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Economic policy of regulating trade between states through government regulations From Wikipedia, the free encyclopedia
Protectionism, sometimes referred to as trade protectionism, is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations. Proponents argue that protectionist policies shield the producers, businesses, and workers of the import-competing sector in the country from foreign competitors and raise government revenue. Opponents argue that protectionist policies reduce trade, and adversely affect consumers in general (by raising the cost of imported goods) as well as the producers and workers in export sectors, both in the country implementing protectionist policies and in the countries against which the protections are implemented.[1]
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Protectionism has been advocated mainly by parties that hold economic nationalist[lower-alpha 1] positions, while economically liberal[lower-alpha 2] political parties generally support free trade.[2][3][4][5][6]
There is a consensus among economists that protectionism has a negative effect on economic growth and economic welfare,[7][8][9][10] while free trade and the reduction of trade barriers have a significantly positive effect on economic growth.[8][11][12][13][14][15] Some scholars, such as Douglas Irwin, have implicated protectionism as the cause of some economic crises, most notably the Great Depression.[16] On the contrary, Paul Krugman, winner of the Nobel Prize for Economics, argues that tariffs had no negative impact during the Great Depression.[17] Although trade liberalization can sometimes result in large and unequally distributed losses and gains, and can, in the short run, cause significant economic dislocation of workers in import-competing sectors,[18][19] free trade often lowers the costs of goods and services for both producers and consumers.[20]
A variety of policies have been used to achieve protectionist goals. These include:
In the modern trade arena, many other initiatives besides tariffs have been called protectionist. For example, some commentators, such as Jagdish Bhagwati, see developed countries' efforts in imposing their own labor or environmental standards as protectionism. Also, the imposition of restrictive certification procedures on imports is seen in this light.
Further, others point out that free trade agreements often have protectionist provisions such as intellectual property, copyright, and patent restrictions that benefit large corporations. These provisions restrict trade in music, movies, pharmaceuticals, software, and other manufactured items to high-cost producers with quotas from low-cost producers set to zero.[28]
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In the 18th century, Adam Smith famously warned against the "interested sophistry" of industry, seeking to gain an advantage at the cost of the consumers.[29] Friedrich List saw Adam Smith's views on free trade as disingenuous, believing that Smith advocated for free trade so that British industry could lock out underdeveloped foreign competition.[30]
Some have argued that no major country has ever successfully industrialized without some form of economic protection.[31][32] Economic historian Paul Bairoch wrote that "historically, free trade is the exception and protectionism the rule".[33]
According to economic historians Douglas Irwin and Kevin O'Rourke, "shocks that emanate from brief financial crises tend to be transitory and have a little long-run effect on trade policy, whereas those that play out over longer periods (the early 1890s, early 1930s) may give rise to protectionism that is difficult to reverse. Regional wars also produce transitory shocks that have little impact on long-run trade policy, while global wars give rise to extensive government trade restrictions that can be difficult to reverse."[34]
One study shows that sudden shifts in comparative advantage for specific countries have led some countries to become protectionist: "The shift in comparative advantage associated with the opening up of New World frontiers, and the subsequent "grain invasion" of Europe, led to higher agricultural tariffs from the late 1870s onwards, which as we have seen reversed the move toward freer trade that had characterized mid-nineteenth-century Europe. In the decades after World War II, Japan's rapid rise led to trade friction with other countries. Japan's recovery was accompanied by a sharp increase in its exports of certain product categories: cotton textiles in the 1950s, steel in the 1960s, automobiles in the 1970s, and electronics in the 1980s. In each case, the rapid expansion in Japan's exports created difficulties for its trading partners and the use of protectionism as a shock absorber."[34]
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According to economic historian Douglas Irwin, a common myth about US trade policy is that low tariffs harmed American manufacturers in the early 19th century and then that high tariffs made the United States into a great industrial power in the late 19th century.[35] A review by The Economist of Irwin's 2017 book Clashing over Commerce: A History of US Trade Policy states:[35]
Political dynamics would lead people to see a link between tariffs and the economic cycle that was not there. A boom would generate enough revenue for tariffs to fall, and when the bust came pressure would build to raise them again. By the time that happened, the economy would be recovering, giving the impression that tariff cuts caused the crash and the reverse generated the recovery. 'Mr. Irwin' also attempts to debunk the idea that protectionism made America a great industrial power, a notion believed by some to offer lessons for developing countries today. As its share of global manufacturing powered from 23% in 1870 to 36% in 1913, the admittedly high tariffs of the time came with a cost, estimated at around 0.5% of GDP in the mid-1870s. In some industries, they might have sped up development by a few years. But American growth during its protectionist period was more to do with its abundant resources and openness to people and ideas.
