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Unit 5. Contemporary issues
and Challenges in Global
Economic Environment
Fair Globalization and the Need for Policy
Framework
Globalization has created developmental
opportunities for countries through diffusing
technology, widening markets for goods and
services, expanding investment, and
internationalizing businesses and business
processes.
Yet there is concern about the potentially negative
impacts of globalization, particularly on
employment, working conditions, equality,
international labour standards and social
protection.
The current financial and economic crisis has
greatly deepened this concern.
Fair Globalization is about harnessing the benefits
of globalization while promoting sustainable
economic and social development.
A key premise of Fair Globalization is the
importance of social dialogue among
governments and workers and employers
organizations within and across borders to
achieve social cohesion and promote
international labour standards
The Policy Integration Department promotes
synergies across the pillars of decent work ---
employment creation, rights at work, social
dialogue and social protection, as well as the
need for greater coherence among economic and
social policies more generally. It plays a role in
building links between the United Nations
Organisation’s various programmes, in improving
interaction among international agencies for
greater coherence in policies, strategies,
programmes and activities and undertakes
research on promoting decent work in the context
of globalization.
A process of globalization with a strong social
dimension based on universally shared
values, and respect for human rights
and individual dignity; one that is fair,
inclusive, democratically governed and
provides opportunities and tangible benefits
for all countries and people
A focus on people. The cornerstone of a fairer
globalization lies in meeting the demands of all
people for: respect for their rights, cultural identity
and autonomy; decent work; and the
empowerment of the local communities they live
in. Gender equality is essential.
A democratic and effective State. The State must
have the capability to manage integration into the
global economy, and provide social and
economic opportunity and security.
Sustainable development. The quest for a fair
globalization must be underpinned by the
interdependent and mutually reinforcing pillars of
economic development, social development and
environmental protection at the local, national,
regional and global levels.
Productive and equitable markets. This requires
sound institutions to promote opportunity and
enterprise in a well-functioning market economy.
Fair rules. The rules of the global economy must
offer equitable opportunity and access for all
countries and recognize the diversity in national
capacities and developmental needs.
Globalization with solidarity. There is a shared
responsibility to assist countries and people
excluded from or disadvantaged by globalization.
Globalization must help to overcome inequality
both within and between countries and contribute
to the elimination of poverty.
Greater accountability to people. Public
and private actors at all levels with power to
influence the outcomes of globalization
must be democratically accountable for the
policies they pursue and the actions they
take. They must deliver on their
commitments and use their power with
respect for others.
Deeper partnerships. Many actors are engaged in
the realization of global social and economic
goals – international organizations, governments
and parliaments, business, labour, civil society
and many others. Dialogue and partnership
among them is an essential democratic
instrument to create a better world.
An effective United Nations. A stronger and more
efficient multilateral system is the key instrument
to create a democratic, legitimate and coherent
framework for globalization.
Globalization in Reverse Gear
Today's international economic system
seems inevitable. In fact, it is very fragile.
Here are four ways the age of globalization
could collapse. It's happened before.
Resistance to globalization was arguably the
foremost policy theme in Trump's election
campaign.
He railed against US's existing trade agreements,
threatened to slap taxes on US companies
investing overseas and pledged to keep out the
migrants whom he accused of being rapists.
His plan for First hundred days in office shows
centrality of his theme to renegotiate from
NAFTA, abandon Trans pacific partnership, expel
more than 2 million migrants and build a wall with
Mexico
1. War. The first great age of globalization ended
abruptly with World War I a century ago. The
combatants also traded with each other. But that
didn’t stop the calamity. The genie went back in the
bottle and the bottle was blown up.
At the moment, the United States and China are in an
increasingly tense confrontation in the South China
Sea, where Beijing is trying to turn reefs claimed by
several nations into sovereign Chinese territory. By
the law of the sea, these are international waters and
the United States flew reconnaissance aircraft
through the area to reinforce the point. China issued
warnings.
About $5.3 trillion in world trade passes
through the sea each year.
