Dissertation Title:
Determining Whether Free Trade or Protectionism Serves as the
Most Effective Trade Policy for the Libyan Poultry Meat Sector
MBA in Business management
Dissertation submitted to Dublin Business School and Liverpool John
Moores University in partial fulfilment of the requirements for the
degree of Masters of Business Administration
Submitted by: Anas Ikheneifir
Student ID: 1779234
Supervisor: Mr. Enda Murphy
Word count: (21,000) words
Submission date: 23rd May 2014
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In the name of God, the Most Gracious, the Most Merciful
3
Declaration
I declare that this dissertation is a presentation of my original research work except for specific
sources that are referenced in the text and in the bibliography. Furthermore, this dissertation has
not previously been presented for other assessment to any other university or learning institution.
Signed: Anas Ali A. Ikheneifir
Date: 20/5/2014
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Acknowledgments
Firstly I would like to thank my supervisor, Mr. Enda Murphy, his advices
and supports have been invaluable throughout this dissertation process.
I gratefully thank my dear Wife, Yasmin, who stood by and supported me
throughout this academic journey.
I owe a special thanks to my Father& Mother who always support and give
me this chance to travel abroad and have this experience.
Finally I would thank every person who has made my dissertation complete
and provide me with help and time to achieve my goal.
I dedicate this paper to my Son, Ali, and my daughter, Mariam, and I
wish they will reach this level of education one day.
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Abstract
This dissertation researched the effects of imported goods on the local producers through a case
study of the Libyan poultry industry. Firstly, a full description of the terms international free
trade and protectionism was developed, including the trade barriers and the evolution of
international free trade in terms of globalization and the free movement of goods.
Also this description has discussed the recent and old literatures and scholars in this area and
covers the main aspects for this argument to provide a full understanding. To give this research a
reasonable practicality a case study of the Libyan poultry industry was chosen to apply a
comprehensive insight and a qualitative analysis.
Secondly, a brief introduction about the poultry business was provided, and then the Libyan
poultry business was fully described. In order to obtain a real and true data, in-depth interview
with the Libyan company managers and policy makers were performed to measure the impact
and their perception and how they responds and act to solve this dilemma. Recommendations
were written based on the interviews outcomes and findings at the end.
Thirdly, conclusions indicated that, before applying any sort of trade policy, whether it is a
protectionist or not, Libyan authorities must re-arrangement its trade policies and organizing
work within the Libyan market. Therefore, managers, governments and legal firms should
cooperate together to overcome and eliminate the impact of imported goods on the local
producers by applying a proper trade policy and organizing the Libyan market more properly.
Finally, on the last chapter the researcher explains the MBA experience and how the learner
process enhance his personality and his professional skills and the researcher use some models to
identify which learning style he adopt in his MBA learning journey.
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Contents
List of Tables ………………………………………………………………………………………………………………….. 9
List of Figures …………………………………………………………………………………………………………………. 9
Chapter 1
……………………………………………………………………………………………………………………… 10
1.1 Introduction
……………………………………………………………………………………………………………… 11
1.2 Why this research is important …………………………………………………………………………………… 13
1.3 Recipients of this research …………………………………………………………………………………………. 14
1.4 Scope of the research and limitations ………………………………………………………………………….. 14
1.5 Research structure
…………………………………………………………………………………………………….. 15
Chapter 2
………………………………………………………………………………………………………………………. 16
2.1 International free trade versus protectionism
………………………………………………………………… 17
2.1.1 International free trade and trade liberalization ………………………………………………………….. 17
2.1.2 The political role of trade organisations and policies (GATT-WTO) ……………………………. 21
2.1.3Infant industry argument
………………………………………………………………………………………….. 23
2.2 Types of Protectionism ……………………………………………………………………………………………… 24
2.2.1 Tariffs
…………………………………………………………………………………………………………………… 24
2.2.2 Import Quota
…………………………………………………………………………………………………………. 24
2.2.3 Anti-Dumping Laws ………………………………………………………………………………………………. 25
2.2.4 Subsidies ………………………………………………………………………………………………………………. 26
2.2.5 Embargo
……………………………………………………………………………………………………………….. 27
2.2.6 Voluntary Export Restraints (VER)
………………………………………………………………………….. 27
2.2.7 Export subsidy ………………………………………………………………………………………………………. 27
2.3 Protectionism after World economic crisis (After 2008)
………………………………………………… 28
2.4 Libyan Poultry Meat Sector ……………………………………………………………………………………….. 30
