This study seeks to conduct a critical examination of the income transfer effect rising from industrial protection, thus examining its implications.
The reason domestic industries that are under the protection of import restraints receive the benefits of protection is not because of the harm done to foreign industries from the policy, but because of the ‘protective duties’ paid by domestic consumers’ on the consumption of goods, which is seen to have decreased by more than 26% with the import restraints.
Reflecting on the past thirty years of Korean history, producers are more essential users of imported products, which includes components for home appliances produced for exports. The tariff rate imposed on all trading materials is 12.4%, which is seen to increase the price of all imported and exported trading materials. Nominal tax rates, in addition, apply the price increase on both tariffs and non-tariffs, rising up to 25.9%.
Protective duties are not composed solely of the tax imposed on foreigners, which amounts to 22.9 trillion Won and is as large as two-thirds of the government’s total expenditure in 1990. They added value according to the current price of domestic industries made an increase of about 12.1 billion Won, including manufacturing, agricultural and other sectors. This however, is limited on domestic sales and does not include export sales.
The problem however, is that industrial protection in such method is not only ineffective in providing support to industries in need, but is also burdensome to domestic producers. Hence, there is no clear rationale justifying the current norms of protectionism. Furthermore, the situation is more difficult as government in unable to swiftly respond to and regulate the market. Policies to predict price and assess its validity and make necessary modifications are also functioning very weakly. In addition, policies are also not adjusted to meet local conditions, another essential factor.
The protection of domestic production plays a great impact on increasing the prices of sectors intimately connected to domestic production, making the increase reach at least higher than 20%. However, the added value in production for exports cannot be increased as exports cannot be put under protection. In other words, protection boosts domestic sales but shrinks exports.
In this context, policy support to industries must be minimized as current protective policies are indeed unrealistic. To minimize such support from reaching industries, harms that are done on production elements must be minimized while support mechanisms such as industrial restructuring be provided.
산업보호의 소득이전효과와 그 시사점(Study on industrial protection, its effect on income transfer and implications)
|Series Title; No||정책포럼 / 제15호(9315)|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Industry and Technology < General|
|Holding||KDI; KDI School|