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Trade protectionism: Reasons and

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Article in Competitiveness Review An International Business Journal incorporating Journal of
Global Competitiveness October 2010
DOI: 10.1108/10595421011080760

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Trade protectionism:
reasons and outcomes

384

Duquesne University, Pittsburgh, Pennsylvania, USA

Suhail Abboushi
Abstract
Purpose The purpose of this paper is to establish the benefits of free trade, to examine the reasons
and outcomes of protectionist policies, and to evaluate the rationale behind trade protectionism.
Design/methodology/approach The methodology used in this paper includes review of the
literature and empirical studies published from 1967 to 2008, and descriptive statistical analysis of
data published by international organizations.
Findings International trade has been growing faster than growth of world gross domestic product,
and countries with freer trade policies benefit more than countries with restricted policies. Yet, trade
protectionism continues to be exercised in response to pressure from select industries and political
constituencies. The paper also establishes that trade restrictions are harmful to the economies of the
trading partners.
Originality/value This paper establishes the benefits of free trade, the harms of trade restrictions,
and challenges the popular rationale for protectionism.
Keywords Free trade, Protectionism, Economics, Employment, Politics
Paper type General review

Competitiveness Review: An
International Business Journal
Vol. 20 No. 5, 2010
pp. 384-394
q Emerald Group Publishing Limited
1059-5422
DOI 10.1108/10595421011080760

Introduction
The 2008 index of Economic Freedom published by the Heritage Foundation ranks the
USA as the fifth freest economy in the world. A dimension in the index is the extent to
which international trade is free of government interference. In this regard, while not
top ranking, the USA is a world leader and champion of free trade, and this has been so
for decades, especially after Second World War when the US Government made free
trade part of its foreign policy to promote political cooperation and stability. US
Government commitment to free trade, however, has not been without occasional but
repeated patterns of protectionism that interfere with free trade and cause negative
consequences domestically and internationally. More recently, protectionist sentiments
in the USA seem to be surging again as manifested by the many bills before the
Congress that aim to curtail free trade in different industries and with different
countries. Congress has also been stalling on debate and ratification of free trade
agreements (FTAs) that the administration had laboriously negotiated with key trade
partners in Latin America and Asia. Even presidential candidates in 2008 have been
promising to open existing trade agreements to re-negotiate measures that are more
restrictive. Furthermore, Congress is putting the final touches on a $300 billion farm
bill that is proving to be the costliest in history and that WTO trade partners consider
the main obstacle to completing the Doha Round of multilateral trade negotiations
(Gordon and Cho, 2008). All this while the rest of the world is moving forward and
negotiating FTAs with or without the USA. There are currently 380 FTAs worldwide
and the USA is a member of only about ten. This is reason for concern considering that
about half world trade takes place within FTAs (Trading Without America, 2007).

This renewed surge in protectionism is an occasion to revisit the subject matter

to understand trade protectionism, its consequences, and rationale.
Trade
Nations of the world have been trading in goods and services with each other since the
dawn of history. In modern times, and especially since the establishment of General
Agreement on Tariffs and Trade (GATT), multilateral trade has flourished and
produced economic prosperity and political stability among trading partners. The fruits
of trade have induced every country to want to join the community of trading nations
and to petition for membership in international trade organizations knowing very well
that they would compromise their national sovereignty and become accountable to trade
regulations drafted by delegates of foreign governments. At times, trade has not been
without elusive outcomes, inadequate cooperation with regard to certain protected
industries, and painful socio-economic dislocations within domestic economies. Yet,
and in spite of the shortcomings, trade has advanced steadily and at times rapidly, and
created an awesome outcome where the growth of world trade outpaced the growth of
world economy. Table I shows the growth in world gross domestic product (GDP) and
merchandise and service trades in recent times.
The growth of real trade, as opposed to dollar value trade, exceeded economic
output by more than 4 percentage points between 1996 and 2006. In North America,
real merchandise exports grew by 8.5 percent in 2006 and GDP by 3.4 percent. In Asia,
exports grew by 13.5 percent and GDP by 4.4 percent. Growth in trade and economic
output proliferated to developing countries whose economies actually grew faster than
the developed countries. This robust economic prosperity strengthened investor
confidence, elevated stock market values to historic levels, and lowered the spread in
interest margins between emerging market bonds and those of developed countries.
Foreign direct investment capital flows reached $1.23 trillion in 2006, the second
highest ever, and global liquidity increased foreign exchange reserves and enabled
governments to expedite public debt re-payments. Recent data show that the situation
in the USA is equally attractive. In 2007, US exports reached a record $1.6 trillion,

