Protectionism (Part 2)
The arguments in favour of protectionism
1. To protect infant industries
Infant industries
Infant industry have difficulty to survive when faced with competition from more
established foreign firms.
Protecting an infant industry will give it time to grow and benefit from economies of scale
and gain a global reputation.
The protection also help infant industry to develop into an efficient industry in line with
comparative advantage.
However, it is difficult to identify which new industries will develop and gain a comparative
advantage.
Furthermore, infant industry may become dependent on protection.
Knowing that rival foreign products are being made artificially expensive, it may not feel
any pressure to lower its costs.
2. To protect declining industry
Sunset industry
Sunset industry is a long established industry which is declining due to losing its
comparative advantage.
A government seek to protect sunset industries to allow it to decline gradually in order to
avoid sudden and large rise in unemployment.
The intention is to remove the protection gradually but industry may try to resist the
protection being removed.
In the long run, can lead to inefficiency.
Example:
A country’s steel industry lost its comparative advantage while car industry gain
comparative advantage.
If government imposes tariffs on steel, it will disadvantage the car industry.
Car industry will now have to buy more expensive steel from domestic producers.
This will increase the car industry’s cost of production and lose its sales at domestic
and foreign country.
3. To protect strategic industries
Government seek to protect industries that produce products they regard as strategies.
Government does not want to be dependent on foreign supplies of these products.
Example
– Government seek to protect agriculture in order to achieve food security.
– Government may be worried that households in the country would be in
disadvantage if food supply was cut off due to a trade dispute or a military conflict.
4. To prevent dumping
Dumping
Dumping involves selling products in a foreign market at below cost price.
Domestic consumer will benefit to low price.
In the long run, foreign firms drives out the domestic firms and gain monopoly and raise
the price.
Foreign firm engage in dumping with specific intention of gaining control of a market in
another country by destroying existing competition and preventing new domestic firms
from becoming established.
However, it can be difficult to determine if dumping is taking place or whether the foreign
firms have gained a comparative advantage.
5. To improve the terms of trade
Impose trade restrictions will reduce demand for import and lower the price of import.
Thus, the domestic country able to buy more imports for the same quantity of exports.
This will improve the country’s terms of trade.
Quotas on export will improve terms of trade.
Restricting the supply of exports will drive up the price and increase the purchasing power
of exports.
However, this will distort trade and reduce global output and provoke retaliation.
6. To improve the balance of payments
Import restrictions may reduce current account deficit in the short run.
However, it may lead to retaliation.
Foreign governments retaliate by imposing their own trade restrictions, which cause a fall
in the country’s imports and exports.
International trade will decline and global output will fall.
Trade restrictions provide a short term boost to the current account if the country’s
products are not internationally competitive.
7. To provide protection from cheap labour
Domestic industries should be protected from competition of low wage countries.
However, cost of production will be still high if the country has low wages with low
productivity.
Eg: Low wages and low labour productivity.
Have to hire more labours.
Thus, labour cost may be relatively high.
A country has comparative advantage if it has low wages and low cost.
8. Other reasons
Raise revenue
This will be successful if demand for imports is inelastic.
A government engage in trade restrictions in order to persuade another government to
reduce its trade protection.
Government may seek to protect a range of industries to avoid the risks attached to
overspecialization.
The argument against protectionism
1. Prevent countries enjoying the benefit of free trade.
2. Prevent countries from specializing in the products in which they have a comparative
advantage.
Lower global output and living standards.
3. Reduce international competition.
Increase price and lower the quality of products.
4. Reduce the choice of products available to consumers.
5. Lower the size of firms’ markets.
Reduce firm’s ability to take advantage of economies of scale.
6. Reduce firm’s choice of raw materials and capital goods.
Increase cost of production.
7. Trade war
Tariff push up prices.