According to Irwin, tariffs have served three primary purposes in the United States: "to raise revenue for the government, to restrict imports and protect domestic producers from foreign competition, and to reach reciprocity agreements that reduce trade barriers."[36] From 1790 to 1860, average tariffs increased from 20 percent to 60 percent before declining again to 20 percent.[36] From 1861 to 1933, which Irwin characterizes as the "restriction period", the average tariffs increased to 50 percent and remained at that level for several decades. From 1934 onwards, which Irwin characterizes as the "reciprocity period", the average tariff declined substantially until it leveled off at 5 percent.[36]
Economist Paul Bairoch documented that the United States imposed among the highest rates in the world from around the founding of the country until the World War II period, describing the United States as "the mother country and bastion of modern protectionism" since the end of the 18th century and until the post-World War II period.[37] Alexander Hamilton, the first United States Secretary of the Treasury, was of the view, as articulated most famously in his "Report on Manufactures", that developing an industrialized economy was impossible without protectionism because import duties are necessary to shelter domestic "infant industries" until they could achieve economies of scale.[38] The industrial takeoff of the United States occurred under protectionist policies 1816–1848 and under moderate protectionism 1846–1861, and continued under strict protectionist policies 1861–1945.[39] In the late 19th century, higher tariffs were introduced on the grounds that they were needed to protect American wages and to protect American farmers.[40] Between 1824 and the 1940s, the U.S. imposed much higher average tariff rates on manufactured products than did Britain or any other European country, with the exception for a period of time of Spain and Russia.[41] Up until the end of World War II, the United States had the most protectionist economy on Earth.[42]
The Bush administration implemented tariffs on Chinese steel in 2002; according to a 2005 review of existing research on the tariff, all studies found that the tariffs caused more harm than gains to the US economy and employment.[43] The Obama administration implemented tariffs on Chinese tires between 2009 and 2012 as an anti-dumping measure; a 2016 study found that these tariffs had no impact on employment and wages in the US tire industry.[44]
In 2018, EU Trade Commissioner Cecilia Malmström stated that the US was "playing a dangerous game" in applying tariffs on steel and aluminum imports from most countries and stated that she saw the Trump administration's decision to do so as both "pure protectionist" and "illegal".[45]
The tariffs imposed by the Trump administration during the China–United States trade war led to a reduction in the United States trade deficit with China.[46]
Great Britain, and England in particular, became one of the most prosperous economic regions in the world between the late 1600s and early 1800s as a result of being the birthplace of the Industrial Revolution that began in the mid-eighteenth century.[47] The government protected its merchants—and kept others out—by trade barriers, regulations, and subsidies to domestic industries in order to maximize exports from and minimize imports to the realm. The Navigation Acts of the late 17th century required all trade to be carried in English ships, manned by English crews (this later encompassed all Britons after the Acts of Union 1707 united Scotland with England).[48] Colonists were required to send their produce and raw materials first of all to Britain, where the surplus was then sold-on by British merchants to other colonies in the British empire or bullion-earning external markets. The colonies were forbidden to trade directly with other nations or rival empires. The goal was to maintain the North American and Caribbean colonies as dependent agricultural economies geared towards producing raw materials for export to Britain. The growth of native industry was discouraged, in order to keep the colonies dependent on the United Kingdom for their finished goods.[49][50] From 1815 to 1870, the United Kingdom reaped the benefits of being the world's first modern, industrialised nation. It described itself as "the workshop of the world", meaning that its finished goods were produced so efficiently and cheaply that they could often undersell comparable, locally manufactured goods in almost any other market.[51]
By the 1840s, the United Kingdom had adopted a free-trade policy, meaning open markets and no tariffs throughout the empire.[52] The Corn Laws were tariffs and other trade restrictions on imported food and corn enforced in the United Kingdom between 1815 and 1846, and enhanced the profits and political power associated with land ownership. The laws raised food prices and the costs of living for the British public, and hampered the growth of other British economic sectors, such as manufacturing, by reducing the disposable income of the British public.[53] The Prime Minister, Sir Robert Peel, a Conservative, achieved repeal in 1846 with the support of the Whigs in Parliament, overcoming the opposition of most of his own party.
