop in foreign ports on the way.
The Act has been repeatedly criticised. Senator John McCain, unleashed the latest attack, calling it ‘an archaic law’. It is often reported that, as a result of this protectionist policy, building a ship in America costs four times more than in Asia, while running a ship is at least twice as expensive. Critics even blame the Jones Act for traffic jams. In Europe, 40% of domestic cargo is transported by sea, but in America the figure is not more than 2%.
And yet the Jones Act still stands today, to the profit American ship owners and shipbuilders, as well as rail and road logistical companies, who benefit from the lack of competition. So far, no US president has launched a full-blown campaign to abolish the Act. And this can hardly be expected from Donald Trump, who has always spoken of supporting American business.
Yet, as history shows, the development of domestic industry needs more than just protectionist policies. Following World War II, the Japanese government adopted a policy of active support for the country’s steelmaking companies. However, because of these excessive protectionist measures, the industry ended up with excess high-cost steel production capacity. In the end, Japan adjusted its strategy, putting more emphasis on the technical modernisation of the steelmaking industry and on increasing efficiency.
Boeing accused Bombardier of dumping when it sold Delta Air Lines CS100. As a result, the Canadian company faced the threat of defensive duties, which could enter into force in the US in February 2018
Everyone Does It
“Protectionism is no longer just dead, it’s cursed,” British Prime Minister Benjamin Disraeli said in 1850. By saying this, he acknowledged the defeat of the opponents of free trade, including himself. That Disraeli was mistaken is evident even today.
A recent joint study drawing on figures from the World Bank, Heritage index and Global Trade Alert concluded that the world’s leading powers have often relied on protectionist laws and protective measures to defend domestic industry. No fewer than 7,000 such policies were uncovered in the legislations of the 60 largest global economies. Experts estimate the monetary value of these policies at $400 billion per year.
According to the study, of the relatively large economies, only Brazil, Saudi Arabia and Tunisia have liberalised their economic legislation in recent years. “Donald Trump is getting all the headlines at the moment but everybody’s doing it,” David Lowe, one of the authors of the study said to Reuters. The question is: who is suffering the most from these policies? The expert answer is unambiguous: countries that, in the time of non-free trade, depend exclusively on certain markets. “You can see why Trump is talking so tough about deals like NAFTA. Because he can,” says David Lowe.
'Heat map' of protectionism