In this essay I will be discussing the use of protectionism by governments who wish to protect their economy from foreign competition and evaluating just how effective the use of protectionism really is in a global market. With the focus being on the countries of Switzerland and South Korea. A respected definition of the term protectionism is the use of “Government restrictions on imports and occasionally on exports that frequently give direct or indirect subsidies to industries to enable them to compete with foreign production either at home or abroad” (Daniels, Radebaugh and Sullivan, 2015). However this is a blanket definition of the term, protectionism is not just found in examples of the taxation of physical goods, but can be found in many variants dependent on the intended outcome, such as for economical, political and social gain.
Protectionism has seen a revival in recent years, the reason why can be argued that protectionism is a useful tool for suffering governments to use in periods of economic decline in the hopes of growing domestic wealth without losing out to foreign competition. This use of protectionism as a safety net during times of economic decline, has been evidenced in the fact that “countries typically adopted trade-restrictive policies when they experienced recessions and/or losses in competitiveness” (Georgiadis and Gräb, 2016). However it can also be argued that the use of protectionism should be viewed as a danger that can act as a hindrance to the development of a country’s industries and ultimately economic growth, Georgiadis and Gräb state that the “Global economy continues to be exposed to the risk of a creeping return of trade protectionism” (Georgiadis and Gräb, 2016). Switzerland is an example of a country whose government has implemented the theory of protectionism to ensure the survival against foreign competition, with the main focus being on it’s agriculture industry. The reasons for doing so stem from Switzerland’s geographical location in the world and also as a result of the 2009 financial crisis which can be argued as a direct factor that increased the level of trade protectionism enforced by the country.
Although Switzerland is by far one of the best performing economies in Europe, with continual economic growth projected for 2017 as the GDP rose in 2016 by “1.39%” compared to 2015 (Statista, 2017). Along with the country being ranked highest in the Global Competitiveness index report of 2017. Switzerland must still maintain measures to protect its economy from foreign competition.Switzerland are very protective of their agriculture industry and examples of the use of protectionism in the form of policies to support the industry is prominent. Switzerland is a double-landlocked country meaning it is in close proximity to the borders of countries such as Germany, France and Austria, who are obvious competitors to Switzerland’s own agriculture industry, meaning protectionism can be seen as a key part in maintaining Switzerland’s own agriculture success. An example of this was seen during the economic recession of 2009, where the Swiss government introduced a policy so that “40% of consumers’ expenditure on domestically produced commodities went to support farmers”(Naoi and Kume, 2011).
This government initiative provided farmers with financial support, with fair prices paid on agricultural produce to ensure they could continue working through the harsh economic climate following the financial crisis.The government also implemented an agricultural subsidy policy, which can provide as much as “57%” (Curtis, 2013) of a farmers’ income in Switzerland. This policy acts as a protection scheme to provide subsidy payments to farmers, not only as a source of profitable income but also as a protection against bad crop yields, which could spell the financial end for many farmers if protectionism policies like this were not in place. This subsidy policy also acts as a method of ensuring arable farmland is maintained and kept in the agriculture industry and not sold off for the use in property development. Another example of Switzerland’s protectionism of the agriculture industry is the strict restrictions on the importing of foreign produce.
For example any individual crossing the Swiss border can only bring one kilogram of meat with them (Swiss Customs, 2017), exceeding this limit will incur high taxation on the value of goods. This strict restriction of foreign imports helps to ensure that Swiss based producers in the agriculture market are not burdened so harshly by the threat of foreign based competition and continue to successfully provide produce to the Swiss consumers. This is evidently working as “local production covers 72% of net domestic consumption” (Häberli, 2014). However enforcing such a high level of protectionism to support its agriculture industry against foreign competition, switzerland is arguably disadvantaging itself from possible profitable trade deals with foreign domestic and agriculture markets. The restriction and high taxation of foreign food products, has caused a rise in prices of typical food goods in Switzerland, a rise that is only just offset by the higher than average purchasing power the country benefits from, with only “9% of an average family budget is spent on food” (Häberli, 2014). However with the ‘Food and Agriculture Organization of the United States’ estimating “continuously increasing food prices” (Häberli, 2014) worldwide, if Switzerland’s purchasing power was to fall and food prices were to continue to rise, it could result in a consumer food crisis. In 2017 at the meeting of the World Trade Organisation (WTO), the European Union voiced its concern of Switzerland’s “high level tariff protections on agricultural products”, a point echoed by the United States representative.
