Protectionism in industrial countries

The recent recession in the industrial countries has been the worst since the Great Depression of the 1930s. Unemployment and the decline in competitiveness of traditional sectors led industrial countries to protect their industries from international competition. In the United States the high value of the dollar added fuel to the protectionist mood. As foreign goods became less expensive in dollar terms they displaced domestic goods, leading to a large balance-of-payments deficit and to further pressures for protection.

Only in a few cases has this recent wave of protectionism taken the form of explicit tariffs or quotas. More often, there have been informal agreements to restrict competition – for example, voluntary restrictions on the number of Japanese cars imported into the United States and the United Kingdom, and the suggested harmonization of the prices of food exports from Europe and the United States.

A consequence of protection has been increased emphasis on the establishment of foreign manufacturing facilities in countries that were previously only export markets. For example, Japanese corporations have recently established numerous plants in Europe and the United States. The output of these plants then avoids the protective barriers erected around the local market.

The development of foreign manufacturing facilities in industrial countries has in turn led to the discussion and promotion of “local content” laws. These laws, if approved, would imply that to avoid the measures introduced to protect the local market, it is not sufficient for a foreign firm to manufacture a good locally: It must in addition purchase locally a certain fraction of the inputs for this good.