The possessions of the East India Company in India, known as British India, was the centrepiece of the British Empire, and because of an efficient taxation system it paid its own administrative expenses as well as the cost of the large British Indian Army. In terms of trade, India turned only a small profit for British business.[54] However, transfers to the British government was massive: in 1801 unrequited (unpaid, or paid from Indian-collected revenue) was about 30% of British domestic savings available for capital formation in the United Kingdom.[55][56]
Europe became increasingly protectionist during the eighteenth century.[57] Economic historians Findlay and O'Rourke write that in "the immediate aftermath of the Napoleonic Wars, European trade policies were almost universally protectionist", with the exceptions being smaller countries such as the Netherlands and Denmark.[57]
Europe increasingly liberalized its trade during the 19th century.[58] Countries such as the Netherlands, Denmark, Portugal and Switzerland, and arguably Sweden and Belgium, had fully moved towards free trade prior to 1860.[58] Economic historians see the repeal of the Corn Laws in 1846 as the decisive shift toward free trade in Britain.[58][59] A 1990 study by the Harvard economic historian Jeffrey Williamson showed that the Corn Laws (which imposed restrictions and tariffs on imported grain) substantially increased the cost of living for British workers, and hampered the British manufacturing sector by reducing the disposable incomes that British workers could have spent on manufactured goods.[60] The shift towards liberalization in Britain occurred in part due to "the influence of economists like David Ricardo", but also due to "the growing power of urban interests".[58]
Findlay and O'Rourke characterize 1860 Cobden Chevalier treaty between France and the United Kingdom as "a decisive shift toward European free trade."[58] This treaty was followed by numerous free trade agreements: "France and Belgium signed a treaty in 1861; a Franco-Prussian treaty was signed in 1862; Italy entered the "network of Cobden-Chevalier treaties" in 1863 (Bairoch 1989, 40); Switzerland in 1864; Sweden, Norway, Spain, the Netherlands, and the Hanseatic towns in 1865; and Austria in 1866. By 1877, less than two decades after the Cobden Chevalier treaty and three decades after British Repeal, Germany "had virtually become a free trade country" (Bairoch, 41). Average duties on manufactured products had declined to 9–12% on the Continent, a far cry from the 50% British tariffs, and numerous prohibitions elsewhere, of the immediate post-Waterloo era (Bairoch, table 3, p. 6, and table 5, p. 42)."[58]
Some European powers did not liberalize during the 19th century, such as the Russian Empire and Austro-Hungarian Empire which remained highly protectionist. The Ottoman Empire also became increasingly protectionist.[61] In the Ottoman Empire's case, however, it previously had liberal free trade policies during the 18th to early 19th centuries, which British prime minister Benjamin Disraeli cited as "an instance of the injury done by unrestrained competition" in the 1846 Corn Laws debate, arguing that it destroyed what had been "some of the finest manufacturers of the world" in 1812.[37]
The countries of Western Europe began to steadily liberalize their economies after World War II and the protectionism of the interwar period,[57] but John Tsang, then Hong Kong's Secretary for Commerce, Industry and Technology and chair of the Sixth Ministerial Conference of the World Trade Organization, MC6, commented in 2005 that the EU spent around €70 billion per year on "trade-distorting support".[62]
Since 1971 Canada has protected producers of eggs, milk, cheese, chicken, and turkey with a system of supply management. Though prices for these foods in Canada exceed global prices, the farmers and processors have had the security of a stable market to finance their operations.[citation needed] Doubts about the safety of bovine growth hormone, sometimes used to boost dairy production, led to hearings before the Senate of Canada, resulting in a ban in Canada. Thus, supply management of milk products is consumer protection of Canadians.[63]
