Econs essay.

Discuss whether such protections may be justified. (13)

Such protection may be practiced through tariffs, import quota, exchange control, embargoes (physical control) or subsidies to domestic industries. The motive behind is to limit free trade and its drawbacks such as undesirable foreign competition, over-specialisation and adverse balance of payment. However, free trade should be practiced in the long run so as to promote efficient utilization of scare resources.

International trade exposes home industries to foreign competition. Infant industries, being in the early stage of their development, are unable to compete with established foreign industries in the international market which are operating at much lower costs. This is especially so for developing countries such as Vietnam, Indonesia and even India where the fashion industry is unable to compete with the much sought-after dressing and fashion from developed countries such as U.S.A, and thus do not produce high-end fashion products. Other examples are high-value products which involve sophisticated production. Therefore, it is necessary to protect the infant industries as they have the potential to reap large economies of scale. Developing countries like China now reap economies of scale for producing many of the high-end fashion products like Adidas and Louis Vuitton.

However, protection of local infant industries should only be a temporary measure. It should be stopped when infant industries are large enough to enjoy cost-savings from large-scale protection and thus be competitive against their foreign rivals. Unfortunately, most industries come to rely as much on the protection that a tariff, once imposed, is not easily removed or never withdrawn. This has undesirable effects such as low-quality goods, high prices and limited variety of goods. In short, countries cannot reap the benefit of free trade. This will have a even disastrous effects on world economy as it wastes scarce resources and cultivate inefficiency, on the large scale. Thus protection should not be indiscriminately given to local industries for long term.

Furthermore, foreign companies may compete unfairly by getting rid of excess production by selling at very low prices, often below cost. This practice is known as dumping. If allowed, the cheaper imports will outsell the local goods. There will be a decrease in demand for local goods and local firms will have to close down. This leads to widespread unemployment. Europe over-produced its agricultural products and has to sell it below cost price in the international market, with the sole aim to get rid of its surplus and prevent further losses. Agricultural industries in developing will suffer if it is unable to compete by lowering its selling price through cost of production. This is especially difficult for infant firms which have yet to achieve economies of scale. This further worsens the prospect of agricultural industries in developing countries as it is already plagued with problems like poor technology and low-skilled labour.

However, by preventing dumping, inflation may occur when import duties such as tariff raise the prices of imported raw materials which will raise the prices of local products using these resources. Consequently, consumers will suffer because they will face higher prices.
Protection may be justified to maintain domestic employment and safeguard the interests of workers. When there is general depression in world trade, countries tend to place restrictions on imports in order to ensure that income is spent on home-produced goods, thus maintaining the level of employment in the home industries. Slowdown in the US economy due to global financial crisis and sub-prime fallout led to general pessimism in the world economy. Cost of a French or German car exported to Britain has increased, brought about by protectionism policies implemented by Britain. The government wishes to boost sales of domestic car industries and thus calm the emotions or rioters, fearful of losing their jobs.

However, this encourages inefficiency in home industries because they are producing goods in which they have no comparative advantage, and which can be imported more cheaply from their trading partners. By restricting imports from low-wage countries, demand for these imports will fall and this will drive wages in those countries even lower. Hence, by protecting their industries and employment, countries are merely passing their problems on to their trading partners who in turn, may retaliate, thus leading to an all round contraction in world trade.

Protection is justified so as to aid diversification of industries. Over-dependence on other countries for essential products for national survival such as strategic materials, food and weapons, makes a country especially vulnerable. Therefore, even a small country like Singapore devotes much resource on developing war craft technology through research and development, so as to safeguard its independence.

However, this works against the whole principle of comparative advantage and will lead to higher costs of production, misallocation of resources and decline in world output and trade.

Lastly, protection may be justified to correct an adverse balance of payments. When a balance of payments deficit is caused by excessive import expenditure over export revenue, then import expenditure has to be substantially reduced by tariffs, import quotas, etc, while exports need to be subsidized. Otherwise, the country foreign reserves may be depleted and the country will develop an external debt. An external debt, with accumulated interest lays claim on future generations. This problem is predominant in U.S where its trade deficit amounted to more than billions of US dollars and is known to be “living beyond their means”.

However, the policy of reducing imports is often referred to as a “beggar-thy-neighbor” policy, for the country solves its own problem by passing them on to others. Furthermore, the effectiveness of such policy depends on the price elasticity of demand and supply of the imported goods, If the demand for the imports is price inelastic, the balance of payments problem may not be corrected by increasing the prices of these imports.
As illustrated above are the arguments for and against protectionism.