Book 13 II C - Benefits of protectionism

Give example for protecting infant industries

Eg. Massive subsidies given to Airbus by the EU government so it can compete with Boeing -> enabled it to create a full product line of aircraft and gain 50% share of large commercial aircraft sales

Protectionism protecting infant industries EVAL

Eval: Complacency 

• Remain internationally uncompetitive and inefficient -> CA will not materialise 

• Once protection is given, it is hard to remove

• Vested interests are created and the industries would fight strongly against the removal of trade barriers

• Might be politically damaging, especially if they receive political funding from firms or if the removal will cause S-UN  

• Given the dynamic and unpredictable nature of the world, it is difficult to accurately identify the industry with the potential CA

Protectionism protecting infant industries EVAL eg. + conclusion

• Eg. Malaysia national automobile company, Proton was protected by massive subsidies -> supposed efficiencies never materialised

• HENCE, government should constantly review the progress of the industry and implement protectionist measures for a specified time period

• If the industry fails to make progress, the government can opt to abolish the policy

State protectionism protecting environment EVALS

• International trade might not be the source of the problem

• Limiting it via protectionism does not solve the problem at its root cause

Explain how protectionism causes anti-dumping

• Anti-dumping duties can be imposed on heavily subsidised imports to bring their prices to be more in line with domestic prices

Describe benefits of anti-dumping

• In the present, the foreign firms will lower prices below their own MCOP to steal market share (predatory prices) 

• Assuming that they have the same cost of production, domestic firms cannot match the lower prices and will shut down

• Once they have obtained monopoly power in the future, these foreign firms will then raise prices back up to profit maximising levels -> domestic households would be adversely affected due to market dominance by foreign firms 

• HENCE, government can implement tariffs to prevent foreign firms from selling at a lower price and prevent domestic firms from shutting down 

• Producers: higher PS + reduce UN + higher mSOL

Describe costx of anti-dumping

• CS falls 

• Producers might suffer from lower profits due to higher costs if the domestic tariffs were implemented on imported FOP required by the domestic firms -> AC/MC falls -> subnormal profits cause them to shut down -> employees face fall in wages or lose their jobs if firms shut down or reduce production

State benefits of protectionism

Economic growth

Reduce S-UN

Reduce income inequality

To develop infant industries

Correct trade deficit

Protect environment

Anti-dumping

Describe costs of protectionism

Worsen BOT, -ve EG and higher UN	With the implementation of protectionist measures, trade partners are likely to retaliate since reducing domestic imports would cause a fall in foreign (X-M) -> AD to fall -> foreign -ve EG  Beggar-Thy-Neighbour effect  Cause domestic (X-M) to fall -> domestic -ve Eg
Cost-push inflation	Price of imported FOP increase  Eval: Depends on reliance on imported resources

State overall eval for effects of protectionism

1. Whether adverse effects can be better addressed via other policies 

2. How much society values benefits of trade VS costs of trade