Most Latin American countries gained independence in the early 19th century, with notable exceptions including Spanish Cuba and Spanish Puerto Rico. Following the achievement of their independence, most of the Latin American countries adopted protectionism. They both feared that any foreign competition would stomp out their newly created state and believed that lack of outside resources would drive domestic production.[64] The protectionist behavior continued up until and during the World Wars. During World War 2, Latin America had, on average, the highest tariffs in the world.[65][66]
Juan Perón erected a system of almost complete protectionism against imports, largely cutting off Argentina from the international market in the 1940s. Protectionism created a domestically oriented industry with high production costs, incapable of competing in international markets. At the same time, output of beef and grain, the country's main export goods, stagnated.[67] The IAPI began shortchanging growers and, when world grain prices dropped in the late 1940s, it stifled agricultural production, exports and business sentiment, in general.[68] Despite these shortcomings, protectionism and government credits did allow an exponential growth of the internal market: radio sales increased 600% and fridge sales grew 218%, among others.[69] During this period Argentina's economy continued to grow, on average, but more slowly than the world as a whole or than its neighbors, Brazil and Chile. By 1950, Argentina's GDP per capita accounted fell to less than half of that of the United States.[70]
In 2010, Paul Krugman write that China pursues a mercantilist and predatory policy, i.e., it keeps its currency undervalued to accumulate trade surpluses by using capital flow controls. The Chinese government sells renminbi and buys foreign currency to keep the renminbi low, giving the Chinese manufacturing sector a cost advantage over its competitors. China's surpluses drain US demand and slow economic recovery in other countries with which China trades. Krugman writes: “This is the most distorted exchange rate policy any great nation has ever followed”. He notes that an undervalued renminbi is tantamount to imposing high tariffs or providing export subsidies. A cheaper currency improves employment and competitiveness because it makes imports more expensive while making domestic products more attractive. He expects Chinese surpluses to destroy 1.4 million American jobs by 2011.[71][72] [73][74][75][76] [77][78][79]
There is a broad consensus among economists that protectionism has a negative effect on economic growth and economic welfare, while free trade and the reduction of trade barriers has a positive effect on economic growth.[11][12][13][8][80][81][82] However, protectionism can be used to raise government revenue and enable access to intellectual property, including essential medicines.[83]
Protectionism is frequently criticized by economists as harming the people it is intended to help. Mainstream economists instead support free trade.[29][84] The principle of comparative advantage shows that the gains from free trade outweigh any losses as free trade creates more jobs than it destroys because it allows countries to specialize in the production of goods and services in which they have a comparative advantage.[85] Protectionism results in deadweight loss; this loss to overall welfare gives no-one any benefit, unlike in a free market, where there is no such total loss. Economist Stephen P. Magee claims the benefits of free trade outweigh the losses by as much as 100 to 1.[86]
Protectionism has been accused of being one of the major causes of war. Proponents of this theory point to the constant warfare in the 17th and 18th centuries among European countries whose governments were predominantly mercantilist and protectionist, the American Revolution, which came about ostensibly due to British tariffs and taxes. According to a slogan of Frédéric Bastiat (1801–1850), "When goods cannot cross borders, armies will."[87]
