The Case for Protectionism in International Trade
The Case for Protection
The term protection refers to a policy whereby domestic industries are protected from foreign competition. The aim is to impose restrictions on imports of low-priced products to encourage domestic industries producing higher-priced goods. Domestic industries may be protected by imposing import duties, which raise the price of foreign goods higher than domestic goods. They may also be protected by other non-tariff restrictions that make imports of cheap foreign goods difficult or impossible. Additionally, domestic industries may receive subsidies or grants to enable them to compete with cheap foreign goods.
There are two kinds of arguments commonly offered for protection:
1. Economic Arguments
To Protect Infant Industries
The concept of protecting infant industries was first formulated by Alexander Hamilton but was popularized by Friedrich List. The aim of this protection is to raise the standard of living in the country. This argument comes in static and dynamic forms.
- Static Form: This form assumes that world technology is given and constant. If an industry has large economies of scale, costs will be high when the industry is small but will fall as the industry grows. It is argued that if industries in their infancy are not protected from established foreign producers, they cannot develop to enjoy comparative advantages. Therefore, they are protected by providing various facilities such as subsidies and heavy import duties on foreign goods. This support allows them to expand and enjoy internal economies of scale.
- Dynamic Form: This version of the infant industry argument is supported by the concept of learning by doing. This suggests that the pattern of comparative advantage can be changed. If a country learns enough through producing a product in which it currently has a comparative disadvantage, it may gain in the long run by specializing in those products. It could develop a comparative advantage as the learning process lowers their costs.
To Create or Exploit a Strategic Trade Advantage
An important recent argument for tariffs or other trade restrictions is the need to create a strategic advantage in producing or marketing new products expected to increase normal profits. Some goods are produced in industries containing barriers to further entry. Firms in those industries can earn extra high profits over long periods.
To Protect Against Unfair Actions by Foreign Firms and Governments
Tariffs may be used to prevent foreign industries from gaining an advantage over domestic industries by using practices that harm domestic industries.
2. Non-Economic Arguments
Defense Argument
A country should adopt the policy of protecting its industries from the standpoint of national defense. If a country is dependent on other countries for its agricultural and industrial products, it will be very harmful to its national interest in times of war.
Non-Economic Advantages of Diversification
Comparative advantage might dictate that a country should specialize in producing a narrow range of products. However, the government might decide that distinct social advantages exist in encouraging a more diverse economy. Citizens would have a wider range of occupations, and the social and psychological benefits of diversification would more than compensate for a reduction in the standard of living.
Risk of Specialization
Specializing in producing only a few products may involve risks that a country does not wish to take. One such risk is that technological advances may render its major product obsolete. The pro-tariff argument is that the government can encourage a more diversified economy by protecting industries that otherwise could not compete.
Protection of Specific Groups
Although free trade will maxumize per capita GDP over the whole economy, specific groups may have higher incomes under protection than under free trade.
1 Tariff Barriers-Tariff which is imposed by different countries in the world has been the most important type of trade restriction. A tariff is a ban or duty levied on the traded commodity as it crosses a national boundary. An import tariff is a duty on the imported commodity while an export tariff is a duty on the exported commodity In the context of the policy of protection import tariffs are more important than export tarrif.The first type of protectionist policy directly increases the price at imposed commodities thereby offering protection to the domestic producers from international competition.
Non-tariff barriers’- The second type of protectionist policy directly restricts the quantity of an imported product All the barriers that do not directly increase the price of an imported commodity are called non-tariff barriers. In other worlds, any direct or indirect trade restriction which does not involve tariff is called non-tariff barrier, import quota is one of the important types of non-tariff barriers. Under import quotas, the importing country sets a particular limit for a commodity beyond which no import is allowed during the stipulated time period.Apart from import quota, for may years there has been in operation the voluntary export restriction (VER) through an agreement between the trading countries exporting country to agrees to limit the amount of a good that it sells to the importing country