2.4.1 Poultry business overview ………………………………………………………………………………………. 30
2.4.2 Poultry industry in Libya ………………………………………………………………………………………… 31
2.4.3 Information about Libyan current situation ……………………………………………………………….. 36
Chapter 3
………………………………………………………………………………………………………………………. 37
3.1. Proposed methodology
……………………………………………………………………………………………… 38
3.1.1 The research questions
……………………………………………………………………………………………. 38
3.2 Research Onion
………………………………………………………………………………………………………… 41
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3.2.1 Research philosophy ………………………………………………………………………………………………. 41
3.2.2. Research approach ………………………………………………………………………………………………… 43
3.2.3 Research strategy …………………………………………………………………………………………………… 45
3.2.4 Research choice …………………………………………………………………………………………………….. 46
3.2.5 Time horizon
…………………………………………………………………………………………………………. 47
3.2.6 Research technique and procedure
……………………………………………………………………………. 48
3.3 Ethics
………………………………………………………………………………………………………………………. 48
3.4 Rationale of some interview questions ………………………………………………………………………… 49
Chapter 4
………………………………………………………………………………………………………………………. 51
4.1 Introduction
……………………………………………………………………………………………………………… 52
4.2 Sampling …………………………………………………………………………………………………………………. 53
4.3 The credibility of interview findings (Reliability and Validity) ………………………………………. 53
4.4 Findings
…………………………………………………………………………………………………………………… 54
4.3.1 Determining the main causes of the current crisis in the Libyan poultry sector
………………. 54
4.3.1.1 Producer findings ………………………………………………………………………………………………… 54
4.3.1.2 Policymaker findings …………………………………………………………………………………………… 57
4.3.2 The seen and unseen damages resulting from opening the borders and allowing imports
… 57
4.3.2.1 Producer findings ………………………………………………………………………………………………… 58
4.3.2 Reasons and causes of the inability to compete with imported product …………………………. 58
4.3.3.1 Producer findings ………………………………………………………………………………………………… 58
4.3.3.2 Policymaker findings …………………………………………………………………………………………… 59
4.3.4 How to address the crisis ………………………………………………………………………………………… 60
4.3.4.1 Producer findings ………………………………………………………………………………………………… 60
4.3.4.2 Policymaker findings …………………………………………………………………………………………… 61
4.3.5 The steps that have been taken
…………………………………………………………………………………. 62
4.3.5.1 Producer findings ………………………………………………………………………………………………… 62
4.3.5.2 Policymaker findings …………………………………………………………………………………………… 62
4.3.6 In favor of protectionism or against it with justifications
…………………………………………….. 63
4.3.6.1 Producer findings ………………………………………………………………………………………………… 63
4.3.6.2 Policymaker findings …………………………………………………………………………………………… 64
4.4 Discussion ……………………………………………………………………………………………………………….. 65
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4.4.1Should Libyan trade policy be free trade or protectionist?
……………………………………………. 65
4.4.2 How can the Libyan authorities cope with unfair competition in the local market, and how
can they prevent its future occurrence? …………………………………………………………………………….. 65
4.4.3 Do the Libyan authorities prioritise free trade concepts or protectionism, and why? ………. 66
4.4.4 What is the impact of unfair competition on Libyan poultry farmers?
…………………………… 66
Chapter 5
………………………………………………………………………………………………………………………. 67
5.1 Introduction
……………………………………………………………………………………………………………… 68
5.2 Findings and conclusions
…………………………………………………………………………………………… 68
5.3 Recommendation ……………………………………………………………………………………………………… 70
5.4 Suggestions for Further Researches
…………………………………………………………………………….. 71
Chapter 6
………………………………………………………………………………………………………………………. 73
6.1 Kolb’s learning model
……………………………………………………………………………………………….. 74
6.2 Honey and Mumford (LSQ)
……………………………………………………………………………………….. 76
6.3 MBA experience ………………………………………………………………………………………………………. 78
6.4 Time management
…………………………………………………………………………………………………….. 79
6.5 Interpersonal skills improvement
………………………………………………………………………………… 79
APPENDIX 1
………………………………………………………………………………………………………………… 89
APPENDIX 2
………………………………………………………………………………………………………………… 91
Appendix 3
……………………………………………………………………………………………………………………. 94
APPENDIX 4
………………………………………………………………………………………………………………… 99
Interview #1 ………………………………………………………………………………………………………………….. 99
APPENDIX 5
………………………………………………………………………………………………………………. 105
Interview #2 ………………………………………………………………………………………………………………… 105
APPENDIX 6
………………………………………………………………………………………………………………. 109
Interview #4 ………………………………………………………………………………………………………………… 109
APPENDIX 7
………………………………………………………………………………………………………………. 113
Interview #3 ………………………………………………………………………………………………………………… 113
APPENDIX 8
………………………………………………………………………………………………………………. 124
Interview #5 ………………………………………………………………………………………………………………… 124
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List of Tables
Table (2.1) …………………………………………………………………………………………………………………………….. 32
Table (2.2) …………………………………………………………………………………………………………………………….. 34
Table (2.3) …………………………………………………………………………………………………………………………….. 35
Table (2.4) …………………………………………………………………………………………………………………………….. 35
Table (3.1) …………………………………………………………………………………………………………………………….. 41
Table (6.1) …………………………………………………………………………………………………………………………….. 77
List of Figures
Figure (1.1)