On the other hand, archaeologist Lawrence H. Keeley argues in his book War Before Civilization that disputes between trading partners escalate to war more frequently than disputes between nations that don't trade much with each other.[88] The Opium Wars were fought between the UK[lower-alpha 3] and China over the right of British merchants to engage in the free trade of opium. For many opium users, what started as recreation soon became a punishing addiction: many people who stopped ingesting opium suffered chills, nausea, and cramps, and sometimes died from withdrawal. Once addicted, people would often do almost anything to continue to get access to the drug.[89]
Barbara Tuchman says both European intellectuals and leaders overestimated the power of free trade on the eve of World War I. They believed that the interconnectedness of European nations through trade would stop a continent-wide war from breaking out, as the economic consequences would be too great. However, the assumption proved incorrect. For example, Tuchman noted that Helmuth von Moltke the Younger, when warned of such consequences, refused to even consider them in his plans, arguing he was a "soldier," not an "economist."[90]
The ongoing Russo-Ukraine War began in the aftermath of the Revolution of Dignity and the signing of the European Union–Ukraine Association Agreement in 2014, which included a Deep and Comprehensive Free Trade Area for Ukraine and the European Union (EU).[91]
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an international legal agreement between all the member nations of the World Trade Organization (WTO). It establishes minimum standards for the regulation by national governments of different forms of intellectual property (IP) as applied to nationals of other WTO member nations.[92] TRIPS was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT)[lower-alpha 4] between 1989 and 1990[93] and is administered by the WTO. Statements by the World Bank indicate that TRIPS has not led to a demonstrable acceleration of investment to low-income countries, though it may have done so for middle-income countries.[19]
Critics argue that TRIPS limits the ability of governments to introduce competition for generic producers.[94] The TRIPS agreement allows the grant of compulsory licenses at a nation's discretion. TRIPS-plus conditions in the United States' FTAs with Australia, Jordan, Singapore and Vietnam have restricted the application of compulsory licenses to emergency situations, antitrust remedies, and cases of public non-commercial use.[94]
One of the most visible conflicts over TRIPS has been AIDS drugs in Africa. Despite the role that patents have played in maintaining higher drug costs for public health programs across Africa, this controversy has not led to a revision of TRIPS. Instead, an interpretive statement, the Doha Declaration, was issued in November 2001, which indicated that TRIPS should not prevent states from dealing with public health crises and allowed for compulsory licenses. After Doha, PhRMA, the United States and to a lesser extent other developed nations began working to minimize the effect of the declaration.[95]
In 2020, conflicts re-emerged over patents, copyrights and trade secrets related to COVID-19 vaccines, diagnostics and treatments. South Africa and India proposed that WTO grant a temporary waiver to enable more widespread production of the vaccines, since suppressing the virus as quickly as possible benefits the entire world.[96][97] The waivers would be in addition to the existing, but cumbersome, flexibilities in TRIPS allowing countries to impose compulsory licenses.[98][99] Over 100 developing nations supported the waiver but it was blocked by the G7 members.[100] This blocking was condemned by 400 organizations including Doctors Without Borders and 115 members of the European Parliament.[101] In June 2022, after extensive involvement of the European Union, the WTO instead adopted a watered-down agreement that focuses only on vaccine patents, excludes high-income countries and China, and contains few provisions that are not covered by existing flexibilities.[102][103]
Proponents of protectionism argue that tariffs raise government revenue via customs. Developing countries, including least developed countries (LDCs), often do not collect income taxes because personal incomes are often too low to tax and they lack the capability to collect such taxes from individuals.[104]