2003

2004

2005

Merchandise trade million dollars and % growth

Exports
7,582,000
9,218,000
10,482,000
Growth
16.82
21.57
13.71
Imports
7,861,000
9,575,000
10,853,000
Growth
16.58
21.67
13.46
Service trade million dollars and % growth
Exports
1,833,000
2,209,900
2,469,400
Growth
14.7
20.51
11.77
Imports
1,782,900
2,123,300
2,361,300
Growth
18.86
19.13
11.21
World GDP % growth
2.7
3.8
4.9
Source: WTO statistics

2006

2007

12,108,000
15.5
12,427,000
14.5

12,898,000
14.78
14,211,000
14.35

2,765,700
11.98
2,627,000
11.26
4.7

Trade
protectionism

385

3,257,300
17.79
3,059,100
16.44
5.3

Table I.
World trade and GDP

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386

up 12.6 percent from 2006 and the 2008 numbers are equally impressive with a third of
agriculture output and 20 percent of manufactures exported internationally (Gutierrez
and Schwarzenegger, 2008).
Benefits of trade
The theories of trade from David Ricardos Principles of Political Economy and
Taxation of 1817 until the present time explain the benefits from trade (Ricardo, 1971).
At the risk of doing injustice to the theories of international trade, the gains can
be summarized in three areas. First, the expanded market and subsequent growth of
production reduces cost per unit, and elevates and spreads efficiency. Second,
international competition reduces monopoly power by domestic producers and
compels them to design and achieve higher production efficiencies. Third, consumers
gain wide variety of products at lower prices and enjoy increased purchasing power for
their limited incomes.
While trade is generally beneficial, the benefits rise with more freedom. Countries
with freer trade reap more benefits than countries with restricted trade. A study done by
the World Bank examined trade policy and economic performance for 41 developing
countries between the early 1960s and late 1980s ((The) World Bank, 1987), and
compared economic performance of countries with free trade and countries with
restricted trade. The study found the countries with free trade enjoyed higher economic
performance than countries with restricted trade policy. Table II presents a concise
summary of the highlights of the findings. The data show that countries with strong
free trade policy outperformed those with moderate free policy, and both outperformed
the countries with either moderate or strong restricted policy. The finding was equally
true for the two study periods of 1963-1973 and 1973-1985. The study found that the
average annual growth in real per capita income for 1963-1973 was 6.9 percent in the
countries with strong free trade policy and 1.6 percent in the countries with strong
restricted trade policy. During the period from 1973 to 1985, the growth rates were
5.9 percent and 2 0.1, respectively. The study suggests that investment capital tends to
be more productive in a free trade environment, producing higher economic output and
efficiency. Other studies of trade policy show similar conclusion: not only is free trade
beneficial, but freer trade more beneficial. With this in mind, what then motivates
governments to restrict trade?
Strongly for
free trade

Moderately for
free trade

Moderately for
restricted trade

Strongly for
restricted trade

1963-1973

Singapore 9.0
South Korea 7.1
Hong Kong 6.0

Brazil 5.5
Israel 5.4
Thailand 4.9
Indonesia 4.6

Mexico 4.3
Kenya 3.9
Philippines 2.2

1973-1985

Singapore 6.5
Hong Kong 6.3
South Korea 5.4

Malaysia 4.1
Thailand 3.8
Tunisia 2.9

Sri Lanka 3.3

Pakistan 3.1
Colombia 1.8

Turkey 3.5
Argentina 3.1
Sri Lanka 2.3
India 1.1
Bangladesh 2 1.4
India 2.0
Ethiopia 20.4
Nigeria 22.5
Bolivia 2 3.1

