8 favorable and 4 against arguments for protectionism
What is protectionism in economics?
Protectionism means the government policies that restrict international trade in a country. The main goals of protectionist policies include improving domestic markets, maintaining quality, protecting national security, and promoting economic stability.
Protectionist policies
A government can apply different types of protectionist policies to prevent international trade. Following are the main protectionist trade policies:
- Import and export tariffs
2. Subsidies for domestic industries
3. Economic and administrative burdens
4. Import quotas
5. Product standards
According to the above-mentioned definition of protectionism in economics, protectionist trade policies are designed to improve domestic markets, maintain quality, protect national security, and promote economic stability.
From this point, let’s discuss the favorable and against arguments for protectionism. In other words, let’s discuss about pros and cons of protectionism.
Arguments for protectionism
There are two main types of arguments for protectionism. They are,
- Arguments in favor of protectionism
- Arguments against protectionism
Arguments in favor of protectionism: Infant Industry Argument, Natural security Argument, Diversification of industry argument, Keep Money at Home Argument, “Genetically Modified Products are Harmful” Argument, Anti-dumping argument, Home Market Argument, “Pauper Labour” Argument.
Arguments against protectionism: increasing costs, reducing choices, reducing the quality of costs, Reducing of choices, Reducing the quality of products, resource misallocation
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Table: Arguments for protectionism
Arguments in favor of protectionism:
Why there are government restrictions on international trade? Why is protectionism good? In other words, why do nations practice protectionism? Protectionism is sometimes necessary in trade. There are some common reasons that international trade is restricted.
Infant Industry Argument (IIA)
Infant industries are industries that have newly entered the marketplace and are not established yet to compete with matured foreign companies. According to the protectionists, during the early stages of development need some protection to compete with foreign companies.
During the initial stages of development, infant industries may not be able to cover their costs. They should be provided some financial assistance by the government. The government can impose import tariffs on foreign companies and increase domestic prices. The higher prices will be sufficient to cover the costs of the domestic producers. Further government can utilize the tariff income for the improvement of the domestic industries.
Alexander Hamilton, the first secretary of the US Treasury, was the one who initially put up the infant industry argument. (Our $10 bills bear his likeness.) He argued for the introduction of tariffs in his renowned “Report on Manufacturers” of 1791 in order to (i) promote the expansion of manufacturing and (ii) bolster the American economy.
However, infant industry argument emphasis that the protection should be temporary and should be removed immediately after it has performed its function of “nursing.” Because a basic problem with the infant industry argument is that temporary protection almost always turns into permanent protection.
Natural security Argument
To protect the natural security of a country, it should control exports of goods such as military supplies that are strategically important to national security. Terrorists may gain access to weapons meant for an ally. An ally today could someday become an enemy (like Afghanistan).
Diversification of industry argument
Diversification in an economy is very important for sustainable economic growth. Because an unbalanced economy with over-specialization can result in over-dependence of a country on other countries. It is a very risky situation for a country politically as well as economically. Economically, if a country depends on only a few industries, it is harmful to self-sufficiency. So one of the arguments in favor of protectionism includes that it controls the over-specialization of an economy and increase the diversification
“Balance of Payments” and “Terms of Trade” Argument (Keep Money at Home Argument)
As a protectionist policy, By imposing taxes and quotas on the importing goods (by discouraging the imports) government can decrease the deficit of the Balance of Payments (BOP) and improve the Terms of Trade. Finally, these policies will appreciate the value of domestic currency and increase foreign reserves. This argument can be considered as one of the main reasons for protectionism.
“Genetically Modified Products are Harmful” Argument
why is protectionism good? Some products (Such as genetically Modified Products) may be harmful for the people and some products may not fulfil the quality standards. In this situation, protectionism is required. EU requires pre-market authorization for any genetically modified (GM) or transgenic food to enter Europe.
Anti-dumping argument
Dumping means selling a good or service in an importing country at a price below than price of it on the exporting country. Dumping generates benefits for the consumers in the importing country. Because they can buy that good or service at a lower price. However predatory dumping policies are harmful. Predatory foreign firms sell goods at lower prices to beat the domestic firms and after that, they rise the price. So, there should be anti-dumping practices to prevent predatory foreign firms. One of the main reasons for protectionism is to prevent predatory foreign firms.
Home Market Argument
According to this concept, domestic manufacturers “should have a domestic market for their products. More jobs may be created if foreign imports were stopped.
“Pauper Labour” Argument
One of the arguments in favor of protectionism include that sometimes protection is required especially for the industrially advanced countries to protect their labour force. If there is no protection, there will be an unhealthy competition faced by countries having dear labour economy from those having cheap labour.
Hence, to protect a country’s high standard of living and maintain its high wages, protectionism policies such as tariffs become essential to rule out competition from “pauper labour” countries.
Arguments against protectionism/ What are the drawbacks of protectionism?
Downward multiplier effects – Protectionism reduces the import of the importing country. On the other hand, the export volume of the exporting country is decreased. Exports are a component of the aggregate demand. So, decreasing exports will result of decreasing of GDP in multiply.
Increasing of costs
When the government impose a tariff on a good, it will generate an income for the government. Producers can earn an extra profit by increasing the market price. However, consumers have to bear extra costs because of the tariffs. Further, if producers use imported goods as input
Reducing of choices
As result of protectionism practices such as restriction of imports, imposing taxes, quotas will decrease the choices available for the consumers.
Reducing the quality of products
When government controls the imports, domestic producers tend to produce low quality goods at higher prices.
