TOPIC 24 :
free trade and protectionism
Arguments Against Trade Protection 
Arguments in favour of protectionism
Strategic reasons
Protectionism may raise prices to consumers and producers of the imports they buy.
Competition would diminish
To prevent dumping
To avoid risk of specialization
To protect product standards
Protecting an infant (sunrise) industry
To raise government revenue
Protecting the economy from low-cost labour
To correct a balance of payment deficit
Protecting domestic employment
Distorts comparative advantage
Retaliation from other countries, trade war due to escalating tariffs
Hinder economic growth
-limit over specialization to prevent
over-dependent on the
export of one or two products.
-eg. changes in tech. will reduce commodity.
-changes in patterns for demand and supply can have serious effects on economies of developing country , which tend to over-specialize in primary product.
a decline industries (sunset industries).
-certain industries need to be protected at times of war.
eg. steel where it is needed for many defence items
if the industries are large, this may lead to high levels of structural unemployment
argument may not be very strong:
industry will continue to decline,
protection will prolong the process
this argument may be valid , although it is unlikely that countries will go to war, but if they do supply will be completely cut off.
IT IS LIKELY ARGUMENT IS USED AS AN EXCUSE FOR PROTECTIONISM.
DUMPING=SELLING A LARGE QUANTITIES OF A COMMODITY. AT PRICE LOWER THAN PRODUCTION COST, IN ANOTHER COUNTRY.
-ve effect of declining industry:
gov feels obligated to intervene & protect the market
must protect the economy from imports that are produced in countries where the cost of labour is very low
-it may ruin the domestic producers in the developing country.
-govt. are alllowed to impose anti dumping measures to reduce the damage.
But it is hard to prove if the foreign industry is guilty of dumping.
-Moreover, govt. that subsidizes a domestic industry may support dumping.
Leads to less choice for consumers
Protectionism will invite retaliatory actions by foreign govt. And this reduces the benefits that can be gained by all consumers and producers in all countries.
RLE: Food export bans (live broiler chiken) aimed at protecting domestic prices and supplies (Malaysia-Singapore)
eg. US protect domestic clothing industry against cheap imports from Asia, where wage are much lower
this argument is against the concept of comparative advantage
the comparative advantage changes over time
To protect the saftey, health or environment stabdards of a certain country
For example, the EU banned the import of US beef after it had been discovered that the beef had been treated with hormones
The WTO Allows such bans as long as the bans do not discriminate between countries where similar products are traded
Protection of standards is a valid arguement for the imposement of bans as long as the concerns are also valid. However many of the reasons given for the bans are forms of protectionism.
Another issue is the cost involved with meeting product standards. Costs of both production and documentation are high and costy. This puts producers in developing countries at a disadvantage
in many developing countries it is difficukt to collect taxes, making govs impose imports taxes on products in order to raise revenue
This is not so much an arguement for protectionism, but more a means of raising gov revenue.
Import duties are actually a tax on the consumers in the country who are buying imported products
Govs sometimes impose protectionist measures in an attempt to reduce import expenditure and thus improve a currect account deficit whereby the country is spending more on imports than earning of exports
- infant industry may not have economies of scale
However, this will only work in the short run. It does not address the actual problem, because it does not rexctify the actual causes
- need to protect this industry until it achieves a size where it is able to compete on an equal footing
eg : Saudi Arabian gov has been diversifying into petrochemical production in recent years
the developing countries, without access to sophisticated capital markets, can use the this argument to justify protectionist policies in order to assist with diversification
RLE: Singapore hawkers are forced to import frozen chicken from Malaysia as alternatives.are banned
RLE: China 's tariffs on US imported products reduced relatively fair competition in the country
RLE: India increasing tariffs on sub-standard products imported from China which decreases the potential it gains from specialization
RLE: US-China trade war as tariffs were rising back and forth on imported products from the respective countries
RLE: Stricter trade policies such as in China may harm trade relations with other countries.