Meanwhile, Russia and NATO keep playing
chicken over Kiev (couldn’t resist). Vladimir
Putin’s goal is to show NATO’s irrelevance
and he might succeed. Meanwhile, he’s
building ties with Beijing.
A war between China and the United States,
the world’s two largest economies, is
unthinkable. Just like 1914.
2. End of the American order. Short of war, China
is determined to (as it sees it) liberate itself from
a world economic system set up by Washington
after World War II and run by American and
Western ideas since.
Even as China participates in these established
international bodies, it is building its own system.
One example is the Asian Infrastructure
Investment Bank as a rival to the World Bank,
but with Beijing’s interests foremost. Even close
American allies joined the new bank. China’s
ambitions to unseat the dollar as the world’s
reserve currency is also no secret.
3. Geopolitical disruption. Whether from Islamic
extremism, regime breakdowns, overpopulation or the
emerging troubles from climate change, many regions
of the world are a mess. The Middle East, with a huge
portion of the world’s oil, is the most obvious but far
from the only one.
These disruptions have the capacity to hurt trade, send
large numbers of unemployed young men into the
ranks of terrorists and cause overreactions by nation-
states that only make things worse. Or set nation
against nation, nations that see their interests beyond
the balance of trade.
These disruptions will only grow, especially from climate
change.
4. Collapse of political support. Globalization
in the United States has been enabled by a
series of policy decisions and trade
agreements that made it easy to send jobs
overseas and financialize the economy (which
workers, besides the executives and those on
Wall Street, will benefit from the merger of
Charter Communications and Time Warner
Cable?). Prices for stuff have fallen but so
have incomes for most Americans. Inequality
is worse at any time since at least the 1920s.
Republicans have been very successful in
making a significant bloc of white working-
class voters think their plight is the result of
Big Government and undeserving layabouts
taking “welfare.”
Many Democrats that have supported the
neoliberal agenda wiggle this way and that,
offering bromides about going to community
college, etc. Real moves that could improve
wages and opportunity, such as building
advanced infrastructure, are stuck in our
political dysfunction.
If a majority of voters ever catches on that
their elected officials have sold them down
the river and “welfare” has nothing to do
with their rotten job prospects, and those
jobs they trained for at the community
college have been automated…the jig is
up.
With reverse gears that could be as explosive
as they are unpredictable.
The pandemic adds momentum to the deglobalization
trend
The COVID-19 pandemic is driving the world economy to
retreat from global economic integration.
Policymakers and business leaders are now questioning
whether global supply chains have been stretched too far.
In an environment where alliances are uncertain and
international cooperation is absent, they are also asking
whether they should reduce their economic
interdependence.
National security and public health concerns are providing
new rationales for protectionism, especially for medical
gear and food, and an emphasis on domestic sourcing.
This retreat will not mark the end of globalization, a process
that has reached a historically high level. But globalization
can be reversed, at least partially. The Great Recession
of 2008–10 marked a historic turning point in the degree
of global economic integration.
Now, in response to the current health and economic crisis,
policymakers appear poised to take deliberate steps to
reinforce the movement toward deglobalization.
These steps threaten to slow or reverse the economic growth
delivered by globalization. Even worse, new restrictions on
trade could proliferate and inflict damage that could take
decades to reverse.
The COVID-19 pandemic simply adds further
momentum to the deglobalization trend. The
World Trade Organization has forecast that world
trade will decline between 13 and 32 percent in
2020, much more than the expected fall in world
GDP.
More important is the way countries now think
about economic integration. President Emmanuel
Macron of France has said that the coronavirus
“will change the nature of globalization, with
which we have lived for the past 40 years,”
adding that it was “clear that this kind of
globalization was reaching the end of its cycle.”
The pandemic has reinforced concerns around the
world that supply chains have gone too far.
Export bans have been imposed over concerns about
inadequate domestic production of medical
equipment, personal protective equipment, and
pharmaceuticals.
Such policies will exacerbate shortages, the opposite of
their intended effect.
