The postwar trend in international trade has been toward an increasingly more liberal system. However, many countries have, in recent years (and particularly since 1974), been demonstrating a shift in the opposite direction. Although it is difficult to quantify the net effect on world trade of the trade actions adopted recently, the evidence indicates that it has been relatively limited. Nevertheless, the recent shift away from liberalization is a cause for serious concern.
The general argument against protectionist trade measures is that they provide no real solution to the underlying problems of the protected industry—indeed, they may compound the difficulty of finding long-lasting solutions—and that they ignore the more fundamental reasons why domestic industries may be losing ground to foreign competition. The immediate impact of a protective measure—whether in the form of increased customs tariffs or other import charges, import quotas, or tariff quotas—is an increase in the price of the imported goods in the market of the importing country. This increase gives the domestic producers of the import-competing product a relative price edge that may be sufficient to stimulate domestic sales or, at the very least, to protect their share of the market. In turn, this may benefit labor employed in the protected industry by preventing layoffs, or increase the return on shareholders’ equity in the protected firms.
Protection also brings increased costs, however, which are ultimately borne by the economy as a whole. First, the prices of goods rise on the domestic market; this cost is paid by consumers. Second, protection means that relatively inefficient industries are able to hold or attract resources, while the economy forgoes the higher level of income and employment that would have gone to more efficient industries in the absence of protection. Protectionist measures, moreover, once adopted, tend to become entrenched as the sectors that benefit develop a vested interest in preventing their removal. For a major intermediate goods industry, such as steel, the higher costs are likely to be transmitted throughout the economy in the form of higher prices for the products, such as automobiles and construction materials. Furthermore, the inflationary impact of import restrictions on products such as steel is likely to have an immediate adverse effect on steel-using products, resulting in demands for additional protection against foreign competitors in the affected industries and/or affecting exports adversely.
Trade restrictions also have direct adverse effects on the exporting country, whether it is developed or developing. They reduce access to foreign markets, impinge on the exporter’s ability to share fully in the benefits of increased international trade, and thus also affect the exporting country’s willingness to assure foreign suppliers access to its own market. The effects of protectionist measures are likely to be especially serious on developing countries, which depend on a relatively small volume of trade in a still relatively narrow range of products. Thus, measures with a seemingly minor impact from the developed country’s point of view can have serious consequences for the developing country’s exports. Furthermore, most developing countries faced by reduced access to certain foreign markets may encounter difficulties in finding substitute outlets for their exports, especially in the short run. Such substitution possibilities are often limited by the nature of the export product (which may be specifically designed for certain markets), and by the historical and cultural ties that often determine the direction of their trade. Even if such substitution possibilities exist, the process is often slow and costly, and exporters may fear that redirection of sales may itself provide restrictions in the new markets.