Period

Table II.
Average percent growth
of per capita real gross
national output

Source: World Development Report 1987

Trade protectionism
Protectionism is the sum of government trade policies intended to assist domestic
producers against foreign producers in a particular industry, by means of raising the
price of foreign products, lowering cost for domestic producers, and limiting foreign
producers access to domestic market. The methods to achieve such protection are all too
familiar and include:
.
tariff taxes on imports which continue to be used in spite of great progress under
GATT;
.
quota ceilings on quantity of foreign products sold in domestic market, which
limit the supply and raise the price of imported products;
.
regulatory obstacles that place hurdles in the way of imported products such as
product classifications and seemingly endless lists of standards and
specifications;
.
subsidies to domestic producers that range from tax breaks to direct cash
payments; and
.
currency controls to limit access to foreign currencies or manipulate exchange
rates to inflate the price of foreign products and lower the price of domestic
products.
The arguments for protectionism include national defense, trade deficit, employment,
infant industries, and fair trade.
National defense
Protecting producers in industries such as weapon manufacturing is deemed prudent to
protect the countrys preparedness for times of adversity. This argument has wide
patriotic appeal, but it also has weaknesses. First, protections given to so-called essential
industries are very costly to tax payers and seem to have become routine and matter of
fact. Second, numerous industries qualify to be crucial for national security including
plastics, chemicals, metals, and computers. Should all these industries enjoy protection
from international competition? Third, in todays business environment of global
networking, it is inconceivable to identify a sensitive industry that is without networks
of foreign partners and even co-owners. In the defense industry, Boeing, Raytheon and
DRS Technologies all have dozens of strategic relationships with international
suppliers, partners, clients, and foreign governments as well. Furthermore, these
companies do compete internationally. Could such companies compete against foreign
producers abroad, as Raytheon recently competed with the British firm BT Group PLC
in the UK, and then enjoy protection from the same competitors in the home market
(Cole, 2008)? Finally, some of these national defense companies are not really national
they are becoming foreign owned. Just to illustrate the point, Finmeccanica SpA,
an Italian defense contractor, has recently acquired the US-based DRS Technologies for
$5.3 billion (Michaels, 2008). US security review notwithstanding, this defense company
is now accountable to a foreign owner.
Balance of payments
Advocates of protectionism are alarmed at the deficit in the balance of payments
current account. When trade deficit persists and grows, politicians begin to wield

Trade
protectionism

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protectionism to battle the perceived injustice in the countrys trade relations.

This argument, while popular, disregards key issues. First, study after study in the
economics of trade continues to show that trade deficit per se is not harmful to
the economy. Second, concentrating only on the balance of trade is but a partial and
limited view of a countrys balance of payments. A positive balance in another
account, such as the capital account, which measures capital inflows and outflows,
accompanies a deficit in the balance of trade. That is the case with the US balance of
payments and it is a fact rarely mentioned by arguments for protectionism. Third,
protections that reduce imports invariably reduce exports and do not change the deficit
situation. Kaempfer and Willett (1987) studied the issue of using import surcharge to
reduce trade deficit and concluded that the policy would distort resource allocations
and fail to reduce the deficit. They suggest that the other deficit be corrected, the
government budget deficit, for that holds promise to reduce trade deficit. Recent
studies by the Institute for International Economics arrive at the same conclusion:
limiting imports is not recommended for that will do damage to the GDP (US Current,
2008).
Employment
An industry that has not been preparing for competition, global or domestic, loses
market share and jobs are lost. Workers and their representatives and employers lobby
the government very strongly to obtain protections, and they often do. Protections
reduce imports and preserve some jobs, but the subsequent reduction in exports
reduces employment in export industries. Luttrell (1978) demonstrated that
employment gains from reduced imports and losses from reduced exports balance
each other out with a net employment effect near zero! A second issue is the cost per job
saved. As will be shown in another section of this paper, the cost to the public can reach
hundreds of thousands of dollars per a single job saved. Third, while employment in
the buffered industry is spared, it worsens in industries that depend on imports, like
industrial users of imported goods, retailers, trade related service industries, and so on.
In addition, the rise in the price of protected goods increases the cost of doing business
in these industries and makes them less competitive. Some end up relocating or
shutting down, as has been the case in companies dependent on protected sugar, steel,
timber, and the like.
Infant industries
This is another popular argument in developing and developed countries as well.
A newly established industry may not enjoy the cost and production efficiencies
enjoyed by competitors who have been in business long enough to develop production
efficiencies and innovative technologies. Therefore, the newly established industry
applies pressure on its government to shield it from international competition by
means of imposing trade restrictions in the face of imports for a number of years until
the domestic industry presumably establishes its comparative advantage.
Unfortunately, the protected industry continues to rely on its political power and
allies to extend the duration of its infancy and resist lifting the protections (Coughlin
et al., 1988). Such infant industries enjoy the luxury of protection and often grow in size
and begin to resemble an oligopoly with significant political power to preserve and
even raise levels and types of protection (Pincus, 1977).