Many economists are suggesting Switzerland move to a “Trade rather than protectionism” (Dümmler and Kienast, 2016) viewpoint, which would help promote new trade agreements with its current trading partners such as the European Union, but also the creation of updated free trade agreements with possible profitable opportunities to capitalise on such as post-Brexit Britain and striking deals with emerging economies such as India and Brazil. South Korea is another prominent example of a country whose government has been using protectionism methods to protect its industries in a variety of legal and political methods. South Korea itself is an extensive exporter of goods, in fact the “7th largest export economy in the world”, with an export total of “$483 Billion-Dollars” in 2016 (OEC, 2017). The key industries in the exportation of South Korean goods include the manufacturing of integrated circuit boards for the technology sector at a total of “$49.3 Billion-Dollars” (OEC, 2017) and also automobiles at a total of “$37.
4 Billion-Dollars” (OEC, 2017). However the country, although keen to export its products to benefit its home industries, is not as welcome to the importation of products from western foreign competition. Comparing the facts that its the “7th largest exporter in the world” contrast to being the “11th largest importer in the world”. A clear example of its ideals of protectionism. A prominent example of South Korea’s blatant protectionism is the South Korea Fair Trade Commission (Abbreviated as KFTC), which has wide reaching control of the country’s economy and its ability to interact with the companies within different industries (South Korea Fair Trade Commission, 2017).
The KFTC has been accused of targeting western businesses, operating in South Korea a “Behaviour that threatens the viability of companies doing business in South Korea” (Telford, 2015). The KFTC has been accused of abusing its government sanction policies regarding competition and antitrust laws to directly target successful western companies, in order to “protect their domestic companies” (Telford, 2015). These actions include the apparent investigating and fining of western companies, with the government led organisation issuing “1,200” rulings (Telford, 2017), including fines and sanctions against companies in the period of 2012 to 2014 (Telford, 2017). The KFTC has also been accused of malicious methods used to gain evidence against apparent offending companies with the use of raiding offices without warrants in the hopes of gathering slanderous information to be used against the business in question (Telford, 2017). Another example of South Korea’s attempts at protectionism is the use of “Korea-Unique Standards” (Harris, 2017).
These are the set requirements and specifications that certain products must adhere to, making them suitable for the South Korean consumer market. Specifications that differ from the standards found elsewhere globally. For example the importing of large western manufactured vehicles such as buses and trucks to South Korea is halted by the fact that South Korea standards state that the dimensions of heavy vehicles are “5 cm less than European and 10cm less than US standards” (Harris, 2017).
Now although 5-10cm seems a minimal amount, this in fact causes extensive complications for western automobile manufacturers looking to export vehicles to South Korea and would require a whole new specific manufacturing line to produce vehicles ‘suitable’ for the South Korean market. These strict specifications are a blatant example of the South Korean government’s use of protectionism ideals to secure it’s home industries from foreign competition. So although it is clear that South Korea’s use of protectionism has encouraged the growth of home industries and the pressure placed on foreign competition has arguably protected these industries from the competition.
It can be argued that South Korea’s intensive attitude of protectionism is actually damaging its place in the world trade markets. South Korea benefits from numerous free trade agreements with western countries such as the United States and these countries make up a large percentage of South Korea’s total yearly export. Arguably the largest of these is the “U.
S. – Korea Free Trade Agreement (KORUS)” (USTR, 2017), which came into effect in 2012, to encourage growth of trade between the two countries. In 2013 the United States made up “4.
8%” (USDA ERS, 2013) of all South Korea’s exports. However these free trade agreements are at risk of being terminated and re-evaluated if South Korea continues to focus solely on the export of their own products and services, whilst fiercely sanctioning any importation from foreign competitors as a way to protect home industries. Current president of the United States, Donald Trump even hinted at his intent to “withdraw from KORUS” (Holland, 2017), due to the implications working with a country which is seemingly attacking foreign competition looking to import into the country. With auditing organisation PWC stating that these intensive regulations of sanctioning and threatening any importations from foreign competition is “The most significant obstacle facing foreign companies doing business in Korea” (Samil, 2016). In conclusion, protectionism has most definitely been on the rise in recent years, whether it be due to economical factors such as the financial crisis of 2009, or due to the increased threat of foreign competition against home industries.
Using the examples of Switzerland and South Korea are clearly highlight the use of protectionism as a method of safeguarding their industries from foreign competition. From one perspective it can be viewed as a successful method of providing economic security. However in the long run it can cause the evidential break down of trade agreements these countries relied on in the first place to prosper in the global economy. Regardless of a country’s ability to maintain the competitiveness of its own industries, if it is unable to trade freely due to the extensive methods of protectionism, ruining political relations, the effectiveness of the strategy is most definitely ineffective.