Traditional theory of protectionism
Economist and welfare analysts have always been in support of free international trade as no country can operate in isolation but the popularity of protectionism in the early 1980s was also borne out of various arguments one of which is the infant industry argument which acknowledges that developing countries have a potential comparative advantage in manufacturing but that these manufacturing companies cannot effectively compete with the organised and well developed manufacturing sector in the developed countries [4]. The major assumptions include the assumption of full employment, fixed production technology, balanced trade, perfect mobility of factors within and among nations and that, international prices are controlled by forces of demand and supply [14]
The justification for theory of protectionism was analysed by [15] and it was centred on the traditional approach to protectionism. This theory centres on the tendency of the government to seek for maximisation of income through protectionism. The basic tenet of the theory is that government seeks to achieve certain non-economic objective through the application of protectionism and also seeks to maximise real income. This was criticised in 1968 [16] on the ground that Johnson failed to consider the welfare aspect of international trade in his analysis and its inability to measure traditional welfare loss as a measure of divergence of social from private costs or benefits of protectionism.
This theory therefore opined that protectionism is a mean of supporting new industries in order to enable them grow strong in order to effectively meet international competition. Even though there have been compelling arguments in favour of free trade and increased trade openness especially after the second World War, the World Trade pattern has to a large extent, been shaped by protectionism in recent years.
In the case of Nigeria, this study opined that although the government considered income leakage through illegal importation and smuggling and protection of local industries, analysts have opined that the welfare aspect of the policy was not considered owing to the fact that local production cannot be sufficiently enough to meet local needs [12].
In most developing countries including Nigeria, International Trade policies are mostly guided by the principle that a strong and vibrant manufacturing sector is a major key to Economic Development and that this can best be achieved by protecting the local manufacturers from international competition which is theoretically and practically a tool to enhance local production Bello et al. [17]. The theory has been criticised based on its basic assumptions and a new theory was propounded by David Ricardo.
Ricardian theory of protectionism
Contrary to the traditional theory, Coughing et al. [18] premised his argument on David Ricardo’s theory of 1817 in “Principle of political economy and Taxation” and employed this to explain the benefits of free trade. He therefore opined that the concept of protectionism which only became popular in the 1980s does not encourage specialization Ffrench-Davis et al. [19]. His argument was based on perfectly competitive market and that protectionism can lead to price increase in such markets. He therefore concluded that even though import reduction increases local employment especially in industry that provide similar products, export reduction also reduces employment in industries that specialise on exportation of their products and that developing countries also need exports to pay off their debts. This therefore indicates that while protectionism is beneficial to import based industries, it is detrimental to export based industries. This further corroborated the opinion of [20] that jobs saved by protectionism are more than the job lost.
Theoretical review on manufacturing output
The two major theory that relates to manufacturing output is the Kaldor first and second growth theory. The theories relate manufacturing output, economic growth and external sector of the economy.
Kaldor’s first theory
This was postulated in 1949 with the basic tenets that manufacturing output and growth of any economy are positively and closely related.
He postulated that expansion in the manufacturing sector will lead to employment which will further lead to transfer of labour from the low productivity sector to the industrial sector. He further stated that productivity growth rate is endogenous and depends on output growth rate capturing dynamic contexts, endogeneity of the factors and increasing industrial economies of scale. This implies that the development of the local economy will impact positively on the manufacturing sector. That is, the development of the local economy will improve the availability of raw materials which will in turn reduce over-dependence on foreign markets.
Kaldor’s second theory
This is also known as the Verdoon’s law and was postulated in 1966. This law established the statistical relationship between the growth of manufacturing output and labour productivity growth on manufacturing where causality runs from former to the latter. Its basic argument is that an initial growth in output labour cost given a markup pricing rule for a fall in prices increasing the competitiveness of a country. These gains in turn allow for further output expansion through increasing exports which reinitiate the cycle. This implies that once a country or region acquires a growth advantage, it will tend to keep it through the process of increasing returns and consequent competitive gains that growth itself induces.
Emerging theory of manufacturing
Drucker [21] criticised the Kaldor’s law and opined that manufacturing output impact is not only on economic growth but that it is the integrator that connects all sectors of the economy. He further corroborated this that manufacturing sector provides economic value that pays for everything and everybody. Even though he agreed with the Kaldor’s law on its impact on economic growth, he went further to affirm that its greatest impact covers both social and human concerns.