Level playing field

Advocates of this argument suggest that government should impose protection
measures against foreign businesses if their governments exercise protections of their
domestic industries. The intent is to use reciprocity to pressure foreign governments to
lower or remove their protection measures. This argument, also known as fair trade
policy, is practiced by governments worldwide affecting many industries, and often
results in strong legislations mandating the use of quid pro quo protections. These
protections, however, benefit only the protected industry and result in an escalation of
reciprocal trade restrictions that hurt both economies and instill a relation of
unfriendliness, which defeats one of the key purposes for bilateral trade among nations.
Unfriendly, relations grew between the USA and allies like Canada because of reciprocal
protections affecting timber and other industries (Abboushi, 2006). Furthermore, studies
have shown that costs of such trade restrictions incurred by the society exceed the
benefits that may accrue to the protected industry (Coughlin et al., 1988).
There are other arguments for protectionism such as strategic trade policy, spillover
effect, income redistribution, and so on. However, the record of trade in modern
history continues to show that protectionism is ultimately harmful to society, as will be
argued next.
The effects of protectionism
Protection policies are intended to help the domestic industry maintain or increase its
market share while foreign producers are expected to lose market share and sales
revenues. Oddly enough, the record indicates that foreign producers sometimes benefit
from certain protectionist policies as in the case of quotas, due to increases in their prices,
which may offset the loss in quantity supplied. For a look at the costs of protectionism in
the USA, Tarr and Morkre (1984) estimated the annual cost to the US economy to be
$12.7 billion from protections on autos, textiles, steel, and sugar. Hickoks (1985) analysis
targeted the effects on consumers at different income brackets and discovered that
protections punish low-income consumers much more than upper income consumers.
The trade restraints on clothing, sugar, and autos were found to be equivalent to
23 percent income tax surcharge for households with low income and 3 percent for
households with high income. The impressive study by Hufbauer et al. (1986) analyzed
31 cases of trade protections in industries where trade was larger than $100 million.
They identified the costs and benefits of trade restrictions and calculated what they
referred to as the welfare costs to society. Their study is extensive and Table III
contains key highlights of the findings. As the data show, the costs to consumers
exceeded $100 million in 25 of the 31 cases with the largest loss in the textile and apparel
industry where the costs amounted to $27 billion per year. Costs associated
with protections in carbon steel were $6.8 and $5.8 billion in autos, and $5.5 billion in
dairy products.
The data point to an interesting finding with regard to the relationship between
protectionism and employment. In every single case, consumers (and the society) paid a
hefty price for each saved job per worker, and in the majority of cases, the cost was in
excess of $100,000 per job. These findings should raise serious doubt about the utility of
the argument that protectionism is beneficial for employment. The authors of
the above data calculated the benefits derived by domestic producers and government,
and occasionally, foreign producers as well, and then identified and calculated

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protectionism

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Table III.
Costs of protectionism
in select industries

Benzenoid chemicals
Orange juice
Textile and apparel: phase III
Non-rubber footwear
Carbon steel: phase III
Specialty steel
Autos
Sugar
Meat

Costs to consumers
Total loss
Efficiency loss
(million dollars)
(million dollars)
2,650
525
27,000
700
6,800
520
5,800
930
1,800

14
130
4,850
16
330
30
200
130
145

Costs per job saved

(dollars)
Over 1,000,000
240,000
42,000
55,000
750,00
1,000,000
105,000
60,000
160,000

