The decision of many states of the US to enact statutes to not to award BPO work to India is guided by this very logic. In banking and insurance, regulation serves to limit the risk of insolvency. In communication and energy, the services are regulated to protect consumers from unfair pricing by a natural monopolist. Japan’s quotas on import of rice and establishment of Common Agricultural Policy by the EU are pointers to protectionism on the ground of employment.
But this argument is unsophisticated for many reasons that:
1. It fails to consider productivity differences in two nations (e.g., Mexican workers earn about one-eighth of the level of the US workers because their productivity is about one-eighth level of the US workers);
2. Import substitution will mean less forex earnings to foreigners with which they can buy our exports;
3. It may lead to inflation since in the absence of any competition local manufacturers may increase their prices for prompt profits;
4. Other countries might retaliate with their own restrictions. New import restrictions by a major country have always met with quick retaliation, which may cause more job losses than the gains in the industries protected by the new restrictions during late 1990s the EU restricted imports of US chickens and turkeys valued at $50 million a year to protect EU jobs. The US quickly retaliated by saying it would limit wheat imports from the EU valued at about $300 million a year)
5. Imports may help create jobs in other industries, which may form pressure groups against protectionism (the ban on foreign ships carrying domestic cargo between the US ports costs $3.09 billion. Removal on the ban would mean a loss of 11,905 jobs in ocean shipping but 12790 jobs in related industries such as dock work would be created)
6. Imports also stimulate exports if a heavy machinery and equipment manufacturer has to use more expensive domestic steel then it will be less competitive in export markets)
7. Import restrictions may increase domestic employment but there will be costs to some people in the form of higher prices or higher taxes. In a study it has been estimated that import protection costed the US consumers $223.4 billion in higher prices. But most members of public do not understand the negative consequences in terms of cost and choice.
Another economic argument in favor of protectionism is industrialisation. Many protagonists feel that for the industrialisation of a nation, imports must be restricted. One such measure is known import substitution. Instead of exports made by foreign companies, they will invest to start production in the country, thus adding to employment too. In large economies like China and India it has worked well.
In India, auto imports were not allowed, which was later relaxed but with astronomical import duties. Ultimately the foreign companies entered the local production. Of Course, the market was not found big by their own standards. But it helped the countries and the foreign auto makers by ay of exporting and reaping the scale economies along with lower costs.
To illustrate from Indian case:
i. Ford is exporting over half of its production from India
ii. Suzuki is using India as a base for exporting the Alto and is considering an R&D centre here
iii. Hyundai is making India a global export base
iv. Ford is outsourcing auto components of a large value
v. Delphi, the biggest auto components company in the world will outsource components from Indian ancillaries to the tune of $100 million
vi. The Hindustan Motors, an import substitution dinosaur, has become a supplier of world-class engines to Ford and General Motors.
However, if the market is small, the objective is difficult to be achieved, except where the production technologies allow for efficient small-scale factories suitable for the market, such as pharmaceuticals.
In the context of industrialisation, a much more sophisticated argument for protection is the infant industry argument. The basic assumptions behind the argument are: (a) that market forces will not support the development of a particular industry because the foreign competition is well established and the industry is too risky; and (b) that the industry in question has some spillover benefits, or positive externalities, that make the industry more valuable to the national economy than simply the wages and profits it might generate (many nations have attempted to start their own steel for other industries).
There are numerous problems associated with infant industry argument:
1. Many of the benefits of production are captured by firms or individuals outside of the producing firms
2. Since the producers do not get the full benefit of their own production, they produce less than the amount that is most beneficial for society.
3. It is difficult to identify which industries will get adulthood in how much time to become competitive in international markets. Governmental protection enabled Korean and Brazilian automobile production to become globally competitive but in Malaysia and Australia the industries still remain infant.
4. The protection against import competition will be a disincentive to adopt innovations.
5. Infant industry stakeholders constitute a formidable pressure group, to prevent the import of cheaper competitive product.
The third industrialisation argument emanates from the fact that many developing nations want to broaden their industrial bases. Such nations depend upon export of commodities for bulk of their forex earnings. Nigeria depends entirely on oil exports and Ghana on cocoa.
To increase the share of manufactures and reduce the share of commodities they go in for import restrictions for the reasons:
1. To reverse their deteriorating terms of trade
2. To avoid severe fluctuations in their export earnings
3. To reduce disguised unemployment in their agri sectors.
The terms of trade for many emerging nations have been deteriorating because most commodity prices and their demand over a long term of period have risen more slowly than the manufactured products’ prices. Technological changes in primary products decreased their cost but do not add to new commodity features. Hence, they want to have local manufacturing to use them as raw materials.
Commodity prices are prone to volatile fluctuations due to factors like weather or business cycles abroad. Such fluctuations bring havoc to emerging economies. Their export earnings do not show stability. However, a greater dependence on one or two manufactures also does not help much. In many emerging economies, there is a problem of surplus labour.
A large population lives in rural areas and per capita agricultural output is very low such as India and Egypt. The protectionist argue that their surplus labour can be employed in protected manufacturing sector which will result in increasing national output, even if the added output is not globally competitive. Raul Prebisch, Hans Singer and Gunnar Myrdal are associated with this argument.
But shifting of people away from agriculture creates its own problems:
i. Massive migration from rural to urban areas often leads to unfulfilled expectations, putting pressure on social and political services.
ii. It is wrong to believe that agriculture does not lead to growth. Australia, New Zealand and Western Europe maintain high income with substantial agricultural specialisation.
iii. The local tax payers will have to bear the brunt if the locally made products are more expensive than the made outside products.
Another economic reason forwarded is the balance of payments argument. To balance imports and exports, governments attempt to restrict imports. Recently, the US government had asked India to voluntarily restrict export of steel into the US.
In Myanmar, the military Junta does not allow imports to exceed exports. All imports are subject to permits. Of the total export earnings only 20% can be utilised for import of ‘non-essential’ imports. The governments find it easier to bring in equilibrium this way than to devalue the local currency.
The last, but not the least, economic reason relates to price control argument. At times, to ease the supply in local market, export restrictions are placed may be for short period. India had to restrict export of onions in 1999, ban export of pulses and rice in 2008 to keep the inflation in check.
Sometimes supplies are withheld locally so as to raise prices abroad, as it happened in 1973 oil supply restrictions. But the risks in restricting supplies are that alternate sources or products may hit the market. At other times a country also imposes barriers when it fears that another country may price its products artificially low which may drive local products out of business leading to dislocation for workers and industries. The US Commerce Department had imposed antidumping duty on L G Semicon and Hyundai Electronics in 1977 as they were found selling dynamic random access memory chips (DRAMs) in the US market below their cost of manufacturing.