(In the food crisis in 2012, export bans drove up world
prices and made short-term shortages even worse.)
Protectionism is proving to be no substitute for
stockpiling and preparedness, which have been
inadequate in recent years.
Adam Smith pointed out in his Wealth of
Nations long ago: “The very bad policy of
one country may thus render it in some
measure dangerous and imprudent to
establish what would otherwise be the
best policy in another.”
Scott Morrison, Australia’s prime minister,
told parliament: “Open trading has been a
core part of our prosperity over centuries.
But equally, we need to look carefully at our
domestic economic sovereignty as well.”
Japan has also begun investigating how to
break its supply-chain dependence on
China and produce more at home.
The Threatened Re- emergence of
Protectionism.
More than twenty-five years of progressive
liberalization of trade, from 1947 to 1974, saw
unprecedented growth in world prosperity. Then
the economic climate changed for the worse.
Currency crises, oil crises, debt crises, world
recession, and high unemployment produced an
atmosphere in which demands for protection
increased dramatically. The success of Japanese
exports, and then of exports from the newly
industrializing countries (NICs), produced
pressure for changes in the older industrial
nations.
The Threatened Re-emergence of
Protectionism.
Such changes are painful when unemployment is
high.
Attempts to avoid the pain are the main cause of
today's protectionism in the industrial countries.
Trade in textiles was the first victim, followed
closely by trade in footwear, leather goods, steel,
shipbuilding, cars, and consumer electronics
Why has the movement toward a more liberal
trading environment stalled?
Is the new protectionism a temporary response to
the current crisis or the beginning of a new trend
brought about by a lack of faith in an open trading
system?
If the former, the tide of protectionism may ebb with
economic recovery. But if major countries no
longer feel that their interests are served by the
GATT rules, then an open trading system is
indeed in (expose to danger; threaten) peril.
Protection is demanded by groups who see their
interests damaged by imports and is supplied by
governments that see their interests served by
giving way to these demands.
Economic arguments play a role, but probably a
minor one. The demand for protection has usually
involved an alliance of owners and workers
(although the internationalization of production
through multinational corpoations and
international subcontracting may be undermining
such alliances to some extent).
Factors seem likely to have stimulated such domes tic
interest groups to demand protection in recent years:
Structural changes in trade. Japan's dependence on
imports of energy and raw materials forced it to become
an even more aggressive exporter of manufactures in
response to the oil crises and a slow down in growth.
Since 1978 it has consistently had a trade surplus. The
rise in Japan's share of imports of manufactures from
other members of the Organisation for Economic Co-
operation and Development (OECD) coincided with an
increase in the NICs' share from 1980 onward; the
pressure on some OECD countries' import-competing
industries was great
The new markets created in the NICs for
OECD exports are intensely competitive.
There are no brand loyalties, and costs of
entry are low.
This has led OECD exporters to demand help
from their governments.
The help could be subsidized loans,
measures to tie trade to aid projects, or
other forms of concealed assistance to
exporters.
Reduced flexibility. labor markets in Britain
and some other European nations have
changed in ways which have made labor
less mobile between occupations and
regions. Because the impact of NIC exports
is mainly on industries which tend to be
labor-intensive and concentrated in regions
of high unemployment (textiles, clothing,
and leather goods), labor market rigidities
cause demands for protection
Effects of recession and instability in the
international economy, Slowly growing
economies find adjustment more difficult and
painful than economies which are growing
rapidly.
They lack the expansion of new activities to
absorb the labor displaced from their "twilight"
industries.
High average levels of unemployment increase
the net costs of losing a job and make
governments more sensitive to unemployment
caused by imports. All this reinforces demands
for protection.
Misaligned exchange rates. In the 1980s, in
both Britain and the United States,
appreciating exchange rates meant that
import-competing and export industries
suffered a severe loss of competitiveness.
Producers and politicians responded with
louder demands for protection.
Unfortunately, the depreciation of the dollar
has failed to stifle these demands
Arguments used to justify special protection
MAINTAINING EMPLOYMENT. If a rise in imports
causes the sales of an industry to contract,
protecting that industry can, at least in the short
run, help to maintain jobs.
