It is clear that the UK has no advantage whatsoever in the production of steel, whether absolute or comparative when it comes to Eastern European economies or South East Asian nations. It is therefore difficult for the giant European economy to compete in the international scene without any help. The European Union is great consumer of steel, fuelling the production of the commodity in the UK and in several other EU member countries. However there still exists the need for importation of steel from other economies, mostly China, due in large part, to the low cost of the imported steel which ends up hurting domestic steel industries in the monetary union. In order for the steel industry in the UK and in other EU member states to survive, therefore, it is vital for the union to embrace protectionism policies.
Types of Protectionism to be Embraced
Several policies of protectionism could be embraced by the UK in an attempt to discourage the importation of Chinese made steel and to encourage the consumption of English steel. For one, the nation could use the policy of imposing tariffs. According to Johnson (2013), this is the policy of increasing or imposition of duties to be paid during the importation of certain commodities. The use of tariffs is important in helping reduce the quantity imported of a commodity. It also offers a stream of revenue to the importing country, which could be used to finance government expenditure (English, 2013, p. 143). Tariffs also help increase the price of imported commodities to a level desired by the imposing authority, notes Biswas (2015, p. 365), this could offer the domestic producers of the same commodity a fair chance of surviving the price wars likely to emerge in the event that the imported commodity would have otherwise been cheaper. The economic effect of tariff imposition is depicted below.
Embargoes could also be used to prevent the importation of commodities from foreign manufacturers. A policy that involves the total ban of importation of a given commodity from a given economy (Drezner, 2015, p. 755), imposition of embargoes is an important tool in protectionism. It helps in reducing the quantity of a commodity available in an economy by preventing importation. Using the logic of demand and supply economics, the price of the commodity in question, in this case, steel manufactured in the UK rises. Embargoes are therefore a great policy for ensuring the survival of domestic industries, posits Van Bergeijk (2014), for they can be used as and when desired by a given economy to help achieve industrial stability.
Another protectionism policy that the UK could use to restrict the importation of steel from China would be the use of quotas. According to Hillman (2013), this is the policy of setting a limit to the quantity of a given commodity, in this case imported Chinese made steel, in order to offer a market, by reducing competition for locally produced commodities. Quotas help in the protection of domestic industries by supplementing rather than replacing the local produce (Bouët et al, 2008, p. 854). Imposition of quotas is also essential in the maintenance of local prices to avoid exploitation of consumers, in the thinking of Harrigan and Barrows (2009, p. 282), as it can be used as a tool by the importing economy to help in the plugging supply deficits. The effects of quotas are shown below
Justifications for Using Protectionism
There are several reasons why protectionism, as is the case with the steel industry in UK should be embraced. Most of these reasons are intended to prevent or restrict the importation of steel from the giant Asian economy. For one, the policy of protectionism as used in the UK steel industry against Chinese steel imports is vital in preventing the death of domestic steel industries in the UK. If such protectionism policies as the imposition of tariffs and embargoes were effected, the quantity imported of Chinese steel would be constrained, giving, as Davis (2009, p. 231) insists, the local steel manufacturers a chance to sell their produce and therefore stay in business. This helps prevent the death of industries and therefore aid the UK in avoidance of economic distortion that collapse of the steel industries would have brought through the loss of tens of thousands of jobs and increase of import bills.
Using the protectionist policies such as the imposition of tariffs and quotas would be offer the UK economy a chance to switch from the production of steel to that of a commodity in which it possesses either a competitive, comparative or an absolute advantage. This would offer a chance for the switch to occur without the risk of jobs being lost. Being an advocate for free trade, and a signatory of the World Trade Organization (WTO), the UK is obliged to observe the policies of free trade which reject any notion of protectionism (Bown, 2009). As such, therefore, the use of these policies, though in contravention of WTO policies, would offer the UK economy a chance to find alternative production sectors without posing the threat of distortion during the process.
Steel is a component used in the manufacture of several key and strategic products, in defence and national security, in any country just as is the case in the UK. It is therefore important for the nation to impose restrictions that would ensure the survival of local steel manufacturers who provide this key input. This restriction, carried out through protectionist policies, helps shield the country from sabotage by the Chinese steel exporters (Ma, 2011, p.71).Adoption of certain protectionism policies would also be useful in safeguarding the operations of key strategic sectors of the UK economy, hence helping guarantee the nation’s stability.
UK faces very unfavorable balance of payments in part due to the high value of imports and the low value of exports. This poses a deficit in the nation’s current account. In order to correct this, it would be necessary to restrict, where possible, and even prevent importation of further commodities. This restriction, using protectionist policies, would be more viable, as advanced by Chang, Andreoni & Kuan (2013, p.103), especially in the case of steel which the UK also manufactures. By constraining the quantity imported of commodities, in this case steel from China, and therefore the value of overall imports, the UK would be improving its balance of payment even if no corresponding increase in export value is realized. This is especially so, given the fact that UK consumption of steel imported from China, excluding the locally produced bits, hit 687,000 tons in 2014, observe Yellishetty, Ranjith & Tharumarajah (2015, p. 1091).
By using protectionist policies such as quotas, tariffs and embargoes, the UK is trying to fight back the unfair competition posed by China, as advised by Bouët et al (2008, p. 859). A low wage economy, which enjoys absolutely low costs of producing steel, China can afford to sell its steel at less than the global prices. At present, with accusations of dumping, the importation of the Asian economy’s steel exports are restricted by UK to prevent the unfair competition. The use of these policies help prevent dumping by China, which, as some critics claim, is dumping its steel products in the UK in order to get a foothold of the steel market in the European economy.
Demerits of Protectionism
Despite all its advantages to the importing economy, the use of protectionism has a number of demerits. First, the application of protectionist policies limits the need for specialization and the exploitation of comparative advantage by countries. This is because by applying these policies, the importing economy, in this the UK, allows its steel industry, with little advantage to flourish while the same industries also flourish in other economies such as China, which have a comparative advantage over the UK. This prevents the UK from sufficiently developing other sectors where it would have a comparative or absolute advantage such as financial services hence constraining the efficient allocation of resources. This discourages specialization which would improve efficiencies in global production by exploiting available economies of scale, as advanced by Harrigan & Barrows (2009, p. 282).
By imposing restrictions and even bans on imported steel from China, the UK is essentially encouraging the domestic production of expensive steel for consumption within its borders. This leads to the loss or worsening of the consumer welfare (Drezner, 2015, p. 761), as they have to pay more for steel than they would have, had free trade been allowed to prevail and Chinese steel been imported. Being that steel is a necessity in the Construction, and Industrial & Allied sectors of the UK economy, the use of protectionism leads to increases in prices which reduce the consumption of both the imported steel (having been heavily taxed or even prohibitively limited in terms of quantity and/or price) and domestically produced steel (at the high prices) hence limiting the growth of these economic sectors.
While the use of protectionism as a policy to aid in the survival of local UK steel industries is a noble idea, it is likely to reduce the ability of the industries to survive. This is so because in being protected, the industries gain an advantage over competitors which fades upon the reduction or abolishment of protectionist measures and policies. Protectionism therefore leads to the creation of competition-adverse industries and economies at large, observes Biswas (2015, p. 369).
In view of the recent accusations of dumping by Chinese steel makers and other East Asian steel manufacturers, the use of protectionism to reduce imports is likely to benefit the UK by ensuring the survival of its steel and related industries. The protectionist measures will also increase government revenues. However, by and large, the protectionism policies would hurt the consumers more and even strain the UK economy. It therefore would be wise to adopt a controlled application of these policies. In light of this, the use of protectionism to reduce steel import may be justified, but only to a given extent.
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