……………………………………………………………………………………………………………………………. 15
Figure (2.1)
……………………………………………………………………………………………………………………………. 20
Figure (2.2)
……………………………………………………………………………………………………………………………. 34
Figure (2.3)
……………………………………………………………………………………………………………………………. 35
Figure (2.4)
……………………………………………………………………………………………………………………………. 39
Figure (3.1)
……………………………………………………………………………………………………………………………. 41
Figure (3.2)
……………………………………………………………………………………………………………………………. 43
Figure (3.3)
……………………………………………………………………………………………………………………………. 44
Figure (4.1)
……………………………………………………………………………………………………………………………. 44
Figure (6.1)
……………………………………………………………………………………………………………………………. 75
Figure (6.2)
……………………………………………………………………………………………………………………………. 77
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Chapter 1
Introduction
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1.1 Introduction
Determining an adequate trade policy is vital, and the pursuit of the economy’s stabilisation is
also crucial. Most countries of the world tend to actively engage in globalisation in one way or
another. Furthermore, the outcomes of globalisation and trade liberalisation often involve new
risks, threats and challenges. Some industries are very sensitive to the changes in production
costs, and, due to the high amount of pressure that is derived from global competition; these
factors would certainly affect local producers in many ways.
The evolution of the poultry industry has generally added many benefits and advantages to the
industry, equipping it with an acceptable margin of economic feasibility and contributing to the
provision of meat sources at a relatively low cost (Guerrero-Legarreta et al., 2010, p.). The
Libyan poultry market requires numerous improvements in terms of laws and regulations
governing this market. Typically, these laws are issued for several reasons, including the
following (Guerrero -Legarreta et al., 2010)
1- To verify and maintain a continuous and stable supply for the domestic market with a
product of acceptable quality and affordable prices for the domestic consumer.
2- To maintain the standard of living of farmers and local producers at acceptable levels,
commensurate with the requirements of the local market.
3- To improve the local product quality and specifications.
4- To ensure that the local market and food security of the product are free from any human
health hazards.
5- To preserve the environment and bio-security of the state.
6- To provide superior animal health and welfare conditions.
7- To ensure the provision of a fair competitive environment for all parties.
The desired results of these laws are based on improving the local economy by decreasing the
unemployment rate, which is accomplished by creating new jobs and working to achieve self-
sufficiency and independence in food production. The Libyan poultry market experienced many
price increases and decreases due to the lack of effective regulation, in conjunction with the
ambiguity of the laws that govern the suppliers-and-consumers relationship. Changing the
political regime for any country bears a direct or/and indirect impact on the economy, and Libya
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experienced this kind of change when the Libyan people launched their revolution, the February
17th Revolution of 2011 (also referred to as the “Arab Spring”) (IHS Global, 2013).
Consequently, most of the old laws and regulations need to be revised or removed, including
trade laws. The importation of all types of poultry products was prohibited before the revolution,
except the hatching eggs (Law No.52 of 2004, Law No.64 of 1971). After the revolution of 2011,
all kinds of poultry products (eggs, live chicks, live birds, frozen whole birds and semi-cooked
chicken meat) were allowed by the new regime to allocate the high demand of these goods due to
the dramatic drop in local production (Law No.48 and Law No.18 of 2011). By the end of these
military actions, most of the local producers sought to regenerate their activities by overcoming
the many obstacles faced, including the following:
The lack of animal feed resources (mainly corn and soybeans) at acceptable prices.
Increases in the local currency (Libyan dinar) rate of exchange against foreign currencies.
Increased labour costs.
Purchasing a considerable amount of cheap imported frozen chicken meat.
The spread of deadly animal diseases and epidemics due to the lack of appropriate
immunisation and the absence of regulations governing the entry of live animals from
neighbouring countries.
Libya is one of the countries which are negotiating the terms of accession to the World Trade
Organization (WTO) (WTO, 2014), aiming to achieve economic development and diversify its
sources of income. This situation places the Libyan legislators and decision makers in a position
whereby they are required to apply a coherent policy in order to achieve a balanced economy. On
one hand, one might argue that they should ensure that the possibility of market access is
available with sufficient admissions of foreign investments and imported goods; conversely, they
might implement an appropriate protectionist policy which is fully realisable and agreeable to
WTO regulations.