But this neglects the effect of the resulting price
increase on demand, focuses too narrowly on the
directly affected industry, and protection on other
industries, if the protected industry is a source of
inputs to other industries, then tariffs or controls
on imports wifi raise costs and reduce
employment in the industries which use the
protected materials.
Their job losses may exceed those temporarily saved in
the protected industries.
Moreover, if the exchange rate is flexible, an increase in
protection which reduces expenditure on imports will,
if nothing else changes, cause the exchange rate to
appreciate.
This will reduce profits in both exporting and import-
substituting industries, which would cause
employment to fall in all tradable goods industries
apart from those given the increased protection.
What at first seems self evident that protecting an
industry against a surge in imports will save jobs
turns out to be a risky proposition
SLOWING THE PACE OF ADJUSTMENT. A modification of
the employment argument carries more weight. The idea
is to use temporary controls to allow a slower pace of
adjustment on the grounds that resources may not be
very mobile and that time may be required to retrain labor
and allow new investment to take place.
The need to slow down adjustment is acknowledged by the
inclusion of safeguard provisions in most trade treaties
such as the GATT and the Treaty of Rome.
The argument is valid, but it can be used to justify protection
which is far from temporary and in situations where no
effort is made to shift resources from the area in which
comparative advantage has been lost
PRESERVING THE INCOMES OF CERTAIN GROUPS.
This is one of the main arguments used for the protection of
agriculture in industrial nations. As World Development
Report 1986 showed, the main effect of such a policy is
to push up the price of land, which benefits only
landowners.
Direct income support would be more successful in
preserving wages in farming at a much lower real cost to
the community.
In other industries, where there is no factor of production in
fixed supply, such as land, there is no reason in principle
why incomes could not be supported by protecting the
industry, but direct income transfers would still be far less
costly.
PRESERVING KEY INDUSTRIES. Protection for
agriculture, steel, and automobiles is frequently
buttressed with the idea that these industries
have strategic importance.
One industrial country has argued that its clothing
industry is essential for defense because it
produces uniforms for the army. This shows the
lengths to which the argument has been pushed.
For many products stockpiling is a cheaper way to
preserve supplies for emergencies than
protecting the industry.
PRESERVING KEY INDUSTRIES.
If an industry really is essential, the question is how
best to preserve it.
The orthodox economic answer is through
subsidies, not tariffs or import controls. Subsidies
do not raise prices, hurt consumers, or raise
costs to users.
But the precedents are ominous. Subsidies often
get out of hand and play havoc with budgets.
SUPPORTING NEW (HIGH TECHNOLOGY)
INDUSTRIES.
One variant of the infant industry argument cites the
need to assist new industries through the learning
period (when the local industry cannot compete
with already established foreign firms).
Another variant relies on external benefits such as
technical spin-offs as a justification for protection.
The learning period argument is subject to the
standard criticism that it implies a failure in the
capital market.
Otherwise, if an industry cannot attract
adequate capital to see it through this
learning period, investors evidently cannot
be convinced that it offers a competitive
rate of return.
USING PROTECTION AS A LEVER TO OPEN
MARKETS.
At first glance this seems an almost benign
strategy, opening markets to trade rather than
closing markets by protection. But it is yet
another step down the road to managed trade.
Each individual bilateral trade deal may seem
insignificant, but it invites further political
action of the same kind and undermines the
system of rules governing trade in the GATT.
USING PROTECTION AS A LEVER TO
OPEN MARKETS.
Such arrangements may in any case
backfire, as happened with the U.S.-Japan
accord on trade in semiconductors.
U.S. firms suffered rather than gained from
the protection. The failures of the accord
seem to have sown the seeds of further
conflict
COMBATING UNFAIR TRADE.
There have been increasing demands in industrial
countries for "fair trade" rather than free trade
Normally, unfair trade practices mean such things as
nontariff barriers, covert means to restrict imports,
government subsidies (direct or indirect) to exports,
and dumping (selling to export markets below the
price in domestic markets).
