Making sense of protectionism - Daily Monitor

Making sense of protectionism

Thursday April 18 2019

Susan Khainza, a chartered fi

Susan Khainza, a chartered financial analyst 


Buy Uganda Build Uganda (BUBU) promotes consumption of locally produced goods by obliging enterprises to use local materials and products. Protectionism is the policy of shielding domestic industries from foreign competition by restricting imports. Throughout history, governments have tried to support their economies by raising barriers to foreign trade and competing for export markets. The impact of globalisation has led to sentiments like Brexit and America First.
According to Nair-Reichert and Witschi, trade restrictions intend to protect established domestic industries from foreign competition, protect new domestic industries from foreign competition until they mature (infant industry argument), protect and increase domestic employment, protect strategic industries for national security reasons, generate revenues from tariffs, and retaliate against trade restrictions imposed by other countries.

The 2018/2019 tax measures reflect protectionist ideas of taxing imports to encourage domestic production and preferential treatment for the East African Community (EAC) members. Many trade and investment barriers among EAC members have been eliminated but the Common External Tariffs have resulted in lower-cost imports from non-members being replaced by higher-cost imports from members.

Since economic policies are dependent on human behaviour, let’s look at protectionism from the point of the dating game. Men are driven by women, and live to impress ladies, using financial prowess, sporting talent or gentlemanly ways. A man needs to know his talents. An asthmatic-man need not challenge the muscle-man to a fight. He needs to understand his competitive advantage, perhaps intelligence, and focus on it.

What keeps men working is competition; the knowledge that another man can take his lady. If the lady gives assurance that no one can take her, he gets bored, and steps out in search of a new challenge that will drive him to greater heights. Without competition, a man doesn’t have to mark out his territory, has no reason to work, and society cannot move forward. A man wants to be king. Ladies determine how hard he has to work. Ladies must have choice, in the order of natural selection.

Same goes for companies, economies, governments. Competition is what drives us.
Lock out competition, and we lock out development.
Proponents argue that BUBU will increase local production, local producers shall enjoy higher prices, and URA receive increased tax revenue. But inefficient, high cost producers enter or stay in the market. Higher costs of imported inputs create higher production costs. Consumers suffer higher prices and lower quality goods, creating an overall national welfare loss.

What are our strengths? Should we produce cars? Can we compete in the global market? Where do we have a comparative advantage? Competition forces local firms to be more efficient, productive, and competitive in the global market. Resources are allocated more efficiently. Import competition pushes inefficient firms out of business. Consumers enjoy a better variety and quality goods at lower prices. A country gains when it receives higher prices for its exports and pays lower prices for its imports, instead of producing locally at higher costs. If we use tax to lock out imports, won’t other countries use tax to lock out our exports?

Reality is globalisation is here. Nationalist policies like Brexit, America First and BUBU are doomed to fail. There is an African Proverb: Every morning a gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a lion wakes up. It knows it must outrun the slowest gazelle or it will starve to death. It doesn’t matter whether you are a lion or a gazelle: when the sun comes up, you had better be running. It is simple really: Compete or Die.