Sources: Coughlin et al. (1988); Hufbauer et al. (1986)

the efficiency losses to society. These efficiency losses are the result of production
distortions, reduced consumption, and the many side effects on consumers purchasing
power, industrial customers, and the added bureaucratic and government expenditures
to monitor and enforce the policies. It is fair to summarize and say that while protection
measures may benefit domestic producers and perhaps some affiliated other parties, in
the end, the society pays the price in many ways.
A similar finding was derived when the Organization for Economic Cooperation and
Development (OECD) conducted studies to evaluate the effects of protectionist policies
in manufacturing industries in the OECD member countries (OECD, 1985). The key
findings of the OECDs study point to the following effects of protectionism:
.
rise in domestic price stifled economic growth and depressed investment;
.
drop in imports is accompanied by drop in exports;
.
jobs saved are offset by job losses in export-oriented industries;
.
overall employment does not increase; and
.
the jobs saved are publicized and the jobs lost are not; hence, the public is left
with the impression than protectionist policies benefit employment.
Finally, a note on how does protectionism in developed countries impact developing
countries. The OECD study concludes that reduced imports by developed countries
reduce exports by developing countries and their earnings of foreign exchange, which
they need in order to finance their external public debt. In other words, the multinational
financial situation also gets hurt by trade protectionism. The impact of protectionism on
developing countries was recently re-affirmed by US Government officials most
intimately involved in international trade when six former US trade representatives
affirmed that developing countries have benefited significantly with the reductions in
protectionism by developed countries (Gordon and Cho, 2008).
Evidence from these and other studies clearly show that the costs of trade
protectionism exceed the benefits. While domestic producers and possibly their workers
may gain for a while, consumers and society lose. Inefficiencies inflict the entire economy
and hamper growth, investment, employment, and ultimately even government
revenues. With so much evidence that protectionism is harmful, why does it persist?

Said more accurately, with strong evidence to the negative consequences to protectionist
policies, why does the government continue to impose them and sometimes even
increase them?

Trade
protectionism

Why does protectionism persist?

Studies of US trade policies reveal complex and historic reasons behind the imposition
and promulgation of trade restrictions. This is a fascinating subject matter for
research, and within the limits of this paper, we propose the following literature-based
explanations that provide propositions for further study.

391

Rent seeking
The authoritative studies by Tullock (1967) and Krueger (1974) suggest that
government intervenes in economic activities, as in trade, in response to lobbying efforts
by interest groups seeking government protection of their interests. The process is
referred to as rent-seeking which is common where government protection is sought.
As government rewards rent-seekers, the public begins to distrust the fairness of the
market system and begins to realize that lobbying the government for intervention and
protection is fruitful. For example, the public sees that efforts by US farm lobby to obtain
protection subsidies benefit the farm households by elevating their household income
above the national average. The Department of Agriculture data show that in 2006,
average farm household income was $77,654, a sizable 17 percent higher than average
US household income, and in 2008, average farm household income is expected to rise to
$90,000 (Etter and Hitt, 2008). The farm bill we alluded to earlier and described as
costliest in history, was evaluated by the Office of Management and Budget, who
concluded that the farm economy has never been stronger and there is no need to
increase support and subsidies to people who are among the wealthiest 2 percent of
Americans (Gordon and Cho, 2008). Seeing the fruits of rent-seeking, more people
begin to follow the path of seeking government intervention and protection. An example
related to the above industry is the case of the United Fresh Produce Association, who
was for a long time opposed to protectionism. However, seeing the fruits of subsidies,
they joined the rent-seeking and have been assured monetary and legislative rewards.
Rent-seeking becomes a common and acceptable way of getting things done. It is likely
that this creates and permeates a culture of dependency on government protection,
which resembles the narcotic effect that is referenced in the literature of industrial
relations, where the key players over-rely on outside intervention instead of working out
their industrial disputes (Kochan and Katz, 1988). In other words, protectionism
produces a dependency effect that the beneficiaries find difficult to dispense with. Lamb
(2006) provides an illustrative example of rent-seeking by the California avocado
farming industry that has used this and other political tactics to bloc avocado imports
from Mexico for over 80 years and continue to keep Mexicos exports to a mere 7 percent
of US annual consumption of avocados.
The median voter
A synthesis of public choice literature (Markusen et al., 1995) suggests that public policy
makers enact policies that will get them re-elected by the median (majority) voters.
Since most voters have more labor than capital, they vote to protect labor and seem to be
in favor of public policies that protect their jobs and wages, as they are lead to believe.