Demands that trade should take place on "a level
playing field" sometimes go beyond the question of
unfair practices and attack the very basis of trade
differences in comparative advantage.
208 gwes unit5b

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208 gwes unit5b

  • 1. Unit 5. Contemporary issues and Challenges in Global Economic Environment
  • 2. Fair Globalization and the Need for Policy Framework Globalization has created developmental opportunities for countries through diffusing technology, widening markets for goods and services, expanding investment, and internationalizing businesses and business processes. Yet there is concern about the potentially negative impacts of globalization, particularly on employment, working conditions, equality, international labour standards and social protection.
  • 3. The current financial and economic crisis has greatly deepened this concern. Fair Globalization is about harnessing the benefits of globalization while promoting sustainable economic and social development. A key premise of Fair Globalization is the importance of social dialogue among governments and workers and employers organizations within and across borders to achieve social cohesion and promote international labour standards
  • 4. The Policy Integration Department promotes synergies across the pillars of decent work --- employment creation, rights at work, social dialogue and social protection, as well as the need for greater coherence among economic and social policies more generally. It plays a role in building links between the United Nations Organisation’s various programmes, in improving interaction among international agencies for greater coherence in policies, strategies, programmes and activities and undertakes research on promoting decent work in the context of globalization.
  • 5. A process of globalization with a strong social dimension based on universally shared values, and respect for human rights and individual dignity; one that is fair, inclusive, democratically governed and provides opportunities and tangible benefits for all countries and people
  • 6. A focus on people. The cornerstone of a fairer globalization lies in meeting the demands of all people for: respect for their rights, cultural identity and autonomy; decent work; and the empowerment of the local communities they live in. Gender equality is essential. A democratic and effective State. The State must have the capability to manage integration into the global economy, and provide social and economic opportunity and security.
  • 7. Sustainable development. The quest for a fair globalization must be underpinned by the interdependent and mutually reinforcing pillars of economic development, social development and environmental protection at the local, national, regional and global levels. Productive and equitable markets. This requires sound institutions to promote opportunity and enterprise in a well-functioning market economy.
  • 8. Fair rules. The rules of the global economy must offer equitable opportunity and access for all countries and recognize the diversity in national capacities and developmental needs. Globalization with solidarity. There is a shared responsibility to assist countries and people excluded from or disadvantaged by globalization. Globalization must help to overcome inequality both within and between countries and contribute to the elimination of poverty.
  • 9. Greater accountability to people. Public and private actors at all levels with power to influence the outcomes of globalization must be democratically accountable for the policies they pursue and the actions they take. They must deliver on their commitments and use their power with respect for others.
  • 10. Deeper partnerships. Many actors are engaged in the realization of global social and economic goals – international organizations, governments and parliaments, business, labour, civil society and many others. Dialogue and partnership among them is an essential democratic instrument to create a better world. An effective United Nations. A stronger and more efficient multilateral system is the key instrument to create a democratic, legitimate and coherent framework for globalization.
  • 11. Globalization in Reverse Gear Today's international economic system seems inevitable. In fact, it is very fragile. Here are four ways the age of globalization could collapse. It's happened before.
  • 12. Resistance to globalization was arguably the foremost policy theme in Trump's election campaign. He railed against US's existing trade agreements, threatened to slap taxes on US companies investing overseas and pledged to keep out the migrants whom he accused of being rapists. His plan for First hundred days in office shows centrality of his theme to renegotiate from NAFTA, abandon Trans pacific partnership, expel more than 2 million migrants and build a wall with Mexico
  • 13. 1. War. The first great age of globalization ended abruptly with World War I a century ago. The combatants also traded with each other. But that didn’t stop the calamity. The genie went back in the bottle and the bottle was blown up. At the moment, the United States and China are in an increasingly tense confrontation in the South China Sea, where Beijing is trying to turn reefs claimed by several nations into sovereign Chinese territory. By the law of the sea, these are international waters and the United States flew reconnaissance aircraft through the area to reinforce the point. China issued warnings.
