4.3 Arguments For and Against Trade Protection Questionbank

Northland Free Trade Agreement

Northland is a landlocked developing country of 5 million people. Despite agriculture employing 60% of the labor force, the sector contributes only 25% to GDP, highlighting significant productivity challenges. The country's trade profile reflects this economic structure, with exports concentrated in primary products like coffee, tea, and textiles, while relying heavily on imports of machinery, oil, and processed foods, resulting in a persistent annual trade deficit of $1 billion.

In response to growing concerns about import dependency and the need to protect domestic industries, Northland's government initially implemented substantial tariffs on processed food imports. This protection policy aimed to nurture local food processing capabilities and reduce the trade deficit. However, while these measures provided some shelter for domestic producers, they also resulted in higher consumer prices and limited market competition.

Recently, Northland has taken a significant step by signing a free trade agreement (FTA) with a neighboring country, marking a shift from protectionist policies toward regional integration. This move presents both opportunities and challenges: while it promises improved market access for Northland's exports and potential technology transfer through increased regional trade, it also exposes local producers to stronger competition. However, to maintain domestic standards of living in face of fear of machinery replacing jobs, the Northland's government has imposed a minimum wage. The success of these policy shifts will largely depend on how well Northland's agricultural sector can adapt to new market pressures while leveraging its traditional export strengths.

Table 1: Northland's Trade Data Before and After FTA

Table 2: Price Elasticities of Demand for Northland’s Key Exports and Imports

Relief as Kenya raises tariff for steel and iron imports

Steel manufacturers in Kenya are set to benefit as the government moves to protect the local manufacturing industry from cheap steel and iron imports.

In 2014 a government official announced an increased tariff on steel and iron imports. “Our steel mills are closing down due to unfair competition from cheaper imported iron and steel products,” he explained. “To protect and create more jobs in the iron and steel industries, tariffs on a wide range of imported iron and steel products will be increased from 0 % and 10 % to 25 %,” he said. The government official further stated that as well as protecting the local industries from cheaper imports, the protectionist measures would raise an additional 2.6 billion Kenyan shillings (Kenya’s currency) annually in government revenue and support economic growth.

The potential of local industries to expand and create jobs through trade has been held back by a number of administrative barriers. The government remains focused on improving the business environment. Over the past six months, the government has made it easier to register a company and trade across borders. The time taken to move goods out of the main harbour has fallen sharply; non-tariff barriers such as roadblocks have also been reduced. Importers of refined industrial sugar and wheat are also pleased after the government scrapped requirements to pay unnecessary administrative charges.

However, there is a belief among manufacturers that there is a need for more deregulation to lower their costs of production and in effect reduce the cost of doing business.

Kenya sees gross domestic product (GDP) growth picking up but current account a concern

Good economic growth rates in neighbouring countries like Uganda help to boost Kenyan exports, particularly for agriculture that makes up nearly a quarter of the Kenyan economy. The government suggests that the main risks to growth are the slow performance of developed economies that are key export markets for Kenyan goods and services, and Kenya’s large and persistent current account deficit of over 10 % of gross domestic product (GDP) in the last three years. This is a major concern for sustained economic growth and the value of the Kenyan shilling.

Table 1: Steel and Iron Trade Data

Table 2: Kenya’s Current Account Data

Kenya Implements Tariffs to Protect Domestic Steel Industry

The Kenyan government has taken steps to shield its domestic steel industry from cheaper imports by increasing tariffs on steel and iron products. The policy aims to support local manufacturers, reduce dependency on foreign suppliers, and stimulate job creation.

In 2014, a government official announced a tariff hike on steel and iron imports, raising rates from 0% and 10% to a uniform 25%. "Our domestic steel mills are struggling due to unfair competition from low-cost imports," the official stated. "Our domestic steel mills furthermore provide employment to large populations. They have also been ensured to follow sustainable measures throughout the production chain", he added. The new tariffs are projected to generate an additional 2.6 billion Kenyan shillings in government revenue, fostering economic growth and industrial expansion.

Kenya’s manufacturing sector has long faced structural challenges, including high production costs and bureaucratic hurdles. To address these, the government has introduced measures such as reducing non-tariff barriers, streamlining business registration, and expediting cargo clearance at ports. Importers of refined industrial sugar and wheat have also benefited from the elimination of excessive administrative fees.

However, local manufacturers argue that further deregulation is necessary to enhance efficiency and lower costs, ensuring the long-term competitiveness of the industry.

Kenya’s Economic Growth and Trade Deficit Challenges

Strong economic growth in neighboring Uganda has increased demand for Kenyan exports, especially in agriculture, which constitutes nearly 25% of Kenya’s GDP. Nevertheless, concerns persist over slow economic recovery in key export markets and Kenya’s substantial current account deficit, which has remained above 10% of GDP for three consecutive years. Policymakers fear that this could hamper sustained economic expansion and depreciate the Kenyan shilling.

Table 1: Tariff Revenue from Steel and Iron Imports

Table 2: Kenya’s Current Account Deficit

[Sources: adapted from www.standardmedia.co.ke, 13 June 2014; www.af.reuters.com, 25 July 2014; www.cnbcafrica.com, 25 November 2013]

A country’s government is considering a subsidy program to promote renewable energy production. Use the following information to answer the questions:

The government plans to allocate $500 million in subsidies. The price elasticity of supply for renewable energy is 1.50.

China and the Global Trade

On 15 January 2020, the United States (US) and China signed a deal that reduced some tariffs and required China to buy more from US producers. This was a first step towards resolving a trade war, which had reduced bilateral trade flows by 9% and investment flows by 60%. However, critics argued that the deal left most tariffs unchanged and did not deal with deeper disagreements. The US, the European Union (EU) and Japan are calling for tougher World Trade Organization (WTO) rules on government support for firms that manufacture items such as steel or solar panels. The support, which is often in the form of subsidies, has allegedly undermined competing firms overseas, either by promoting exports or by decreasing imports, and therefore distorted global trade. Other governments also give subsidies, but there are claims that China uses them more extensively. The proposed WTO rule change would require governments to prove that subsidies do not give domestic firms an unfair advantage over foreign firms and that they do not lead to excess supply in the global market. If the rules are implemented, the WTO may regain some of the authority that it has lost in recent years. One of the US government's goals when imposing huge tariffs on Chinese-made goods was to bring back manufacturing jobs to the US. Therefore, despite the new deal, the 25% tariff on Chinese-made furniture will stay. As a result, many US furniture firms that had used overseas factories to make their US company-branded products have reduced their imports of Chinese-made furniture. Meanwhile, Vietnam, Cambodia and Bangladesh are benefitting because US manufacturers of wood furniture are setting up factories there. Therefore, some other US producers are asking for the tariff on Chinese-made wooden furniture to apply to all wooden furniture imported into the US, regardless of where it is manufactured. China is becoming less dominant as an exporter and more integrated into the global trading system. Its current account surplus was over 10% of gross domestic product (GDP) in 2007, but it declined to just 0.4% in 2018. Chinese producers are increasingly buying raw materials and other inputs from overseas producers. Although most electronic devices sold in the US are assembled in China, Chinese firms are often dependent on US semiconductor suppliers. If the US and China tried to be less interdependent, it would take more than 10 years for China to become self-sufficient in the production of computer semiconductors and for the US to shift to other suppliers of labor.

Table 1: Bilateral Trade and Investment Flows (US-China Trade War)

Table 2: China's Current Account Surplus (as % of GDP)