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Trade Protection and Support for Domestic Firms
Discuss whether or not trade protection supports the growth of domestic firms.
International Trade and Exchange Rates
Frequently asked question
Consider the limitations of your analysis and discuss them honestly.
The impact of trade protection on the growth of domestic firms is a subject of debate among economists. Here are some arguments for both sides:
Reasons why trade protection might support the growth of domestic firms:
➡️1. Decreased Competition from Imports: Trade protection measures such as tariffs, quotas, or subsidies can increase the price of imported goods, making them less competitive compared to domestically produced goods. This can lead to an increase in demand for domestic goods, supporting the growth of domestic firms.
➡️2. Promotion of Infant Industries: Trade protection can be used to shield newly established industries, often referred to as infant industries, from foreign competition. By providing temporary protection, these industries can have a chance to develop and achieve economies of scale, improving their competitiveness in the long run.
➡️3. Retention of Jobs: Trade protection can help preserve domestic jobs by limiting the impact of foreign competition. By creating a barrier to imports, domestic firms may be able to maintain their market share and continue employing workers, thus supporting employment levels.
➡️4. National Security Considerations: Trade protection may be justified in industries deemed critical for national security. By safeguarding domestic production capabilities in sectors such as defense or strategic resources, trade protection can ensure the resilience and independence of the country.
Reasons why trade protection might not support the growth of domestic firms:
➡️1. Retaliation and Reduced Export Opportunities: When a country imposes trade protection measures, other countries may respond with their own protectionist measures, such as tariffs or trade barriers on the country's exports. This can limit export opportunities for domestic firms, leading to decreased demand and reduced growth prospects.
➡️2. Higher Production Costs: Trade protection can lead to higher costs for imported raw materials and intermediate goods, increasing the production costs for domestic firms. This can reduce their competitiveness and profitability, potentially hampering their growth.
➡️3. Lower Quality and Innovation: Insulation from international competition may result in domestic firms facing less pressure to innovate and improve their products and processes. Without the incentives provided by foreign competition, firms may become complacent, leading to a decline in product quality and overall competitiveness.
➡️4. Inefficiencies and Resource Misallocation: Trade protection can create inefficiencies and misallocate resources by favoring less efficient domestic industries over more efficient foreign competitors. This can hinder overall economic growth and productivity improvements, as resources are directed towards protected sectors at the expense of more productive uses.
It is important to consider that the impact of trade protection on domestic firms depends on various factors, including the specific industry, the extent of protectionism, and the broader economic context. Trade protection measures should be evaluated carefully, taking into account the potential benefits and drawbacks for domestic firms and the overall economy.
- Definition of protectionism
- Importance of trade in the global economy
- Purpose of the essay
II. Advantages of protectionism
- Increase in price of imports
- Reduction in quantity of imports
- Increase in demand for domestic goods
- Growth of infant industries
- Prevention of sunset industries from declining
III. Disadvantages of protectionism
- Possibility of retaliation
- Increase in cost of production
- Lower quality of output
- Complacency of domestic firms
IV. Case studies
- Examples of countries implementing protectionist policies
- Analysis of the effects on their economies
- Summary of advantages and disadvantages of protectionism
- Recommendation for a balanced approach to trade policy.
Up to ➡️5 marks for how it might: Protectionism may increase the price of imports - making imports less desirable - quantity of imports demanded decreases - quantity of domestic goods demanded increases -. Protectionism may reduce the quantity of imports e.g. quotas - An increase in demand for domestic goods may lead to an increase in revenue - and profits - of domestic firms, encouraging them to hire more workers - decreasing unemployment -. Trade protection can allow infant industries to grow / prevent sunset industries from declining - which may enable then to take greater advantage of economies of scale - making them more internationally competitive -.
Up to ➡️5 marks for how it might not: Protectionism might lead to retaliation - other countries might put a protectionist policy on domestically produced goods - increasing the price of the country’s exports / reducing the quantity allowed - decreasing the demand for exports -. An increase in price of imported raw materials may increase some firms costs of production - lowering profits -. Domestic substitute raw materials may be of a lower quality - which will reduce the quality of the output of domestic firms - may lead to lower demand -. Trade protection may make domestic firms complacent/less efficent - may become reliant on protection - less incentive to grow -.