| U.S. Historical Tariffs (Customs) and Tax Collections by the Federal Government | ||||||
|---|---|---|---|---|---|---|
(All dollar amounts are in millions of U.S. dollars) | ||||||
| Year | Tariff Income | Budget % Tariff | Federal Receipts | Income Tax | Payroll Tax | Average Tariff |
| 1792 | $4.4 | 95.0% | $4.6 | $- | $- | 15.1% |
| 1795 | $5.6 | 91.6% | $6.1 | $- | $- | 8.0% |
| 1800 | $9.1 | 83.7% | $10.8 | $- | $- | 10.0% |
| 1805 | $12.9 | 95.4% | $13.6 | $- | $- | 10.7% |
| 1810 | $8.6 | 91.5% | $9.4 | $- | $- | 10.1% |
| 1815 | $7.3 | 46.4% | $15.7 | $- | $- | 6.5% |
| 1820 | $15.0 | 83.9% | $17.9 | $- | $- | 20.2% |
| 1825 | $20.1 | 97.9% | $20.5 | $- | $- | 22.3% |
| 1830 | $21.9 | 88.2% | $24.8 | $- | $- | 35.0% |
| 1835 | $19.4 | 54.1% | $35.8 | $- | $- | 14.2% |
| 1840 | $12.5 | 64.2% | $19.5 | $- | $- | 12.7% |
| 1845 | $27.5 | 91.9% | $30.0 | $- | $- | 24.3% |
| 1850 | $39.7 | 91.0% | $43.6 | $- | $- | 22.9% |
| 1855 | $53.0 | 81.2% | $65.4 | $- | $- | 20.6% |
| 1860 | $53.2 | 94.9% | $56.1 | $- | $- | 15.0% |
| 1863 | $63.0 | 55.9% | $112.7 | $- | $- | 25.9% |
| 1864 | $102.3 | 38.7% | $264.6 | $- | $- | 32.3% |
| 1865 | $84.9 | 25.4% | $333.7 | $61.0 | $- | 35.6% |
| 1870 | $194.5 | 47.3% | $411.3 | $37.8 | $- | 44.6% |
| 1875 | $157.2 | 54.6% | $288.0 | $- | $- | 36.1% |
| 1880 | $184.5 | 55.3% | $333.5 | $- | $- | 27.6% |
| 1885 | $181.5 | 56.1% | $323.7 | $- | $- | 32.6% |
| 1890 | $229.7 | 57.0% | $403.1 | $- | $- | 27.6% |
| 1900 | $233.2 | 41.1% | $567.2 | $- | $- | 27.4% |
| 1910 | $233.7 | 34.6% | $675.2 | $- | $- | 15.0% |
| 1913 | $318.8 | 44.0% | $724.1 | $35.0 | $- | 17.6% |
| 1915 | $209.8 | 30.1% | $697.9 | $47.0 | $- | 12.5% |
| 1916 | $213.7 | 27.3% | $782.5 | $121.0 | $- | 8.9% |
| 1917 | $225.9 | 20.1% | $1,124.3 | $373.0 | $- | 7.7% |
| 1918 | $947.0 | 25.8% | $3,664.6 | $2,720.0 | $- | 31.2% |
| 1920 | $886.0 | 13.2% | $6,694.6 | $4,032.0 | $- | 16.8% |
| 1925 | $547.6 | 14.5% | $3,780.1 | $1,697.0 | $- | 13.0% |
| 1928 | $566.0 | 14.0% | $4,042.3 | $2,088.0 | $- | 13.8% |
| 1930 | $587.0 | 14.1% | $4,177.9 | $2,300.0 | $- | 19.2% |
| 1935 | $318.8 | 8.4% | $3,800.5 | $1,100.0 | $- | 15.6% |
| 1940 | $331.0 | 6.1% | $5,387.1 | $2,100.0 | $800.0 | 12.6% |
| 1942 | $369.0 | 2.9% | $12,799.1 | $7,900.0 | $1,200.0 | 13.4% |
| 1944 | $417.0 | 0.9% | $44,148.9 | $34,400.0 | $1,900.0 | 10.6% |
| 1946 | $424.0 | 0.9% | $46,400.0 | $28,000.0 | $1,900.0 | 7.7% |
| 1948 | $408.0 | 0.9% | $47,300.0 | $29,000.0 | $2,500.0 | 5.5% |
| 1950 | $407.0 | 0.9% | $43,800.0 | $26,200.0 | $3,000.0 | 4.5% |
| 1951 | $609.0 | 1.1% | $56,700.0 | $35,700.0 | $4,100.0 | 5.5% |
| 1955 | $585.0 | 0.8% | $71,900.0 | $46,400.0 | $6,100.0 | 5.1% |
| 1960 | $1,105.0 | 1.1% | $99,800.0 | $62,200.0 | $12,200.0 | 7.3% |
| 1965 | $1,442.0 | 1.2% | $116,800.0 | $74,300.0 | $22,200.0 | 6.7% |
| 1970 | $2,430.0 | 1.3% | $192,800.0 | $123,200.0 | $44,400.0 | 6.0% |
| 1975 | $3,676.0 | 1.3% | $279,100.0 | $163,000.0 | $84,500.0 | 3.7% |
| 1980 | $7,174.0 | 1.4% | $517,100.0 | $308,700.0 | $157,800.0 | 2.9% |
| 1985 | $12,079.0 | 1.6% | $734,000.0 | $395,900.0 | $255,200.0 | 3.6% |
| 1990 | $11,500.0 | 1.1% | $1,032,000.0 | $560,400.0 | $380,000.0 | 2.8% |
| 1995 | $19,301.0 | 1.4% | $1,361,000.0 | $747,200.0 | $484,500.0 | 2.6% |
| 2000 | $19,914.0 | 1.0% | $2,025,200.0 | $1,211,700.0 | $652,900.0 | 1.6% |
| 2005 | $23,379.0 | 1.1% | $2,153,600.0 | $1,205,500.0 | $794,100.0 | 1.4% |
| 2010 | $25,298.0 | 1.2% | $2,162,700.0 | $1,090,000.0 | $864,800.0 | 1.3% |
| -------------------------------------------------------------------------------------------- | ||||||
| Notes: All dollar amounts are in millions of U.S. dollars Income taxes include Individual and Corporate taxes Federal expenditures often exceed Revenue by temporary borrowings. Initially the U.S. Federal Government was financed mainly by customs(tariffs Average Tariff Rate % = Customs Revenue/ cost of Imports (goods). Other taxes collected are: Income Tax, Corporate Income Tax, Inheritance, Tariffs—often called Customs or duties on imports, etc. Income Taxes began in 1913 with the passage of 16th Amendment. Payroll taxes are Social Security and Medicare taxes Payroll Taxes began in 1940. Many Federal government Excise taxes are assigned to Trust Funds and are collected for and "dedicated" to a particular Trust. Sources:
