There is a general consensus among economists that protectionism is a bad thing. Assess the extent to which the Singapore Government’s approach to international trade may need to be adjusted in response to a growth in worldwide protectionism. [15m]
Protectionism represents any attempt to impose restrictions on trade in goods and services. The aim is to cushion domestic businesses and industries from overseas competition and prevent the outcome resulting from the inter-play of free market forces of supply and demand. Protectionism can come in many forms including tariffs, quotas, VERs and domestic subsidies etc.
Singapore is a small, open economy, highly dependent on external demand. In 2010, external demand
accounted for nearly three-quarter of Singapore’s total demand. Singapore’s dependence on trade means
that trade barriers erected by other countries when world wide protectionism grows, will result in significant welfare losses for Singapore.
This essay will assess the extent to which the Singapore Government’s approach to international trade may need to be adjusted in response to a growth in worldwide protectionism.
What is Singapore Government’s approach to international trade?
Singapore continues to pursue trade liberalization through bilateral and regional agreements.
Since 2008, six new FTAs have entered into force, of which four are regional agreements negotiated
within the framework of ASEAN and two are bilateral agreements. It has also signed bilateral
agreements, or negotiations are under way, with an additional 12 countries. Altogether Singapore’s
has a network of 18 regional and bilateral agreements covering 24 trading partners, mostly within the
Asia-Pacific region. Singapore is also participating in the Trans-Pacific Partnership negotiations.
Together with its ASEAN partners, Singapore is continuing to work towards achieving an
ASEAN Community by 2015. Steps taken to reach this objective include the ASEAN Trade in Goods
Agreement (ATIGA) in 2010, and the ASEAN Comprehensive Investment Agreement (ACIA), which entered into force in 2012.
Singapore has a very open trading regime, levying tariffs on only six tariff lines (stout and
porter, beer and ale, and medicated and non-medicated samsu) subject to specific rates. These tariffs
have been eliminated for imports from FTA partners. However, around 30% of Singapore’s tariff
lines are unbound; with bound rates ranging from 0-10%.
Singapore maintains a single window system for customs processing through which traders
may submit import documentation and permits online. The single window connects to all
governmental agencies from which authorizations are required: approval time is about 10 minutes in
99% of cases. Singapore Customs has introduced new, or expanded existing, initiatives to further
facilitate trade. In addition, since 2011, importers have been able to apply for binding advance rulings
on customs valuation.
Import prohibitions are in place mainly for health, safety, and environmental reasons, or to
comply with Singapore’s international (non-WTO) obligations. Imports remain prohibited for
chewing gum unless for therapeutic purposes, and for used motor vehicles more than three years old.
Singapore requires licences for a variety of imports, through either automatic or non-automatic
procedures. Imports of rice are managed through a strategic reserve for food-security purposes, under
which licenced importers are required to stockpile rice equivalent to two months of imports. No
specific trade concerns have been raised in the SPS or TBT Committees regarding any of Singapore’s
Singapore did not take any contingency measures over the financial crisis: it does not have
safeguards legislation, it has never imposed a countervailing measure, and its last anti-dumping
measures were terminated in 2003.
Arguments in favour of protectionism
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.
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.
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.
Arguments against Protectionism
misallocation of resources: It leads to global misallocation of resources, as it supports inefficient producers and in certain cases (tariffs and quotas) consumer surplus is scarified.
the danger of retaliation and “trade wars”: Continuous protectionist measures by a country might lead to retaliation of other countries and they might also put protectionist measures on the imports.
the potential for corruption: Putting administrative controls might also lead to corruption.
increased costs of production due to lack of competition: Constant protection to the domestic producers and lack of competition propagates inefficiency and lack of initiative to control cost.
higher prices for domestic consumers: As we can see due to tariffs and quotas domestic consumers end up paying more.
Increased costs of imported factors of production: Imported goods become expensive which might also lead to imported inflation.
reduced export competitiveness: Continuous protection to domestic industries (such as subsidies) might make them inefficient in terms of cost and technology. In the long run they might become uncompetitive in the exports market.