6. a)Explain why protectionism exist. [10m]
Infant industry argument: It is argued that government should go in for protectionist measure to protect infant industries, or else they will not get an opportunity to survive due to international trade. Example of infant industry is when the Malaysia government protects it’s Proton brand by imposing high tax on Japanese imports such as Honda, Toyota etc.
Efforts of a developing country to diversify: Developing countries need to protect industries in which they want to diversify.
Protection of employment: Protecting domestic industries also means protecting domestic employment. For example the USA imposes a tax of 35% for tyres imported from China thereby protecting their employment in the tyre industry.
Source of government revenue: Tariffs form a good source of revenue for governments.
Strategic arguments: it means use of a tariff to protect military capability. The idea is, to consume the goods of our country to promote the national industry and so, in the case of war we don’t have to buy the products in a foreign country and our industries have the capacity to produce all the goods that our country need. We want tariffs to reduce the “dependence” on international resources.
Means to overcome a balance of payments disequilibrium: High imports as compared to exports might lead to severe balance of payments issues. Government might resort to protectionist measures such as tariffs and quotas to restrict import and thereby control the balance of payment disequilibrium.
Anti-dumping: Dumping is when manufacturers export a product to another country at a price either below the price charged in its home market. This harms the domestic industry and employment. The importing country might resort to protectionist measures such as tariffs to control dumping of these goods. For example, China tariffs on imports of stainless steel tubes from EU and Japan. Tariffs vary between 9% and 14%.
b) Discuss whether you agree that globalisation has more merits for developed than developing countries. [15m]
Why developing countries benefit more?
(1) Lift many out of poverty. It is not difficult to see why. When a transnational company (TNC) decides to relocate in low-cost economies, many new jobs will be created. It can be in production line, technical areas and also management. People who are once unemployed will now have an opportunity to improve their livelihood while those who already have working experience may be able to climb to a higher corporate platform, thus earn better pay. Consider China. It has the largest poverty reduction in history, from 250 million in 1978 to about 34 millions in 1999. Indian government, has successfully cut poverty rate by half despite late in opening up their economy
(2) Backbone of growth. With globalisation, goods can easily penetrate the borders of other countries, thanks to the prominent role played by WTO. With its establishment (previously was GATT), global tariffs on average has been reduced from 40% to just 4%. Low-cost Asian economies have the most to benefit from this. This is because of the comparative advantage in manufacturing sector. Unskilled labours are in abundance and yet level of productivity is comparable. Besides natural resources are easily obtainable which further reduces the production costs. As such local economies can pursue export-led growth, a buzzword synonymous with China. Such strategy allows economic diversification, rather than just having a typical primary sector. The impact onto local economy can be magnified through multiplier effect. Perhaps this explains, why China can register double-digit growth in the past few years
(3) Exposure to competition. Firms which were once operating behind walls of barriers will now be forced to be more competitive. Failure to do so, will force them to exit the industry very soon. Local firms will now be more careful with the allocation of scarce resources to ensure there is no wastage. They will employ the most efficient techniques of production. Innovation and R&D activities will increase to ensure the rolling-out of new products, to satisfy consumer needs. Workers must continuously improve their productivity to ensure that they are still relevant. All these when combine, will have a powerful supply-side effect that will ensure the success of local economy in long run
(4) Cheaper price and more choice of goods. That’s simple. Say, a country produces barley. When barley is also sourced from outside that means supply of barley in the economy will increase, causing its price to fall. That’s something to be cheered by most consumers who are best categorized as low to middle income earners. Consumer surplus will increase too since the gap between what they are willing to pay and what they are actually paying increases. On top of that, standard of living will also increase when there are more choice of goods
Why rich countries benefit more?
(1) Widening income inequality. Fragmentation of production process is driven by the goal of cost-minimising. In many parts of Asia, labours are cheap, productivity is considerably high, raw materials are easily obtainable and cost of shipping has fallen. Goods are produced with the lowest cost possible and in most circumstance, cost saving will not be passed on to foreign buyers when the goods are shipped back to home country. Entrepreneurs are reaping higher supernormal profits, while management will reward themselves with fat bonuses leaving nothing for those grass-root workers. Even if there is, the reward might be insignificant. This partly explains for the widening income inequality between the developed and developing nations. While I agree that very few people will make a huge fortune out of this, they are normally the firm owner which runs business that supply raw materials to foreign firms
(2) Low reinvestment onto local economy. In theory, foreign firms will reinvest part of their profits into the local economy hence giving the economic growth a boost. In reality, most of the post-tax profits will be repatriated towards home country, hence very little left to generate value for local economy. Local suppliers of raw materials and capital goods may not benefit from this. In some worst case scenarios, local firms will relocate to another place when the period of tax concession is over. All I can say is no reinvestment and no tax proceeds for government
(3) Source of environmental hazard. There is no way we can claim that standard of living in developing nations has increased when those countries become the house to so many factories which over-operate. Water and air pollution are inevitable. Noise pollution is out of control when houses are located near to factories or construction sites. Congestion is becoming more prominent when an area is designated for factories. It is worth to note that 1st world countries have ‘shifted their problems’ to the 3rd world. Air is cleaner over the other side. Their factories use clean technology unlike those in Asia. What’s more when the environmental law is weak
(4) Exploitation of labour. Perhaps proponents of globalisation have exaggerated their stand. Claiming that the standard of living in developing countries has increased based on real GDP per capita may not be that accurate. While it is true that unskilled workers have received an increase in their paycheck, it is nothing close to an increase in their workload. In short, an increase of wages by 10% leads to an increase of 50% in works. One does not need to be a genius to see how factory workers are exploited in China. They are paid peanuts and yet overworked. Women suffer the most in terms of discrimination in workplace. Labour union is weak and the existing law is just too fragile to uphold justice for them. Also some workers may be put to work under unsafe conditions. For instance, child labour in mines
(5) Put more into poverty. While it is true that many jobs are created when foreign factories and firms are opened, there are even more unseen job losses. Some claim that every one new job created, up to three will be lost. Think about this. How many local firms that really have the competitive edge to race against giant conglomerates? Nearly none. In short, industrial liberalization rewards the competitive firms and penalizes those uncompetitive ones which are made up of majority. Job creation is insufficient to offset the amount of job losses. If globalisation brings so much benefit, then how come 80% of the global populations earn only 20% of global income?
(6) Domination of local economy. Poor countries often become the subject of biasness. The WTO although in theory is said to be an independent organization, is not more than a puppet to rich and powerful nation like US. Poor countries are often urged to open up their economy to the import of agriculture goods from 1st world. On the other hand, it does not take any serious action when US and EU have such thick tariffs protecting their agriculture and dairy industry against agricultural produce from the 3rd world. Also through influential organization like IMF and World Bank, powerful countries have become the shadow that meddles with the fate of HIPCs (Highly Indebted Poor Countries). Many ill-suited policies are fed onto 3rd world which creates more harm than good. The intention is to keep them begging for more financial aid and hence being locked into more pricey agreement which they cannot commit