Most of the developed countries are applying these types of protectionism policies by adapting
various types of protections to support their local producers. These can be summarised as
follows:
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1. Import-quota (by volume or by percentage)
2. Tariffs (taxes usually measured by a percentage of imported ton)
3. Subsidies (measured in many ways)
4. Anti-Dumping Laws
These methods can be applied to them individually or as a group. For instance, the US and the
EU countries have long realised these principles. They have not only protected their local
producers from unjust competition from the imported goods, but have also exerted extra efforts to
subsidise their farmers, thus allowing them to keep producing sufficient products for the
population. The argument here arose from whether the decision makers will prioritise the local
producers’ interests or the free trade principle, without any kind of restrictions and trade barriers,
or whether they will embrace a compromise between these two, offering a solution to stabilise the
local prices and support the local farmers.
In addition, the legal authorities of developing countries frequently complain that recently
established industries such as the poultry meat industry require at least a certain level of
protection until they become more competitive and less vulnerable to foreign competition
(Krugman et al., 2012, p.258) (sometimes referred to as “infant industries”). Such protectionist
policies can be economically dangerous, because they allow domestic producers to continue
producing less efficiently, and eventually lead to economic stagnation. The researcher will thus
analyse the Libyan poultry meat sector in detail to identify the main factors which could improve
the poultry sector by achieving:
1. Price stabilisation.
2. Assuring fair competition (imported goods versus locally produced goods).
3. Economical wealth and market share.
1.2 Why this research is important
The present research is important because there is a major problem in the form of local producers
suffering from market flooding by imported frozen meat. It must be determined whether free
trade or protectionism suits the Libyan context. The researcher is a Libyan individual who
possesses previous experience in this field, having worked in Libya’s poultry sector and wishes
to contribute to a solution for this dilemma. The rationale underlying the choice of this topic is
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that the researcher was, and still is, working in this sector, via his family’s business. Furthermore,
as a student and a person who has worked in this sector, it is relatively easy for the researcher to
address the study’s key points, from collecting the relevant data to contacting the appropriate
persons for interviews. Additionally, the researcher believes that the research project may add
some fresh information concerning the concept of protectionism, and he will strive to determine a
reasonable solution for this complicated issue. The researcher will be aided in investigating this
case by using his business management knowledge to analyse the economic, marketing,
agricultural and legal aspects to establish a thorough understanding of the Libyan poultry meat
sector.
1.3 Recipients of this research
The main recipients and beneficiaries of this research will be the Libyan authorities (the Libyan
Ministry of Commerce and the Libyan Ministry of Agriculture), in addition to local Libyan
poultry meat producers and farmers, economists, legal advisors and policy makers. Figure 1.1
depicts the relationship between these various areas as perceived by the researcher in this
dissertation.
Figure 1.1: The relationship between various recipients of this research
1.4
Scope of the research and limitations
As this researcher intends to explore the impact of applying a trade policy in Libya, he will
explore the existing research in this area by referencing books, articles, websites and journals.
The author will also conduct an industry review by examining the performance of the top poultry
15
companies in Libya. The word “poultry” here includes ducks, turkey, rabbits and layer chicken,
to clarify the research concerning and limit the research area; this research will address the
Libyan poultry meat sector (chickens meat only). This geographic and type of industry elements
are the research’s main limitations.
1.5
Research structure
This dissertation consists of six chapters. The first chapter is the present “Introduction” chapter,
whereby the aim of the dissertation has been outlined briefly, while background information into
the research topic and the reasons for conducting this research have been justified. The research
hypothesis has also been addressed, and the research questions listed. Chapter 2 will examine the
literature available in relation to the research area based on the various sources encountered,
including books, online journals, articles, official reports, conference materials and internet
materials. In this chapter, the researcher will try to explain the Libyan poultry market situation
and justify the need for this type of research.
Chapter 3 will detail the research methodology, design, strategy and approach which have been
used in order to prove the hypothesis. This chapter will also offers also justifications for each
approach pursued by the author. Most aspects of the research approach were adopted from
Saunders et al. (2009). Chapter 4, meanwhile, will be concerned with the interview findings of
the qualitative primary research (in-depth interviews). The researcher will present the findings of
the primary research and strive to match these findings with the research objectives in order to
answer the research questions. Also, Chapter 4 will discuss the findings in order to gain a full
understanding of the research topic and lead the researcher to ascertain appropriate conclusions.
In Chapter 5 (“Conclusion and Recommendations”), the author will summarise the findings
according to the objectives, and will also highlight general issues and concepts raised during this
research, advancing general conclusions and listing some recommendations based on the research
findings. This chapter will also incorporate the potential of further studies in this area. Chapter 6
will offer the researcher’s self-reflection in regard to the dissertation work and MBA programme
by using some models to identify the researcher’s learning style and establish how he gained this
knowledge. Furthermore, the researcher will describe the entire MBA experience and indicate the
benefits of this academic experience.
