Protectionism
How strong an argument can be made for
protectionist policies?
protectionism
• We’ve spoken about various protectionist policies such
as tariffs, import quotas, subsidies and voluntary
export restraints.
• What were the benefits that arose from these policies?
• Did the benefits seem to outweigh the costs or did the
costs outweigh the benefits?
Protectionism
• We’re not the only students of Economics who believe
that the costs of protectionism surpass the benefits, yet
supporters of protectionism are still out there and
influencing policy. We’ll take a look at the validity of
their arguments
Protectionism
• One of the most commonly cited arguments in favour
of protectionism is the idea that it is needed to give
infant industries a chance to succeed.
• If production of a particular good has just begun
domestically, established foreign producers will have a
head start and may already be producing at a lower
cost.
• How can new domestic producers compete with
foreign firms that may already be experiencing
economies of scale?
Infant industries
Infant industries
• The answer is that new domestic industries would not
have a very good chance at survival without some sort
of protectionist policy.
• It is possible that a country could eventually achieve a
comparative advantage in the production of a certain
good, even if it starts to produce later than another
country.
• In this example, protectionist policies could be justified
under the condition that the protectionist policies are
temporary
Infant industries
• Critics of the infant industry argument point to several
potential problems, including:
• How accurately can government identify industries
that could eventually result in a comparative
advantage?
• Once an industry is granted protection, where are the
incentives for that industry to innovate and produce at
more efficient levels?
• Will government be strong enough to remove the
protection in the future?
Strategic Trade
policy
• Another argument in favour of protection argues that
certain industries are so vital to a country’s well-being
that they must be protected so economies of scale can
eventually be achieved, giving a country comparative
advantage in a dynamic and valuable industry.
• What types of industries fall into this category?
Probably not these
But maybe these
Strategic Trade
policy
• Supporters of protectionist policies argue that
technology is so important to future economic growth
that it is in a country’s best interest to ensure that they
achieve comparative advantage in this field.
• Barriers to trade, subsidies, low interest loans, tax
advantages, and government sponsored research and
development can all foster growth in these industries,
but the WTO doesn’t want to hear about it
Criticisms of Strategic Trade
policy
• What industries could potentially achieve comparative
advantage?
• What protectionist policies should be implemented?
• What if all countries try to achieve comparative
advantage in the same industries?
• What if government never removes the protectionist
policies?
How about some
variety?
Diversification
• Supporters of protectionism warn of the dangers of
too much specialization. They argue that
protectionism gives a country opportunity to develop a
broader range of industries and not be just another
banana republic
Diversification
• Diversification may prevent developing countries from
relying on one primary sector good and provides
protection against price or supply changes
• Diversification may allow a developing country to
move beyond agricultural production to processing and
more technologically advanced areas which may lead
to more economic growth
National Defense
• Some policy makers argue that certain goods are
essential to national defense and must be protected to
ensure the country’s ability to defend itself. When
tensions arise, you don’t want to have to be reliant on
imports to keep your country safe.
• What types of goods are we talking about?
Probably not these again
But maybe these
National Defense?
• Apparently some countries (who will not be named, ok
the U.S.A) protect the following goods because they
are necessary for national defense. They are:
• Gloves
• Umbrellas
• Candles
• Plastics
Government revenue
• We talked about the potential for tariffs to raise
government revenue. This is more common in LDCs
because the tax can be easily collected and because
income tax may not provide government with enough
revenue.
• However, the use of tariffs as a way to collect revenue
is imperfect as it is a regressive tax, creates a
misallocation of resources, and may prevent
government from introducing more effective means of
taxation
Correcting trade
imbalances
• Supporters of protectionist policies argue that they can
correct a situation in which a country imports much
more than it exports. However, this often just leads to
trading partners enacting similar policies, and the net
effects are muted.
Anti-Dumping
• Dumping is the exporting of goods to other countries
at a price that is lower than cost of production, usually
this occurs when export subsidies are granted.
• While illegal, countries still practice this. Supporters
of protectionism argue they should be able to keep
these cheap goods out of their country, but recognizing
when this is actually happening can be quite difficult.
Countries often use this as an excuse to restrict foreign
competition
Protect domestic
jobs
• If we produce more at home than there should be
more jobs for our countrymen. However, this can
negatively affect the economy of trading partners, and
the whole world suffers.
• We also saw with the example of the U.S. sugar import
quota that firms may shift operations overseas, thus
eliminating jobs.
• Subsidies would be least harmful as production does
not decrease.
Wage protection
• Protectionists argue that foreign countries can sell at a
lower price because wages are lower abroad. While
this may be true, wages are just one component of
production costs. And even if the foreign country can
produce at a lower cost, the law of comparative
advantage says they should be producing this good.
So……
Last word on
protectionism,
• Economists love some free trade and don’t consider
protectionism a wise policy, especially for more
developed countries. The arguments we have just
considered range from reasonably sound to absurd…