Empirical literature
Li and Whilley [22] examined the relationship between Trade protectionism and manufacturing sector employment in the United States of America (USA) over the period of 1976–2008 employing the General equilibrium model. The study established that trade protectionism could increase the demand for USA domestic manufactured goods as a result of decreased foreign demand but the simulation results showed that USA trade protectionism reduced manufacturing sector employment.
Ugwuja and Chukwukere [4] examined the concept of trade protectionism and border closure in Nigeria from the political economy perspective by reviewing the rice production from 1984 till date. This study established that even though trade protectionism will boost domestic economy which is in line with the international trade theory, not all stakeholders will benefit from the as there was evidence of food inflation within the period under review.
Cheng et al. [23] studied the impacts of trade protectionism on the Indian economy especially on the manufacturing sector from 1970 to 2017 using the ordinary least square (OLS) econometric technique. The study opined that there are two sides to the trade protectionism theory. In their analysis, it was stated that even though trade protectionism provides a less competitive market for domestic industries and provides a relatively stable environment for their growth; encourage exports and also increase revenue to the government, the policy may not be sustainable as the high tariff rate will eventually harm the economy GDP.
Barratieri et al. [24] examined the macroeconomic impact of trade protectionism using the estimates from country level as well as setting up a small open economy model with firm heterogeneity and employed the Vector autoregressive technique. The study revealed that the policy is not an effective tool in stimulating a macroeconomic environment of a country especially the developing ones.
Abegunde and Fabiyi [25] reviewed the implication of the recent Nigeria-Benin border closure on Nigeria economic development. He employed the OLS technique and affirmed that border closure which had the major aim of protecting the economy has only increased smuggling which are carried out by citizens of both countries. He also established that domestic production, income and patronage increased with reduced national fuel consumption and increased seizure of contraband goods. He therefore concluded that the border closure was not to the economic development of Nigeria.
Eselebor [1] reviewed the effect of Benin-Nigeria Border closure which has been closed in four times between 1984 to March 2020 on safety and vulnerability of the two countries. He therefore concluded that the closure of the border which is the busiest commercial gate way in West Africa has really not curbed smuggling and other security concerns but has opened more bush pathways and maritime routes for the menace. He therefore concluded that the securitisation and better management of the border would be more beneficial to both countries other than the border closure.
Aniukwu [26] examined the impacts and prospects of border closure policy in Nigeria especially in rice production and compared with other nations such as China, Singapore and Japan that have implemented such policy in the past. He therefore concluded that the rice sellers practiced monopoly thereby causing price increase. Although the farmers and the rice sellers enjoyed increased income, it impacted negatively on the cost of living of the citizens.
Kituyi [27] reviewed the performance of the countries in the United Nation which adopted the trade protectionism especially during the COVID-19 period. He analysed that even though trade protectionism may be a tool for building a resilient economy, the growth may not be sustainable as protectionism will only provide temporary relief. It often leads to price hike and supply shortages in the international market. He opined that any economy trying to recover should only adopt it for a while as the manufacturing sector output will not sustain the economy.
Okere and Iheanacho [28] studied the indirect impact of trade protectionism on Nigeria’s economic growth from 1990 to 2013. The Autoregressive distributed lag Bound testing approach was applied to cointegration. In the analysis, protectionism was measured with three variables which are: Trade openness, Subsidy and real exchange rate while the indirect impact on economic growth was measured through industrial production and level of unemployment. The results confirmed the existence of long run relationship but there was no evidence of long causal relationship between real GDP, industrial production, unemployment and labour but in the short run, there is a unidirectional causal relationship running from GDP per capita from industrial production to labour. This study contradicts the general opinion that protectionism is detrimental to economic growth as proved empirically by revealing an indirect link between protectionism and economic growth through industrial production and economic growth.
David et al. [29] reviewed the interrelationship between trade barriers and economic growth with the main objective to determine the nature of the relationship that exist between the duo over the period of 1970–2006. He employed the OLS regression techniques. This revealed that trade openness and economic growth are positively related such that tariff barrier will positively affect economic growth and export while negatively impacts imports.
Identified research gap
Recent studies in the area of protectionism have linked the concept to increased domestic production coupled with increase in prices of goods and services. This is in line with the traditional protectionism theory which postulated that international competition limits the efficiency of the domestic economy. The reviewed literatures therefore revealed that even though trade protectionism might be beneficial in the area of income generation to the government, it is not all beneficial to the citizens and that in most cases do more harm than good in the area of smuggling and high cost of living.
Previous studies have focused on particular subsector of manufacturing industry. Even though this study is in line with the previous studies, it goes further to review extensively the impact of the policy on the manufacturing sector which the government tried to protect and also employed different econometric approach from the previous studies.