Discover why trade restrictions are sometimes used to combat cheap foreign labor. Learn about outsourcing, job protection, and infant industry strategies.
Introduction to Trade Restrictions
Many people would have a hard time living a day where they only used goods made in the United States. Whether it is cars, clothes, or electronics, the list of imported foreign goods is practically endless! Although most governments and economists agree that free trade among countries has many benefits, there are also some common reasons industries and others are opposed to it. In these situations, industries and businesses often call for trade restrictions to help protect them from cheap foreign labor that makes it hard for them to compete.
As mentioned above, trade restrictions are typically undertaken in an effort to protect companies and workers in a domestic economy from competition by foreign firms. These restrictions often are labeled as protectionist strategies, which simply means trade policies that restrict the importation of goods and services produced in foreign countries. Some of the most common trade restrictions are referred to as tariffs, quotas, and embargoes.
An always controversial issue in advanced economies is the topic and practice of outsourcing, which is when firms in a developed country transfer some of their activities abroad in order to take advantage of lower labor costs in foreign countries. For example, you may have experienced or heard of companies outsourcing their client service and call center operations to India and other countries where they can pay much lower wages. The benefits are lower wages and a better bottom line to American companies; the costs are the potential loss of jobs and lost productivity.
Governments, economists, and politicians all desire to maintain or grow existing jobs in their country. Over time, though, foreign competition (often cheaper labor) can disrupt or threaten industries that at one time had a comparative advantage but are no longer among the world's lowest-cost producers. At this point, countries and governments must make a decision. Are they better off just buying cheaper products and services from other foreign firms and in doing so let their domestic industries struggle? Or, do they protect those companies and help them stay afloat, maintaining adequate employment rates and a good standard of living for their citizens? Many times, they elect to use a tariff or quota to help maintain jobs.
It is important to note that although tariffs and quotas can protect jobs domestically, the use of these trade barriers can be very expensive. For example, assume the U.S. government is trying to protect U.S. cell phone makers, which employ thousands of U.S. workers. Now imagine that a quota, which limits the number of foreign cell phones imported into the United States, is enforced. This quota will likely lead to a smaller supply of cell phones and a shift of the supply curve to the left. This causes prices to rise for U.S. consumers.
An economist or government must weigh the additional cost to consumers as compared to the cost per job saved. If consumers pay $100 million more in higher cell phone prices as a result of a quota, but we save 200 jobs that result in $15 million in employment income, was the economy better off? The 200 workers who still have a job likely think so, but the $85 million dollar difference might have many others thinking differently.
Now that we have discussed job protection, let's look at another popular reason for imposing trade restrictions.
One of the most common arguments for trade barriers and how they can offer protection against cheap foreign labor or more advanced international firms is that they can serve as a buffer or strategy to help protect young domestic industries. In the beginning, firms in a new industry may be too small to achieve the necessary efficiencies or economies of scale to compete with much larger international firms. The larger, more established foreign firms could easily put the small and younger firms out of business because they can often produce goods at a much lower cost.
Not only are new firms up against larger, more efficient companies, but they often have to figure out how to compete against international companies that pay much lower wages. Suppose U.S. workers in the cell phone industry earn $15 per hour, while Indonesian workers in the cell phone industry earn only $3 per hour. Some might argue that the U.S. workers will be more productive and that the U.S. firms can afford to pay the $15 wage rate, but will they be five times more productive?
Often, the new firms are simply unable to produce high levels of output in the beginning and must do so at a much higher average costs. They simply find it difficult to compete. Ultimately, this can lead to a loss of jobs in a home country and a lower standard of living for many citizens.
For example, in the 1970s and 1980s the Japanese government directed large amounts of investment into the auto and high-tech consumer products industries. Over time, the Japanese grew larger and gained large advantages in economies of scale. Can you imagine trying to open up your own auto manufacturing business now? How would you compete against the established firms, such as Honda and Toyota? The only way would most likely require some sort of protection against competition in the beginning.
Therefore, the infant industry argument suggests that by offering protection to new industries that are important to a country, these early trade restrictions may allow the new industry to develop and prosper. This will result likely in hundreds or thousands of jobs that may otherwise have never existed. The trade restriction can later be lifted when the industry and top companies are more likely to be able to compete.
In summary, although free trade among countries is often supported as the best long-term strategy for growth and the health of an economy, sometimes economists and governments will argue that trade restrictions should be used from time to time for various reasons. One of the most popular reasons for implementing trade restrictions, such as tariffs, quotas, and embargoes, is that they can help protect companies and workers in a domestic economy from foreign competition and cheap foreign labor. These restrictions often are labeled as protectionist strategies, which simply mean trade policies that restricts the importation of goods and services produced in foreign countries.
The most popular trade restriction argument is for domestic job protection. Trade restrictions may arise to combat the practice of outsourcing, which is when firms in a developed country transfer some of their activities abroad in order to take advantage of lower labor costs. They may also arise to help domestic firms to compete with more established foreign firms. It is important to note that although tariffs and quotas can protect jobs domestically, the use of these trade barriers can be very expensive and often outweigh the costs of the jobs they are saving.
Besides overall job protection, another key benefit or argument for trade restrictions is that they can serve as a buffer or strategy to help protect young domestic (infant) industries that simply can't compete with larger foreign firms in the beginning. Whether it is cheap foreign labor they are up against or advanced technology, these trade restrictions can give domestic firms time to grow and develop the workforce and processes they need to compete in the future.
Once you are done with this lesson, you should be able to:
- Identify some trade restrictions used as protectionist strategies
- Recall the common reasons for imposing tariffs, quotas, and embargoes
- Describe some of the factors a government must consider before imposing a trade restriction