  • 14. About $5.3 trillion in world trade passes through the sea each year. Meanwhile, Russia and NATO keep playing chicken over Kiev (couldn’t resist). Vladimir Putin’s goal is to show NATO’s irrelevance and he might succeed. Meanwhile, he’s building ties with Beijing. A war between China and the United States, the world’s two largest economies, is unthinkable. Just like 1914.
  • 15. 2. End of the American order. Short of war, China is determined to (as it sees it) liberate itself from a world economic system set up by Washington after World War II and run by American and Western ideas since. Even as China participates in these established international bodies, it is building its own system. One example is the Asian Infrastructure Investment Bank as a rival to the World Bank, but with Beijing’s interests foremost. Even close American allies joined the new bank. China’s ambitions to unseat the dollar as the world’s reserve currency is also no secret.
  • 16. 3. Geopolitical disruption. Whether from Islamic extremism, regime breakdowns, overpopulation or the emerging troubles from climate change, many regions of the world are a mess. The Middle East, with a huge portion of the world’s oil, is the most obvious but far from the only one. These disruptions have the capacity to hurt trade, send large numbers of unemployed young men into the ranks of terrorists and cause overreactions by nation- states that only make things worse. Or set nation against nation, nations that see their interests beyond the balance of trade. These disruptions will only grow, especially from climate change.
  • 17. 4. Collapse of political support. Globalization in the United States has been enabled by a series of policy decisions and trade agreements that made it easy to send jobs overseas and financialize the economy (which workers, besides the executives and those on Wall Street, will benefit from the merger of Charter Communications and Time Warner Cable?). Prices for stuff have fallen but so have incomes for most Americans. Inequality is worse at any time since at least the 1920s.
  • 18. Republicans have been very successful in making a significant bloc of white working- class voters think their plight is the result of Big Government and undeserving layabouts taking “welfare.” Many Democrats that have supported the neoliberal agenda wiggle this way and that, offering bromides about going to community college, etc. Real moves that could improve wages and opportunity, such as building advanced infrastructure, are stuck in our political dysfunction.
  • 19. If a majority of voters ever catches on that their elected officials have sold them down the river and “welfare” has nothing to do with their rotten job prospects, and those jobs they trained for at the community college have been automated…the jig is up. With reverse gears that could be as explosive as they are unpredictable.
  • 20. The pandemic adds momentum to the deglobalization trend The COVID-19 pandemic is driving the world economy to retreat from global economic integration. Policymakers and business leaders are now questioning whether global supply chains have been stretched too far. In an environment where alliances are uncertain and international cooperation is absent, they are also asking whether they should reduce their economic interdependence. National security and public health concerns are providing new rationales for protectionism, especially for medical gear and food, and an emphasis on domestic sourcing.
  • 21. This retreat will not mark the end of globalization, a process that has reached a historically high level. But globalization can be reversed, at least partially. The Great Recession of 2008–10 marked a historic turning point in the degree of global economic integration. Now, in response to the current health and economic crisis, policymakers appear poised to take deliberate steps to reinforce the movement toward deglobalization. These steps threaten to slow or reverse the economic growth delivered by globalization. Even worse, new restrictions on trade could proliferate and inflict damage that could take decades to reverse.
  • 22. The COVID-19 pandemic simply adds further momentum to the deglobalization trend. The World Trade Organization has forecast that world trade will decline between 13 and 32 percent in 2020, much more than the expected fall in world GDP. More important is the way countries now think about economic integration. President Emmanuel Macron of France has said that the coronavirus “will change the nature of globalization, with which we have lived for the past 40 years,” adding that it was “clear that this kind of globalization was reaching the end of its cycle.”
  • 23. The pandemic has reinforced concerns around the world that supply chains have gone too far. Export bans have been imposed over concerns about inadequate domestic production of medical equipment, personal protective equipment, and pharmaceuticals. Such policies will exacerbate shortages, the opposite of their intended effect. (In the food crisis in 2012, export bans drove up world prices and made short-term shortages even worse.) Protectionism is proving to be no substitute for stockpiling and preparedness, which have been inadequate in recent years.
