Protectionism

Arguments For Protectionism: To preserve culture/way of life

industries that have been identified with a country's history and culture will have to give way to foreign competition if they have lost their comparative advantage

Arguments For Protectionism: The Infant Industry Argument

protecting a newly established ("sunrise") industry to enable it to grow and gain economies of scale, allowing it to compete with large, low-cost industries from developed countries → "Leveling of the playing field"

Types of protectionism (Indirect): Administrative Barriers

set up to make it expensive for importers to compete (e.g. health, safety, environmental and legal standards)

Types of protectionism (Indirect): Non-competitive purchasing by governments

some governments have the policy of buying only from domestic producers even if it means paying higher prices

Types of protectionism (Indirect): Import Silencing

a form of rationing, a license or permission to import has to be obtained from the government; usually used in conjunction with currency exchange controls

Types of protectionism (Direct): Quotas

a physical limit on the number or value of goods that may be imported into a country

Types of protectionism (Direct): Tariffs

a tax on imports; maybe specific (fixed) or ad valorem (percentage)

Types of protectionism (Direct): Embargo

a total ban on trade; may be imposed from outside the country or by the domestic government itself

Types of protectionism (Direct): Subsidies

given to domestic firms to lower prices of domestic goods and make them more competitive with foreign goods

Types of protectionism (Indirect): Voluntary Export Restraints (VER)

an exporting country agrees to a voluntary quota of exports into another country (e.g. Japan to the US)

Arguments For Protectionism: To correct a Balance of Payment deficit

attempts to reduce import expenditure to improve a current account deficit -Works only in the short-run as it does not address actual cause of the deficit

Arguments For Protectionism: Strategic Reasons (national security)

certain key industries essential to national interest need to be protected (e.g. oil, power, steel, national defense, industries containing sensitive information)

Arguments For Protectionism: Declining Industries

the 'sunset' industry argument; to protect old, declining industries which have lost their competitive advantage -Will simply prolong the process; goes against the concept of comparative advantage

Arguments For Protectionism: To raise government revenue

the IMF estimates that 15% of total government revenue in developing countries come from tariffs -Actually a tax on consumers who pay higher prices

Protectionism

the act of imposing barriers to free trade, usually put in place by government and international organizations

Types of protectionism (Indirect): Exchange Controls

the government limits the amount of foreign currency available to importers

Arguments For Protectionism: To prevent dumping

the sale of goods at prices which are lower than their production cost 3 reasons: -Overproduction in the domestic economy -Excess/idle capacity- to recover a part of the production cost to minimize losses -Penetration pricing- to gain a foothold and eventual control of an industry in a foreign country -Very difficult to prove; may lead to retaliation

Arguments For Protectionism: Protecting Domestic Employment from low-cost labor

to avoid structural unemployment that leads to social and economic suffering for affected workers -consumers end up with fewer choices and paying higher prices; may lead to retaliation

Arguments For Protectionism: Protect product standards

to ensure that imports match the standards set on domestic products (e.g. safety, health and environmental)

Arguments For Protectionism: Diversification (avoid overspecialization)

to protect a country from price fluctuations on industries which it is too dependent upon, e.g. primary products produced by LDCs such as sugar, coffee, cocoa, rubber, etc.

Free Trade

when goods and services are allowed to move freely between countries

Arguments against Protectionism

• Leads to higher prices and less choices for consumers • Inefficient use of resources- distorts comparative advantage which leads to lower potential world output • Domestic firms may become inefficient in the absence of competition- leads to higher production cost and less innovation • Raises prices to producers- increase cost of imported factors of production, which leads to higher prices for consumers. This may also reduce export competitiveness • May lead to retaliation and "trade wars" • May lead to corruption- due to red tape and other administrative barriers