| ||||||
Tariffs were the greatest source of United States federal revenue (up to 95% at times) until the federal income tax began after 1913. For well over a century the federal government was largely financed by tariffs averaging about 20% on foreign imports. At the end of the American Civil War in 1865 about 63% of Federal income was generated by the excise taxes, which exceeded the 25.4% generated by tariffs. In 1915 during World War I tariffs generated only 30.1% of revenues. Since 1935 tariff income has continued to be a declining percentage of Federal tax income.
A 2016 study found that "trade typically favors the poor", as they spend a greater share of their earnings on goods, as free trade reduces the costs of goods.[111] Other research found that China's entry to the WTO benefited US consumers, as the price of Chinese goods were substantially reduced.[112] Harvard economist Dani Rodrik argues that while globalization and free trade does contribute to social problems, "a serious retreat into protectionism would hurt the many groups that benefit from trade and would result in the same kind of social conflicts that globalization itself generates. We have to recognize that erecting trade barriers will help in only a limited set of circumstances and that trade policy will rarely be the best response to the problems [of globalization]".[113]
According to economic historians Findlay and O'Rourke, there is a consensus in the economics literature that protectionist policies in the interwar period "hurt the world economy overall, although there is a debate about whether the effect was large or small."[57]
Economic historian Paul Bairoch argued that economic protection was positively correlated with economic and industrial growth during the 19th century. For example, GNP growth during Europe's "liberal period" in the middle of the century (where tariffs were at their lowest), averaged 1.7% per year, while industrial growth averaged 1.8% per year. However, during the protectionist era of the 1870s and 1890s, GNP growth averaged 2.6% per year, while industrial output grew at 3.8% per year, roughly twice as fast as it had during the liberal era of low tariffs and free trade.[114] One study found that tariffs imposed on manufactured goods increase economic growth in developing countries, and this growth impact remains even after the tariffs are repealed.[115]
According to Dartmouth economist Douglas Irwin, "that there is a correlation between high tariffs and growth in the late nineteenth century cannot be denied. But correlation is not causation... there is no reason for necessarily thinking that import protection was a good policy just because the economic outcome was good: the outcome could have been driven by factors completely unrelated to the tariff, or perhaps could have been even better in the absence of protection."[116] Irwin furthermore writes that "few observers have argued outright that the high tariffs caused such growth."[116]
According to Oxford economic historian Kevin O'Rourke, "It seems clear that protection was important for the growth of US manufacturing in the first half of the 19th century; but this does not necessarily imply that the tariff was beneficial for GDP growth. Protectionists have often pointed to German and American industrialization during this period as evidence in favor of their position, but economic growth is influenced by many factors other than trade policy, and it is important to control for these when assessing the links between tariffs and growth."[117]
A prominent 1999 study by Jeffrey A. Frankel and David H. Romer found, contrary to free trade skeptics' claims, while controlling for relevant factors, that trade does indeed have a positive impact on growth and incomes.[118]
Economist Arvind Panagariya criticizes the view that protectionism is good for growth. Such arguments, according to him, arise from "revisionist interpretation" of East Asian "tigers"' economic history. The Asian tigers achieved a rapid increase in per capita income without any "redistributive social programs", through free trade, which advanced Western economies took a century to achieve.[82][119]