  • 24. Adam Smith pointed out in his Wealth of Nations long ago: “The very bad policy of one country may thus render it in some measure dangerous and imprudent to establish what would otherwise be the best policy in another.”
  • 25. Scott Morrison, Australia’s prime minister, told parliament: “Open trading has been a core part of our prosperity over centuries. But equally, we need to look carefully at our domestic economic sovereignty as well.” Japan has also begun investigating how to break its supply-chain dependence on China and produce more at home.
  • 26. The Threatened Re- emergence of Protectionism. More than twenty-five years of progressive liberalization of trade, from 1947 to 1974, saw unprecedented growth in world prosperity. Then the economic climate changed for the worse. Currency crises, oil crises, debt crises, world recession, and high unemployment produced an atmosphere in which demands for protection increased dramatically. The success of Japanese exports, and then of exports from the newly industrializing countries (NICs), produced pressure for changes in the older industrial nations.
  • 27. The Threatened Re-emergence of Protectionism. Such changes are painful when unemployment is high. Attempts to avoid the pain are the main cause of today's protectionism in the industrial countries. Trade in textiles was the first victim, followed closely by trade in footwear, leather goods, steel, shipbuilding, cars, and consumer electronics
  • 28. Why has the movement toward a more liberal trading environment stalled? Is the new protectionism a temporary response to the current crisis or the beginning of a new trend brought about by a lack of faith in an open trading system? If the former, the tide of protectionism may ebb with economic recovery. But if major countries no longer feel that their interests are served by the GATT rules, then an open trading system is indeed in (expose to danger; threaten) peril.
  • 29. Protection is demanded by groups who see their interests damaged by imports and is supplied by governments that see their interests served by giving way to these demands. Economic arguments play a role, but probably a minor one. The demand for protection has usually involved an alliance of owners and workers (although the internationalization of production through multinational corpoations and international subcontracting may be undermining such alliances to some extent).
  • 30. Factors seem likely to have stimulated such domes tic interest groups to demand protection in recent years: Structural changes in trade. Japan's dependence on imports of energy and raw materials forced it to become an even more aggressive exporter of manufactures in response to the oil crises and a slow down in growth. Since 1978 it has consistently had a trade surplus. The rise in Japan's share of imports of manufactures from other members of the Organisation for Economic Co- operation and Development (OECD) coincided with an increase in the NICs' share from 1980 onward; the pressure on some OECD countries' import-competing industries was great
  • 31. The new markets created in the NICs for OECD exports are intensely competitive. There are no brand loyalties, and costs of entry are low. This has led OECD exporters to demand help from their governments. The help could be subsidized loans, measures to tie trade to aid projects, or other forms of concealed assistance to exporters.
  • 32. Reduced flexibility. labor markets in Britain and some other European nations have changed in ways which have made labor less mobile between occupations and regions. Because the impact of NIC exports is mainly on industries which tend to be labor-intensive and concentrated in regions of high unemployment (textiles, clothing, and leather goods), labor market rigidities cause demands for protection
  • 33. Effects of recession and instability in the international economy, Slowly growing economies find adjustment more difficult and painful than economies which are growing rapidly. They lack the expansion of new activities to absorb the labor displaced from their "twilight" industries. High average levels of unemployment increase the net costs of losing a job and make governments more sensitive to unemployment caused by imports. All this reinforces demands for protection.
  • 34. Misaligned exchange rates. In the 1980s, in both Britain and the United States, appreciating exchange rates meant that import-competing and export industries suffered a severe loss of competitiveness. Producers and politicians responded with louder demands for protection. Unfortunately, the depreciation of the dollar has failed to stifle these demands
  • 35. Arguments used to justify special protection MAINTAINING EMPLOYMENT. If a rise in imports causes the sales of an industry to contract, protecting that industry can, at least in the short run, help to maintain jobs. But this neglects the effect of the resulting price increase on demand, focuses too narrowly on the directly affected industry, and protection on other industries, if the protected industry is a source of inputs to other industries, then tariffs or controls on imports wifi raise costs and reduce employment in the industries which use the protected materials.