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Chapter 2
Literature Review
17
The pursuit of economic prosperity for any country is based on how this country applies an
appropriate trade policy. One may visualise a situation whereby a country begins to appraise and
discuss the benefits of international economic integration. The first move towards trade
liberalization involves reducing the trade barrier’s effects. Once this step is completed, opposition
to it may emerge. However, the battle between those forces desiring liberalisation and those
fearful of local market disruption may persist. A political compromise should be established to
eliminate the consequences of these kind of disputes.
2.1 International free trade versus protectionism
2.1.1 International free trade and trade liberalization
The Scottish economist Adam Smith, in his famous book The Wealth of Nations, proposes the
gain (value) of free trade by adopting the concept of absolute advantage, stating that “It is the
maxim of every prudent master of a family, never to attempt to make at home what it will cost
him more to make than to buy […] If a foreign country can supply us with a commodity cheaper
than we ourselves can make it, better buy it of them with some part of the produce of our own
industry, employed in a way in which we have some advantage” (Smith, 1863). In the
introduction of his book, Smith defines wealth as “the annual produce of the land and labor of the
society” (Smith, 1863). With this theory, Smith reasons that international trade should not be
banned or restricted by tariffs, quotas or any kind of trade barriers, but rather allowed to flow as
dictated by market forces. The trade theory of absolute advantage was opposed to the principle of
mercantilism in terms of discouraging imports, which were prevalent during that period of time.
The English economist David Ricardo, in his book On the Principles of Political Economy and
Taxation, proposed the principle of comparative advantages (Ricardo, 1817), asserting, “A
country has the comparative advantage when it is unable to produce a good more efficiently than
other nations but produces the good more efficiently than it does any other good”. However, no
country can develop a comparative advantage in everything, because comparative advantage is a
concept of the relative costs of doing things, so some things must be comparatively more or less
advantageous. Moreover, all countries must possess a comparative advantage in something in
terms of trade (Kowalski, 2011, p.32). Furthermore, he adds that comparative advantage theory
has a major role to play in trade (Kowalski, 2011, p.32).
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In the 1930s, two Swedish economists, Eli Heckscher and Bertil Ohlin introduced a new
international trade theory. Simply known as the Heckscher-Ohlin model, this also adopted the
principle of factor proportions: “countries produce and export goods that require resources
(factors) that are abundant and import goods that required resources in short supply” (Ohlin,
1933). In other words, the cost of any resources is simply the result of supply and demand.
According to Adam Gerard in his work Globalization: From Heckscher-Ohlin to the New
Economic Geography, describing the O-H Model, he states,
In the framework of international trade theory, the opening of international markets
applies not only to equalization of goods prices but also to equalization of factor prices.
When H-O trade occurs, the prices of goods tend to equalize between countries, and the
relative prices of factors of production will also tend toward international equality. The
country where labour is expensive will be importing labour-intensive goods, causing local
wages to decline. A country where capital is expensive will in turn be importing capital-
intensive goods reducing the need for local capital and presumably its return (Adams,
2008, p. 163).
Despite the considerable limitations of these theories, research reveals that they appear to be
supported by a substantial body of evidence. The most appropriate method by which to
understand the benefits of free trade is David Ricardo’s theory of comparative advantage, in
conjunction with an analysis of the impact of a tariff or import quota using the law of supply and
demand to demonstrate the theoretical benefits and disadvantages of free trade (Wild and Wild,
2013, p.165).
Because the present research deals with protectionism in the agricultural sector, we should briefly
mention the famous Corn Laws, which were designed to protect local cereal farmers in
the United Kingdom against competition from less expensive foreign imports, basically imposing
steep import duties, ensuring it became too expensive for anyone to import grain from other
countries, even when the people of Great Britain and Ireland needed inexpensive food, as was the
case during the Great Irish Famine (“Corn Laws,” 2013). Economists such as Helpman and
Krugman in the mid-1980s developed a trade theory which is known as “new trade theory” by
using an integrated approach to explain the trade pattern (Helpman and Krugman, 1985).
Krugman, in another article of the same period, supports the free trade reports that, “If there were
19
an Economist’s Creed, it would surely contain the affirmations ‘I understand the Principle of
Comparative Advantage’ and ‘I advocate Free Trade’” (Krugman, 1987).