There is broad consensus among economists that free trade helps workers in developing countries, even though they are not subject to the stringent health and labor standards of developed countries. This is because "the growth of manufacturing—and of the myriad other jobs that the new export sector creates—has a ripple effect throughout the economy" that creates competition among producers, lifting wages and living conditions.[120] The Nobel laureates Milton Friedman and Paul Krugman have argued for free trade as a model for economic development.[11] Alan Greenspan, former chair of the American Federal Reserve, has criticized protectionist proposals as leading "to an atrophy of our competitive ability. ... If the protectionist route is followed, newer, more efficient industries will have less scope to expand, and overall output and economic welfare will suffer."[121]
Protectionists postulate that new industries may require protection from entrenched foreign competition in order to develop. Mainstream economists do concede that tariffs can in the short-term help domestic industries to develop but are contingent on the short-term nature of the protective tariffs and the ability of the government to pick the winners.[122][123] The problems are that protective tariffs will not be reduced after the infant industry reaches a foothold, and that governments will not pick industries that are likely to succeed.[123] Economists have identified a number of cases across different countries and industries where attempts to shelter infant industries failed.[124][125][126][127][128]
The United States, which today has the largest economy in the world and one of the highest GDP per capita, has employed tariffs throughout much of its history. Alexander Hamilton, the first United States Secretary of the Treasury, supported tariffs at the country's inception in his 1791 Report on Manufactures. Abraham Lincoln signed the 1861 Morrill Tariff to raise revenue during the United States Civil War. The Republican Party (United States), a fiscally conservative political party, currently supports and has historically supported protectionism.[129]
Certain policies of First World governments have been criticized as protectionist, such as the Common Agricultural Policy[131] in the European Union, longstanding agricultural subsidies and proposed "Buy American" provisions[132] in economic recovery packages in the United States.
Heads of the G20 meeting in London on 2 April 2009 pledged "We will not repeat the historic mistakes of protectionism of previous eras". Adherence to this pledge is monitored by the Global Trade Alert,[133] providing up-to-date information and informed commentary to help ensure that the G20 pledge is met by maintaining confidence in the world trading system, deterring beggar-thy-neighbor acts and preserving the contribution that exports could play in the future recovery of the world economy.
Although they were reiterating what they had already committed to in the 2008 Washington G20 summit, 17 of these 20 countries were reported by the World Bank as having imposed trade restrictive measures since then. In its report, the World Bank says most of the world's major economies are resorting to protectionist measures as the global economic slowdown begins to bite. Economists who have examined the impact of new trade-restrictive measures using detailed bilaterally monthly trade statistics estimated that new measures taken through late 2009 were distorting global merchandise trade by 0.25% to 0.5% (about $50 billion a year).[134]
Since then, however, President Donald Trump announced in January 2017 the U.S. was abandoning the TPP (Trans-Pacific Partnership) deal, saying, "We're going to stop the ridiculous trade deals that have taken everybody out of our country and taken companies out of our country, and it's going to be reversed."[135] President Joe Biden has largely continued Trump's protectionist policies, and has not negotiated any new free trade agreements since assuming office in January 2021.[136]
The 2010s and early 2020s have seen an increased use of protectionist economic policies across both developed countries and developing countries worldwide.[137][138]
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