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When the average voter begins to accumulate capital, as in investments, they begin
to favor liberal policies and reduced trade protections because liberal policies are better
for invested capital (profits). US multinational companies, which make up the absolute
majority of the S&P 500, derive a sizable portion of their revenues in international
markets, and to them, free trade is preferable to restricted trade. As a result, the voting
behavior of the median voter begins by supporting and demanding protection for
labor, and only when the median voter begins to accumulate capital will free trade
become preferable. Studies by Gokcekus and Tower (1989) seem to support this
proposition and find that when the public begin to acquire investments, they diminish
their support for protectionism and begin showing preference for free trade. Recent
evidence from the public voting choices seem to concur voters dependent on their labor
want to see strong protections from international trade. Politicians notice that and they
tailor their positions accordingly.
Status quo bias
Under free trade, industries that are not prepared for the competitive pressures may
lose market share and jobs are then eroded. Even though liberalized trade may create
new jobs, as in export or new industry jobs, losers are more identifiable than gainers,
and they capture the attention and sympathy of the public. This creates political
pressure for protection, and protectionism follows. Knetsch (1989) suggests that people
prefer keeping what they have (current jobs) over what they may gain in a liberalized
and growing economy. These two driving forces, sympathy for the workers and
preference for what people currently have, create status quo bias, and create pressure
on government to protect current industries against the infringement of foreign
competition.
Domestic partisan politics
Ever since independence in 1776, the US Congress regulated trade by means of tariffs
and a variety of protectionist measures. After First World War, and during the
Progressive Era, Congress established public and quasi-public institutions to help
government understand the technical intricacies of globalization and international
trade. Congress created the Department of Labor, National Bureau of Economic
Research, and the Brookings Institute. One important bureaucracy Congress created
was the Tariff Commission (TC), which continues to be an important part of the US trade
bureaucracy today and its current name is the US International Trade Commission. The
primary purpose for the creation of the TC was to generate statistical and economic
analysis that the government could rely upon to formulate non-partisan trade policies.
Democrats and Republicans differed over the structure of the bureaucracy to be
established. They also differed over the purpose, whether to protect consumers against
price increases or producers against unfair pricing by foreign competition. They also
disagreed bitterly over the nature and duration of trade protections. The squabble
between Democrats and Republicans went on for decades, and resulted in the creation of
one bureaucracy only to be supplanted by another and the adoption of one trade policy to
be superseded by another policy, all depending on who had the upper hand in Congress
and the Administration at the time. We cite this concise historic perspective, which is
based on the fascinating study by Schnietz (1998) to illustrate the point that trade policy,
including protectionism, is significantly the result of partisan duel where each party

shapes its policy to appeal to its key constituents and to the public. Even a brief review of
the US history of trade policies reveals the relentless tug of power between Democrats
and Republicans, where one party favors protectionism at one time and another at
another time, depending on their readings of the preferences of the public and their
valued interest groups. Therefore, trade policy, like other public policies, falls prey to
partisan politics.

Trade
protectionism

393
Conclusion
The USA is a free-market economy and a world advocate of international trade free of
restrictions. However, significant protectionist measures have always been, and
continue to be imposed on trade in a variety of industries purportedly to protect those
industries and public interest. The studies surveyed for this paper show that the welfare
of protected interest groups may be advanced, but always at the expense of the larger
society. It is often argued that protectionism is good for the country, but those arguments
are rhetorical appealing to and arousing public sentiment. Protectionism does not
advance public welfare. In fact, public welfare stands to be hurt by trade protectionism.
A second conclusion pertains to governments motive. The studies surveyed point to one
very strong force politics, and it is not so much the international political relations but
the domestic political pressures and competition. Politicians of all factions have vied for
serving the interests of the politically capable and aggressive interest groups. While this
may be part of the nature of the democratic political system where the government
responds to the pressures of the politically active and resourceful interest groups, the
drawback is the loss incurred by large sections of the population whose welfare is
compromised by trade protectionism.
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Corresponding author
Suhail Abboushi can be contacted at: abboushi@duq.edu

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