  • 36. Their job losses may exceed those temporarily saved in the protected industries. Moreover, if the exchange rate is flexible, an increase in protection which reduces expenditure on imports will, if nothing else changes, cause the exchange rate to appreciate. This will reduce profits in both exporting and import- substituting industries, which would cause employment to fall in all tradable goods industries apart from those given the increased protection. What at first seems self evident that protecting an industry against a surge in imports will save jobs turns out to be a risky proposition
  • 37. SLOWING THE PACE OF ADJUSTMENT. A modification of the employment argument carries more weight. The idea is to use temporary controls to allow a slower pace of adjustment on the grounds that resources may not be very mobile and that time may be required to retrain labor and allow new investment to take place. The need to slow down adjustment is acknowledged by the inclusion of safeguard provisions in most trade treaties such as the GATT and the Treaty of Rome. The argument is valid, but it can be used to justify protection which is far from temporary and in situations where no effort is made to shift resources from the area in which comparative advantage has been lost
  • 38. PRESERVING THE INCOMES OF CERTAIN GROUPS. This is one of the main arguments used for the protection of agriculture in industrial nations. As World Development Report 1986 showed, the main effect of such a policy is to push up the price of land, which benefits only landowners. Direct income support would be more successful in preserving wages in farming at a much lower real cost to the community. In other industries, where there is no factor of production in fixed supply, such as land, there is no reason in principle why incomes could not be supported by protecting the industry, but direct income transfers would still be far less costly.
  • 39. PRESERVING KEY INDUSTRIES. Protection for agriculture, steel, and automobiles is frequently buttressed with the idea that these industries have strategic importance. One industrial country has argued that its clothing industry is essential for defense because it produces uniforms for the army. This shows the lengths to which the argument has been pushed. For many products stockpiling is a cheaper way to preserve supplies for emergencies than protecting the industry.
  • 40. PRESERVING KEY INDUSTRIES. If an industry really is essential, the question is how best to preserve it. The orthodox economic answer is through subsidies, not tariffs or import controls. Subsidies do not raise prices, hurt consumers, or raise costs to users. But the precedents are ominous. Subsidies often get out of hand and play havoc with budgets.
  • 41. SUPPORTING NEW (HIGH TECHNOLOGY) INDUSTRIES. One variant of the infant industry argument cites the need to assist new industries through the learning period (when the local industry cannot compete with already established foreign firms). Another variant relies on external benefits such as technical spin-offs as a justification for protection. The learning period argument is subject to the standard criticism that it implies a failure in the capital market.
  • 42. Otherwise, if an industry cannot attract adequate capital to see it through this learning period, investors evidently cannot be convinced that it offers a competitive rate of return.
  • 43. USING PROTECTION AS A LEVER TO OPEN MARKETS. At first glance this seems an almost benign strategy, opening markets to trade rather than closing markets by protection. But it is yet another step down the road to managed trade. Each individual bilateral trade deal may seem insignificant, but it invites further political action of the same kind and undermines the system of rules governing trade in the GATT.
  • 44. USING PROTECTION AS A LEVER TO OPEN MARKETS. Such arrangements may in any case backfire, as happened with the U.S.-Japan accord on trade in semiconductors. U.S. firms suffered rather than gained from the protection. The failures of the accord seem to have sown the seeds of further conflict
  • 45. COMBATING UNFAIR TRADE. There have been increasing demands in industrial countries for "fair trade" rather than free trade Normally, unfair trade practices mean such things as nontariff barriers, covert means to restrict imports, government subsidies (direct or indirect) to exports, and dumping (selling to export markets below the price in domestic markets). Demands that trade should take place on "a level playing field" sometimes go beyond the question of unfair practices and attack the very basis of trade differences in comparative advantage.