What are the long-term implications of protectionism, as practised today in the developed market economies? Many economists argue that tariff and nontariff barriers to trade are harmful not only for the countries which face these barriers but also for the countries which impose them. So far the trade-negotiation experts have emphasized on how the protectionist policies followed by the industrially advanced countries lead to slow growth of exports from the developing countries and defeat their plan to achieve high rates of economic development. The time has come to demonstrate with equal force that the slow growth of· purchasing power which results from poor economic performance of the developing countries in the world markets should be a matter of great concern for the advanced countries facing domestic deflation in their over-protected economies.
The cost of protectionism in terms of inefficient use of resources must be higher in the developed economies than in the c1eveloping ones. The ‘infant’ industry which grows under protection in the developing countries can at least expect to catch up with the mature industries in future. But the ‘senile’ industry which an industrially advanced country protects from international competition is doomed to stagnation, if not decay, as the rest of the economy keeps paying a high price for its survival. Thus, for every job saved in the ‘senile’ industries the U.S. consumers pay a sum of 50,000 dollars per annum which far exceeds the wages paid.
Tariff is not the only form of protection that breeds inefficiency. Melvyn Krauss goes deeper into various forms of protectionist devices and shows how they distort resource allocation and cause stagnation in the country making use of these devices. The ‘old protectionism’ refers to trade-intervention instruments, such as the tariff or subsidy. In the ‘new protectionism’ Krauss has included all actions of the government of the welfare state that interfere with the private economy and affect international trade.
The scope of ‘new protectionism’ is broad and much beyond the restraining influence of the General Agreement on Trade and Tariffs (GATT) provisions. The welfare state in western Europe, U.S.A. or. U.K. has grown out of a skepticism as to the ability of the market mechanism to allocate resources and distribute income in accordance with the society’s objectives. Ideally speaking, these objectives are high levels of income and employment and an equitable distribution of income. Paradoxically, the welfare state intervention very often alters income distribution in favour of the rich who, by virtue of being the politically stronger pressure group, set the direction of government policy. Even then, the welfare state can remain a viable entity if it is supported by a high rate of productivity growth. But Krauss shows that state intervention in various forms, such as labour subsidies, capital controls, cartel agreements, subsidized loans, regional development grants, investment grants, environmental policies, price-fixing arrangements, production subsidies, consumption subsidies, export subsidies, tariffs, etc. necessarily reduces productivity levels. This is what he calls the inherent contradiction of the welfare state.
The book begins with a lucid and non-technical analysis of various issues under protectionism, such as free trade versus tariff, tariff versus quota, tariff versus production subsidy and the trade-creating-trade-diverting features of a customs union. The effects of these trade policies on domestic income distribution and resource allocation have been discussed in a manner which should appeal to a reader with no technical background.
In a different context the author has raised the issue of export subsidy versus production subsidy and sought to justify the GATT provisions against the former. But the author has argued that the total effect of government intervention in an industry should be considered, and not just the subsidy element, in applying the GATT rules on the use of subsidies. For example, incentives given to an industry located in the backward region of the welfare state should not be included in export or industrial subsidy as such incentives do not suppress fair competition. The problem coines under international tax and subsidy harmonization. Global harmonization often requires either the free market to adjust to the welfare state or the vice versa. In either case the integrity of one of them is endangered. Since GATT has no supranational authority over the contracting parties, harmonization of unequal tax and subsidy rates among the trading countries often takes the course of retaliatory actions in the form of countervailing duties which are used as offensive rather than defensive weapons. The emergence of the welfare state is thus seen to dash all hopes for a liberal international economic order that may have been created by the Kennedy Round of trade negotiations.
The chapter on the effects of welfare state intervention on international trade starts with various income redistribution policies, such as, rent control and income transfers from capital to labour. The conflict between the free market and the welfare state is further illustrated by the problem of the guest workers whose presence in the country renders income redistribution policies largely ineffective. The increasing size of government consumption and the government procurement policies have wide-ranging implications for international trade and welfare. On the question of environmental protection the author has shown how protection of the environment has meant protection of local enterprise.
Krauss has expressed strong views against the argument that free trade creates unemployment under rigid factor prices and/or immobile factor resources and shown that a government policy of promoting greater mobility of factor resources with selective safeguards is a better way to deal with unemployment than general fiscal and monetary measures. Unfortunately, ‘adjustment assistance’ is used more as a protectionist instrument than as a policy to promote greater mobility of resources.
An attempt seems to have been made to develop an analytical framework to understand the causes and effects of protectionism. The author’s arguments, based upon the neoclassical theory of international trade, clearly demonstrate the nature of distortions caused by the welfare state interventions. The propositions derived in the book are well-known to the trade theorists. If the purpose of the author has been to improve popular understanding of some of the most intricate issues in international economics, his clarity of exposition may have served that purpose.
Given what the book has to offer, one is left with a feeling that perhaps more than an analytical model is needed to fully appreciate the multi-dimensional problems of the world economy. It is no use talking about income-redistributive aspects of the welfare state without a detailed empirical analysis. Empirical studies are required with greater urgency than theoretical models, as the latter. already existing in various forms, can appeal to the national policy makers or international organizations only if they are well-supported by the former.
At the theoretical level, greater emphasis should be placed on ‘second;’ best’ policies than on ‘first-best’ policies like free trade which cannot coexist with the contemporary economic systems. Krauss has shown the distortionary effects of tariffs and subsidies along with welfare state intervention policies like subsidies, developmental loans or environmental protection. One would be curious to know how the second set of policies compare with the first set. It is not enough to show that all welfare state policies except lump-sum transfers distort relative prices: What is more important for us is to find out whether some policies not directly affecting trade, are more distortionary than those affecting trade directly. This is vital for a proper evaluation of the concept of the welfare state. Empirical models would perhaps be more useful than theoretical models in comparing direct trade intervention with welfare state intervention in its pure form.
The developing countries are struggling hard to bring about a radical change in the present international economic order. The task is not an easy one. Krauss, making use of neoclassical general equilibrium model, reminds us that the new international economic order is not just a dream, the developing countries cherish but a concept of utmost importance for the entire international community including the developed countries. This, more than anything else, is the contribution of the book.
Sandwip Kumar Das is Reader at School of International Studies, Jawaharlal Nehru University, New Delhi.