4.3 Arguments for and against trade protectionism

Arguments for

-Infant industries

-Sunset industries

-Strategic industries

-Health and Safety

-National security

-Anti-dumping

-Employment/jobs

- Current account deficit

- Labour/environment regulation

-Diversification

- Government revenue

Infant industries

• To protect new firms that would be unlikely to succeed at start-ups due to the level of global competition. Once established support is removed

Sunset industries

• Similar to above, but at the other end of the life cycle, these firms are on their way out and the government chooses to support them to help limit the economic damage that would occur if they closed abruptly

Strategic industries

• Industries such as energy, defence and agriculture are essential to self-sufficiency and security. Being reliant on other countries for these creates vulnerabilities for a nation

Health and safety

High standards will result in some imports being restricted as they don't meet the standards

National Security

Countries need to ensure self-sufficiency, if conflicts were to arise causing administrative barriers to be placed (embargoes/sanction), then they would not be significantly affected by imported goods

Anti-dumping

• Dumping is anti-competitive and can harm a country's industries

Employment/jobs

When firms outsource production to other countries or certain industries are experiencing structural unemployment governments will step in to protect job

Current account deficit

• When imports > exports the amount of money leaving the country to support foreign firms is greater than that entering to support domestic firms. Protectionism aims to correct this imbalance

Labour/environmental regulations

• Many countries offer cheap labour and low-cost production due to poor environmental regulations. Protectionism can help apply pressure to bring about change in these countries

Diversification

Used to avoid risk of over-specialization to expand production in different sectors. - generates larger demand for domestically produced goods

Government revenue

Such as tariffs, will allow an increase in government revenue as an opportunity to gain the source of public sector income

Agruments against

-Reduced choice

- Increased prices

- Retaliation

- Reduction in export competitiveness

- Resource misallocation

-Domestic inefficiency increases

Reduced choice

Protectionism reduces both the quantity and variety of goods/services available to customers

Increased prices

Protectionism either reduces the supply of goods/services which leads to higher prices - or in the case of tariffs, directly leads to higher prices

Increased costs

Manufacturers who rely on imported raw materials face higher costs of production. If protectionism is widespread it may generate inflation in the economy and/or lead to a loss of employment

Retaliation

Foreign producers are hurt by protectionism and it is common for their governments to retaliate with their own measures which further harm free trade

Reduction in export competitiveness

Protectionism reduces the need to be efficient or to innovate. Over time this leads to higher prices and worse quality products which will reduce export sales

Resource misallocation

Global welfare is reduced as protectionism shifts production away from more efficient foreign producers to less efficient domestic producers

Domestic inefficiency increases

With a reduced level of competition, domestic firms will be less productively efficient and will spend less on research, development and innovation

Real life examples against:

- During the mid-20th century, India adopted an ISI strategy, imposing high tariffs on imported goods to protect domestic industries. While this initially helped some sectors grow, it led to inefficiencies and a lack of competitiveness

- many Indian industries produced lower-quality goods due to reduced competition

Real life example for:

- 2018, China = introduced retaliatory tariffs on a range of US products, including soybeans, cars, and aircraft. The tariffs were introduced in response to US tariffs on Chinese goods and were intended to protect Chinese industries and send a message to the US government

- South Korea and Taiwan used protectionist policies in the mid-20th century to nurture their automotive and electronics industries, which later became globally competitive.