Jadish Bhagwati, the famous economist, explains why free trade remains the best policy despite
two centuries of theoretical challenges. He also writes, “In short, we need to remember that if we
refuse to reduce our trade barriers just because others do not reduce theirs, we lose from our
trading partners’ barriers and then lose again from our own” (Bhagwati, 2003). Before this, he
(Bhagwati, 1994, 1989) wrote of domestic market failure, arguing that the greatest threats to free
trade arise from unemployment and claiming that protection represents an unsuitable method of
solving domestic market failure, such as unemployment (Bhagwati, 1989). Clearly, this is true,
considering the American experience in the car industry, when America attempted to support its
local producers in order to assure US jobs against the Japanese car manufactures by applying
several types of protection, which caused cars to become more expensive in the US;
consequently, fewer cars were sold, and jobs were lost.
Douglas Irwin argues that, “When legitimate exceptions to free trade are accepted into economic
theory, there may come a period of diminished confidence among economists in free trade as a
policy,” adding that any emerging theories linked with strategic trade policy will facilitate some
economic insights, yet will fail to fundamentally challenge economists’ faith in free trade (Irwin,
1991). According to Dutt’s (Dutt, 2009) findings which strengthen the case for free trade and
weaken the case for protectionism, by observing and investigating the impact of protectionist
trade policy, “We examine whether protectionist trade policies lead to increased bureaucratic
corruption. Using multiple measures of corruption and trade policies, we find strong evidence
that corruption is significantly higher in countries with protectionist trade policies.” Someone
could object to free trade without supporting protectionism, and could disagree with protection
without supporting free trade. The Economist scholar Krueger (1974) analysed the relationship
between protectionism and corruption originally in the form of rent-seeking activities. She
recognizes that government regulations are pervasive and give rise to rents and rent-seeking,
which may take the form of bribery and violate the ethical standards. However, her analysis dealt
mainly with proofing that welfare losses with import quotas (that give rise to rent-seeking) are
greater than losses under an equivalent tariff. Moreover, as Bhagwati (1982), Bardhan (1997)
point out that, applying a protection measure may lead to corruption the higher the tariffs the
20
higher will be the willingness to pay of firms upon whom the tariff is imposed to reduce or
remove the tariff.
Obviously, most of the world’s economists and scholars support free trade principles, and most
believe that this progressive trade liberalisation has been highly beneficial. Meanwhile, both
theory and evidence suggest that income rises are more evenly distributed when countries pursue
free trade, rather than applying any type of protection instrument.
In contrast, there is no specific theory to support protectionism, but protectionists seek to justify
their interests by promoting new types of instruments; one of these in known as “fair trade”. The
theories relating to trade policies are still strong enough to explain why and when this will be the
case, or what the results of supporting fair trade will be. As the fair trade movement grows, these
theories will become increasingly incapable of predicting and explaining trade policy outcomes.
This was clear when the Economist magazine facilitated an online debate on its website in 2010
by hosting two economics experts, one supporting free trade (Jadish Bhagwati) and the other
supporting fair trade (Ngaire Woods). The debate ended with a very tight result in favour of fair
trade, with 55% for “Yes” to Fair Trade and 45% indicating “Yes” for Free Trade (“Economist
Debates,” 2010).
Moreover, despite the large amount of researches those support free trade but developed
countries like US and EU countries still subsidizing their local producers. For example, the
American authorities allowed the president of the United States to negotiate trade deals with
other countries by issuing the Trade Act of 1974. Section 201 of this act granted the president
broad authority to counteract injurious and unfair foreign trade practices (“TRADE ACT OF
1974, Public Law 93–618,” 1974). This law was restored in 2002 by the Trade Act of 2002.
According to Pindyck and Rotemberg (Pindyck and Rotemberg, 1987), “UNDER Section 201 of
the 1974 Trade Act, a domestic industry can obtain temporary protection against imports by
demonstrating, first, that it has been injured and second, that increased imports have been a
substantial cause of injury”. Protection under the act might assume the form of a quota or tariff
lasting for a period of five years, during which time the industry would presumably possess an
opportunity to make the adjustments necessary to strengthen its competitive international
position.
21
2.1.2 The political role of trade organisations and policies (GATT-WTO)
During the Great Depression of the 1930s, the United States suffered due to stringent and
irresponsible laws known as the Smoot-Hawley Act. Under this act, the level of trade fell
dramatically and the US authorities decided to reduce the effect of this law to pass this difficult
period. Therefore, political action and bilateral negotiation took place domestically and
internationally to pursue trade liberalisation (Krugman et al., 2011, p.236). The 1960s was a
profitable era for free traders. The Kennedy round of trade negotiations reduced tariffs to
unprecedentedly low levels in order to liberate the world economy. This was dashed by the
experience of the 1970s, when the Tokay round of trade negotiations began to remove so-called
nontariff barriers (NTBs). Unfortunately, it has not developed from its first stage, and an increase
in the protectionism practices by the industrialised countries is evident.
