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Economics explained


International trade

Arguments in favour of protectionism

Arguments in favour of protectionism

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To protect infant industries (new, unestablished businesses) from foreign competition.

Firms in a new industry may find it difficult to survive when faced with competition from more established, larger foreign firms. Such industries are too small yet to have gained economies of scale; their workers are inexperienced; they lack backup facilities, such as communications networks and specialist suppliers. They may have only limited access to finance for expansion. Protecting a new infant industry may give it time to grow and so benefit from economies of scale and gain a global reputation. Once they have achieved a comparative advantage, the protection can then be removed to enable them to compete internationally

To protect declining industries

If declining (also called sunset) industries, which have lost their comparative advantage, go out of business quickly there may be a sudden and large rise in unemployment. If the industry is granted protection and that protection is gradually removed, unemployment might be avoided. As the industry reduces its output, some workers may retire and some leave for jobs in other industries. There is again, however, a risk that the industry may resist reductions in the protection it receives. This can lead to considerable inefficiency.

To protect strategic industries

A good arguments for protectionism include the need for strategic security for certain goods. For example, most developed countries place a degree of protection on their defence industries. A government may be worried that fi rms and households in its country would be seriously disadvantaged if fuel was cut off due to a trade dispute or a military conflict. As a result it may protect some home industries even if they are relatively inefficient.

To prevent dumping

Dumping occurs when foreign firms sell their products in large quantities at prices deliberately below those charged by domestic firms, often even below the cost of production. This clearly gives the foreign firms an unfair price advantage, so protectionist measures may be needed. Competition from abroad, especially when it involves dumping or predatory pricing, could drive domestic producers out of business.

To improve the terms of trade

If a country purchases a large proportion of another country or countries’ exports of a product, it may be able to force down its price. By imposing trade restrictions, it can lower demand and as its demand is significant this may lead to a lower price. This will improve the country’s terms of trade and allow it to purchase more imports for the same quantity of exports.

To improve the balance of payments

A government may impose trade restrictions in order to improve its current account position. For instance, imposing tariffs may encourage consumers to switch from buying imports to buying domestic products.

Protection can also be a source of government revenue.

Tariffs may be used to raise revenue. This will be successful if the demand for imports is inelastic.

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