4. Protectionism

What is Protectionism

Barriers to trade to protect domestic firms from foreign competition

What are the types of protectionism

Tariff - Tax imposed on imports to raise import prices

Quota - Quantity limit on imports that are allowed to enter the country, this creates excess demand and hence increases prices

Embargo - Outright ban on imports (used in wars, international relations issues and for human rights issues)

Export Subsidies - Government grants used to lower production costs for domestic firms encouraging export of goods and becoming more competitive in foreign markets

Exchange Rate Devaluation - Central Banks and Government can intervene in foreign exchange markets to weaken the currency and give domestic producers the advantage of cheaper costs

Red Tape - Layers of Bureaucracy that foreign producers need to go through to sell their goods into another country

Standards/Regulations - Increased Standards can make it harder for foreign producers to meet these standards and sell their goods (product safety standards, health and safety standards, environmental standards)

Reasons for Protectionism

Infant Industry Argument

Dumping

Unemployment

Standards

Government Revenue

Current Account Deficit Reduction

General Evaluation Points for Protectionist Policies

Higher Prices and Lower Quantity

Retaliation

Harm to Domestic Firms

Breaking WTO Rules

Allocative Inefficiency

Cost

Elasticity

What is Infant Industry Argument and Evaluation (reasons for protectionism)

Using protectionism to allow small industries to grow in size and produce more output and develop economies of scale to be more internationally competitive without the threat of global competition. Once they become bigger, the protectionist policies can be taken away

Eval: Long Run Inefficiency as business could get complacent with this benefit, as a result costs elsewhere could increase. Businesses will need to be monitored and this protectionism needs an end date so it can’t be endless

Retaliation: Foreign firms may not like that their exports are being targeted so they could retaliate and set their own protectionist policies back on this country’s exports meaning infant industries will not be able to grow as much in size

What is Dumping and Evaluation (reasons for protectionism)

When a good is sold overseas at a price below costs of production which could destroy overseas industries. This is an illegal trade practice but still happens commonly around the world

Eval: Hard to prove as it is hard to collect evidence and you will need to fight a court case to prove to the WTO. The WTO reviewing process can take a long time as well

What is Unemployment and Evaluation (reasons for protectionism)

Industries in countries without the comaparative advantage will not be able to survive due to deindustrialisation causing a rise in structural unemployment

Eval: Delaying the Inevitable as if the industry is chronically uncompetitve then you could argue that deindustrialisation and unemployment will occur anyway and that protectionism is just delaying this process. May be better for the government to invest in training programmes to reduce structural unemployment

Retaliation - If foreign countries retaliate and impose their own harsher protectionist measures back then more jobs would be lost as a result of the retaliation then saved from the original protectionist measures

What is Standard and Evaluation (reasons for protectionism)

Governments can impose standards (worker standards, product safety, health and safety, environmental etc.) or raise standards in order to protect key stakeholders

Eval: Proof Needed - Firms need to prove to the WTO that the standard or raise in standard is necessary otherwise you could be sanctioned by the WTO or you could face heavy retaliation from trading partners

What is Government Revenue and Evaluation (reasons for protectionism)

Tariffs can increase Government Revenue (easy to collect and can be in very high sums)

Eval: If supply and demand are inelastic then the government will collect a lot of revenue and if supply and demand is more inelastic then the government will collect less revenue

What is Current Account Deficit Reduction and Evaluation (reasons for protectionism)

Tariffs can help reduce imports which would help to reduce a current account deficit

Eval: Retaliation as other countries won’t accept the attack on their exports via tariffs meaning that for the inital country, their exports are likely to fall more than the fall in imports which would actually worsen the current account deficit

If supply and demand is inelastic then the import reduction will not be that big so not as effective but if supply and demand is elastic then the import reduction will be bigger and more effective