By Michael Jones (michael.jones@tsiglobalconsulting.com)
The mainstream economic ideal of free trade is a far cry away from the system that we see today in international business. Instead of working to reduce trade barriers between countries, certain states have worked to protect their own domestic industries from foreign competitors. Of course, countries have always had protectionist policies in place, and it seems likely that this will continue to be the case for the foreseeable future – but identifying these policies, and which specific industries they protect can often be a challenge, one that may not be solved until a company’s investment in a particular country is well on its way. This article will look at some of the more stark examples of industry protectionism all over the world, so that your company can be better prepared in expanding its international operations.
One of the world’s strongest protectionist policies comes from the European Union in the form of the Common Agricultural Policy (CAP). Simply put, this policy establishes tariffs on agricultural products in order to make it easier for domestic European farmers to compete with countries that hold a comparative advantage in this industry. The tariffs range from under 20% to up to 75% of the product for certain meats and dairy products. The CAP also provides subsidies to farmers in certain sectors, as well as quotas on what foreign agricultural producers can bring into the EU in the first place. While the EU may have a good market for agricultural exports from third countries, those who are looking to do business with it should be aware of the CAP which may limit sales into the EU market. Of course, other countries, specifically the United States, have high agricultural protectionism in place, but what makes the EU’s policy unique is, logically, that it applies to all EU member nation states. Those looking to do business anywhere in the EU need to take this policy into account.
Another, more complex, controversial example of modern protectionism comes from China in the supermarket industry. Recently, several foreign chains were publicly fined and punished by the Chinese government for legal violations inside the country. Those in charge of meting out the punishment state that the matter is a black and white case of violating the law: in many cases, these chains failed to meet Chinese product labeling standards or similar policies. However, many of these chains believe that they are being unfairly targeted, and even harassed, by the authorities in these cases, and that the same standards are not being upheld by domestic competitors – that this harsh enforcement of policy is, in actuality, a subtle form of protectionism. Other foreign competitors who have not necessarily been publically punished have complained that the authorities have made it harder to acquire business and land permits. The lesson to learn in this situation is that protectionism doesn’t always take the form of legal restrictions: sometimes, once in country, unofficial or indirect problems may come up that your domestic counterparts may not have to deal with. Of course, since in this example, the case for protectionism is based on hearsay, the Chinese authorities may have been correct in their judgments: this is just something to keep in mind.
The last example of modern protectionism does not come from a foreign country; instead, it comes, introspectively enough, from our own. The U.S. is one of the most heavily protected economies in the world, utililizing most forms of protectionism available to it: tariffs, quotas, subsidies on domestic products, and many more. This is perhaps most evident in the agricultural field. The U.S., has historically been one of the main “breadbaskets of the world,” but the US agricultural sector is beginning to feel the pinch of foreign competition. Largely due to political pressure from constituents, including corporate agribusiness, US lawmakers have over the years approved various forms of price supports for agriculture, making it much more difficult for foreign companies to compete with subsidized and highly mechanized US agricultural production. Agricultural subsidies in both Europe and the United States have indeed badly distorted trade patterns and the natural rhythm of production based on comparative advantage.
Despite the rhetoric of free trade, at least for now less-than-free trade seems to be the norm. Navigating specific protectionist policies can be difficult and costly for those who are new to the field of international business – if you are looking for help in your international operations, give TSI Global Consulting a call at 210-757-0618. We’ll give you a consultation to help you get started.