The consequences of this became clear when the Wall Street Journal published an article titled
“Trade tussle: Surge in protectionism worries and perplexes leaders of many lands”, by Janssen
et al. (1978). This article states that, “After three decades of immense increases in world trade
and in living standards, exports and imports are causing tense pressures in nearly every nation
and among the best of allies. The U.S. sets price floors against Japanese steel, Europe accuses the
U.S. of undercutting its papermakers, the Japanese decry cheap textiles from South Korea,
French farmers have smashed truckloads of Italian wine, and AFL-CIO President George Meany
rattles exporters world-wide by calling free trade ‘a joke’”. The negotiations commenced under a
provisional set of rules known as the General Agreement On Tariff and Trade (GATT), which
mainly led to a continuous reduction of trade barriers. In 1995, the World Trade Organization
(WTO) was established to form a legitimate body which could regulate the trade actions between
nations. Krugman et al. (Krugman et al., 2011, p.238) describe the GATT-WTO approach as
“like a device designed to push a heavy object, the world economy, gradually up a slope-the path
to free trade. To get there requires both ‘levers’ to push the object in the right direction as well as
‘ratchets’ to prevent backsliding”.
Despite the aims firstly set up in the Uruguay round (UR) of trade negotiations to introduce
efficiency gains by reducing trade barriers across nations, the developed countries have managed
to rely on various nontariff barriers, especially in the agricultural sector. According to Nogués
(Nogués, 2004), conclusions concerning the UR Agreement affect agricultural trade, and it was
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clear that this agreement declaration promised to liberalise world agricultural trade, though this
has not occurred for several reasons:
Protection levels for many products are higher today than at the time of the UR
initiation.
Multilateral rules on contingent protection make it impossible for farmers to defend
themselves from accusations of unfair trading.
Some protection instruments have been created which leave too many decisions to be
taken by bureaucrat, and consequently, this would facilitate rent-seeking behaviour.
In 2001, WTO decide to initiate another round of negotiations which took place in Doha (Qatar),
globally known as the Doha Development Round, in order to make the world more globalised
and to help the poorer nations by eliminating trade barriers and subsidies in farming, and by
addressing the Geneva negotiators’ failure to reach agreement on agricultural subsidies and
import tariffs, though, ultimately, no agreement was reached during the stages of the Doha round.
Political action still serves to act against protectionism. When the G20 summit took place in
London (April, 2009), it was stated clearly after the beginning of the global recession in year
2008 (point No 22) that:
Resisting protectionism and promoting global trade and investment, World trade growth
has underpinned rising prosperity for half a century. But it is now falling for the first time
in 25 years. Falling demand is exacerbated by growing protectionist pressures and a
withdrawal of trade credit. Reinvigorating world trade and investment is essential for
restoring global growth. We will not repeat the historic mistakes of protectionism of
previous eras (“G20 Summit – Leaders’ Statement,” 2009).
After three months (July, 2009), the G8 leaders also emphasised their declaration in L’Aquila city
in Italy, via an official statement (Point No.45):
“We reconfirm our commitment to keep markets open and free and to reject protectionism
of any kind. In difficult times we must avoid past mistakes of protectionist policies”(G8
Summit-Leaders Statement, 2009).
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2.1.3Infant industry argument
The governments of developing countries often argue that most of the established industries
require temporary protection until they become more competitive and less vulnerable to foreign
competition. Such industries are called “infant industries”, where protectionism is vital to
survival. According to Krugman and Obstfeld (2006, p.244), in their criticism of this argument,
the approach of the infant industry appears realistic, though economists have highlighted its
shortcomings. They cite two particular reasons for this: firstly, “it is not always a good idea to try
to move today into the industries that will have a comparative advantage in the future”, and
secondly, “protecting manufacturing does no good unless the protection itself helps make the
industry competitive”.
Clearly, any domestic market failure may stem from several factors; for instance, a lack of
experience, the lack of skilled labour, the lack of modern technology, and so on. Although some
protectionism is permitted for developing countries under WTO regulations (WTO-GATT Article
XVIII) where it relates to the Governmental Assistance to Economic Development, the balance
of evidence suggests that infant industry protection has had only limited success in practice this is
become clear when Krueger and Turner (1982) applied an empirical study to test the Infant
industry argument on the Turkish economy in particular ; they conclude that the protected
Turkish industries did not experience rapid increases in outputs per unit of input. It is sufficient to
prove that protection was not warranted, however, at least in the Turkish economy case
protection did not elicit the sort of growth in outputs per unit of input on which infant industry
proponents’ base their claim for protectionism, as protected industries have tended not to become
internationally competitive over time.
Free Trade means letting people buy and sell as they see fit, abroad as well as at home.
Protectionism means using the force of government to keep people from trading as they see fit or
to fine them for it. Sometimes the misuse of this force could lead to something known as
(Beggar-Thy-Neighbor) policy, that policy is attempt to increase a nation’s output, income and
employments at the expense of another nation’s outputs, income and employment, which this
policy may leads to a trade disagreements and conflicts between countries. Most economists like
John Keynes (Keynes, 1994, p.152), Joan Robison (Robison, 1937), Abba Lerner (Lerner, 1936)
argue against it; and the whole world suffers from the destructive power that Beggar-Thy-
Neighbour policies made in the world economy in that era.
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2.2 Types of Protectionism
The classic argument for free trade is based on the overall, or aggregate, economic wellbeing of
society. Free trade is best for the overall economy, even though individual groups may suffer
financial losses from this policy. The conflict between the economic interests of specific groups
within the community and the economic interests of the community as a whole is the essence of
the battle between free trade and protectionism. Free traders argue from the perspective of
particular interest groups (Krauss, 1978, p.2). Protectionism could be defined as a policy of
protecting local industries against unfair foreign competition by means of trade restriction(s)
placed on the imports of foreign competitors, protection could come in one single form or a
combination, and these forms are:
2.2.1 Tariffs
A tariff is simply a tax levied on imports (sometimes exports). Under WTO rules, tariffs must,
with certain exceptions, be utilised be on a non-discriminatory, ‘most favoured nation’ basis
where all trading partners should be treated equally (WTO-GATT: Article 1). The effect that
tariff has on the domestic market is to raise domestic prices in the country imposing the tariff
which creates a gap between prices in the importing and exporting countries. The gain of
inducing tariff is generating revenues for the government of the importing country (source of
income). Therefore, tariffs will benefit the government and producers of the importing country in
the form of tax and producer surpluses.
There are types
Tariffs is the oldest form of protectionism, the importance of tariffs has declined in modern times
because modern governments usually prefer to protect domestic industries through a variety of
nontariff barriers, such as import quotas (limitations on the quantity of imports) and export
restraints (limitations on the quantity of exports usually imposed by the exporting country at the
importing country’s request) (Krugman et al., 2011, p.193). Nonetheless, an understanding of the
effects of a tariff remains vital for understanding other trade policies.
2.2.2 Import Quota
A restriction on the amount (measured in units or weights) of a good that can enter or leave a
country for a certain period of time is called a quota. After tariffs, quotas are the second most
common type of trade barriers that governments used (Wild and Wild, 2014, p.188). Quotas
known as nontariff barriers (NTB), the quantitative restrictions on trade have been one of the
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main means of increasing protection in the world economy in the last twenty-five years. Textiles,
steel, and autos are well-known examples (Anderson, 1988). Historically, countries placed import
quotas on the textile products of other countries under the Multi-Fibre Arrangement. This
arrangement at one time affected countries accounting for more than 80% of the world trade in
textiles and clothing used (Wild and Wild, 2014, p.188). When that arrangement expired in 2005,
most of poor textile producer countries feared to loss their market share to china, but some
countries like Bangladesh finds its way through the global market by benefiting from cheap
labour and the reluctance among purchasers to rely exclusively on china (Global monopoly)(Wild
and Wild, p.189).
Jadish Bhagwati (1969) had criticize the presence of monopoly in domestic production,
monopoly in foreign supply or monopoly among quota holders by saying that it is sufficient to
destroy the economic equivalence of tariff and quotas, and later on scholars shows that is also
breaks down in the presence of uncertainty (Pelcovits, 1976), and in the presence of retaliation as
pointed out by Rodriguez (1974). Quota could be distributed by several ways and they have
rather different economic effects and different purposes (Winters, 1992):
i.
Fist come first served: this entails allowing imports from 1St January until the quota is
exhausted and then just closing the borders.
ii.
Auction: Quotas will be sold by the governments to the highest bidders.
iii.
Administrative allocation: this type of distribution made to avoid monopoly among
quota holders.
iv.
Non-Price bidding
Lastly, the difference between a quota and a tariff is that with a quota, the government receives
no revenue. When a quota instead of a tariff is used to restrict imports, the sum of money that
would have appeared with a tariff as government revenue is collected by whoever receives the
import licenses. License holders are thus able to buy imports and resell them at a higher price in
the domestic market (Krugman et al, 2011, p.206).
2.2.3 Anti-Dumping Laws
The term “dumping” in international trade terminology; means price discrimination in favour of
exports. Dumping could occur between different importing country and between different
individual buyers. The concept of dumping is defined in Article VI of GATT 1994 by WTO, the
agreement on implementation of Article VI of GATT 1994, commonly known as the Anti-
